On Friday, October 21, the Norris Group proudly presents its 9th annual award-winning black tie event, I Survived Real Estate. An incredible lineup of industry experts will join Bruce Norris to discuss perplexing industry trends, head-scratching legislation and opportunities emerging for real estate professionals. Proceeds for the event benefit Make a Wish and St. Jude Children’s Research Hospital. This event is not possible without the generous help of the following platinum partners: HousingWire, PropertyRadar, the Apartment Owners Association, the San Diego Creative Real Estate Investors Association, InvestClub for Women, MVT Productions, the San Jose Real Estate Investors Association, Inland Empire Real Estate Investment Club, Think Realty, and White House Catering. Visit www.isurvivedrealestate.com for event information and tickets.
This podcast begins with Sean O’Toole discussing the real estate market. He began by saying how there is a lot of money being poured in to disrupt real estate right now. It is almost like everybody is so worried about Zillow way back when, but there is a lot more happening right now. Sean was a big service to an agent who had a listing where if they were in the listing business it would go there for free. You are not trying to be a competitor with them, but rather a partner and drive interesting. They could receive the leads as a buyer interest, or another agent could. Bruce asked Sean if this was his model. If Bruce, for example, had any interest at all in anything it seems he could just go to the website to have a lot of good information at his fingertips and see which players are in the area. The idea is to be where people start.
Nick Bailey said this was the case. Zillow’s mission statement is to become the largest marketplace online. May was one of their largest months at 171 million unique visitors who came to one of their assets or sites. When you look at the number of transactions that will be done, even last year’s compared to this year’s at $5 ½ million without new construction, this number could change year-to-year by a couple hundred thousand. However, you have this huge number that is looking online. This has disrupted the advertising space. For many who have purchased a property or picked up a Homes Magazine, people originally were not allowed to put the listings into advertising mediums for free.
There has been a shift in the market where the pocketbooks of brokers and agents dried up and their marketing spend was gone for a matter of four years. For Zillow, these were some of their biggest years of growth. Nick thinks this is partly due to the fact that all listings come on the site for listing agents, and it is free. It is only when someone wants to engage and pour gas on it to generate more leads and buy advertising that the agents then spend. Zillow currently has about 90,000 agents within the U.S. who are spending customers.
It is also the fact that listings are tied to the ability to place advertising. It is a value exchange that takes place, but the goal in creating this marketplace is to have a huge online audience and connect them with real estate professionals once they are ready to engage. What they are finding with consumer behavior is they will start with Zillow because they want data and information. The zestimate is what started the organization, and they did not have listings for two years. Bruce asked how this number is derived and if he can go to the bank with it. Nick said the zestimate is a really interesting topic because he knows how much customers love it.
They have a median error rate at 5.4%, but that is just nationwide. It varies so much by market. There are a handful of non-disclosure states that do not publish sold data. They run the zestimate on 110 million homes every single evening, and it is a very complicated process. They take any type of data they are provided on the property, most of it being public data including beds, baths, square footage, lot size. They then encourage homeowners to update the data because that will change the zestimate. What is important here for professionals in the real estate world is people get locked onto the zestimate number. If you go down a little farther and look at zestimate details, you see a range. This is typically whether you are an investor, buyer/seller, or working with a real estate professional. Any way you are working off a range anyway. For this reason they encourage people to dig deeper on it since it is generally pretty accurate in that range.
Gary Acosta told a story about Spencer Rascoff. He was moderating a panel with his CEO, and he was wondering if Spencer had any questions. Spencer told him the audience was mostly real estate professionals and do not like the zestimates. Spencer told Gary to go ahead and ask him about that, so Gary went on stage and somehow misspoke it. He accidentally said most of the audience cannot stand Zillow when he meant to say the zestimate.
Nick Bailey also shared his story how two weeks ago he was speaking to an agent audience and they talked about the rate going from 7 ½ to 5.4. A lady stood up, raised her hand, and told him to not get them any more accurate because that was how she generated with her sellers value for her commission. They will have the zestimate in their back pocket and say, “Mr. and Mrs. Seller, let me tell you why. Zillow has not even seen you home, but I have and can price it for you.” If that conversation is created between a real estate professional and a seller and they can capture the client, the question then is when. Some do not know how to use it as a tool, so for everyone at Zillow it is education.
Sean O’Toole said they also provide an estimated value at PropertyRadar. The Zillow estimate has done more than anything else in the last decade to prove the value of a realtor more than anything else. Why realtors would have any issue with Zillow’s estimate is the best thing that could happen. It was a complete lay-up to show you how to add value. They also have their own estimate, and you have to remember the characteristics used in these things. Was curb appeal in there, was view in there? The last time he was up at Zillow and chatting with them, they were saying how they were trying hard to get in data on where water is so they can tell the difference between water front and non-water front.
From a public records perspective, you are on an ocean front street. The house on one side on the ocean and the house on the other side are identical. You get into a neighborhood where there are all different qualities of houses, and there is no chance it will be accurate. You get into a large sub-division of nearly identical homes, and it will be spot-on. If you know that couple of things, then you can look at an estimate to know whether or not it is good. You can also add value if you are in the real estate space.
Bruce ended this segment by asking Gary about the mood of the lending industry. Every time he opens the paper, Moody’s is being sued by the Department of Justice for bond assessments a decade ago. There is still that overhang of concern where Bruce said he if were a lender he would still be looking over his shoulder. Bruce asked if this forces the industry to have overlays that are restricting people who could get loans, and there is no way this environment will let this happen. Gary said it is affecting overlays, which are underwriting guidelines set by Fannie, Freddie, and FHA. However, the lenders have the option to add to those guidelines or make those loans for restrictive. They do that to make sure their loans are squarely inside the box and there is little risk the loans will go into default.
When you see the Justice Department using a 200-year old laws to go after lenders and charge them troubled damages for making an underwriting error. This will clearly suppress the enthusiasm for those lenders to go out and make loans, especially loans that are on the margin. This is one of the reasons credit access is tighter today than it has been historically. It is not just because Fannie and Freddie do not have products that are relevant in today’s marketplace. There is clearly an opportunity for improvement there. Lenders are really nervous about getting fined and any loan going into default since the CFPB has set new rules around how to service loans that go into default. It is much more costly to service a loan in default, ten times more than it was ten years ago.
This also plays into the equation. Not all regulation is bad, although we need it to be a little bit tighter than it was pre-crash. Clearly the pendulum has swung too far the other way and is effecting buyer opportunities to participate in homeownership.
Bruce said he has never seen a blueprint of how to deal with somebody who did not make a payment like the one just experienced. Before you had to foreclose, and this time you almost had to not foreclose. Bruce asked if this is a blueprint going forward if we have an event that causes a lot of foreclosures. He asked if we have seen the playbook that will be played out again. Gary does think so. A lot has changed since that crisis, although they do not want to go to a scenario where foreclosures are gone completely.
Clearly, foreclosures are not good for the family it is effecting. However, the alternative is that these become personal loans, and interest rates become much higher. Mortgages will like credit card loans. He would much rather have access to 3-4% mortgages and have the risk that some of those loans will go bad and go into foreclosure. Without this out there, mortgage lending will become much more costly. This is something they do not want to see.
After the break, Bruce brought up the entire panel of experts. Bruce first asked if any were concerned they were reaching a peak in price. Doug began by saying it depends on what geography you are talking about. If you are at a peak price in the San Francisco area you probably are, but geographically it is determined. We expect prices to go up nationally about 5% next year, but that is just nationally. If you take a look at Miami, it looks like prices will go down. If you look at the higher price points, you will see the expansion in inventory.
Sean said he was speaking a couple weeks ago, and he went before a large broker with 800 agents. He said if you take the 4% annual appreciation trend line from 2000 going forward, you put California at 425 today. According to the National Association of Realtors, we are at 526. If you took the peak and took that 4% a year, it goes to 850. His point is that we have a lot of room to go. He does not think we have the same economic environment we have had historically. Despite the California Association of Realtors affordability chart that says we still have room to go, Sean thinks it is different this time in terms of real world actual affordability to have a down payment. We may be at the least affordable, state-wide, on average that we have ever been. We are probably at a peak, and he does not expect a crash.
Gary said if you look at it anecdotally and ask real estate agents in California what their biggest challenge is right now in terms of getting deals done, they will tell you inventory. There is still a shortage of inventory in many markets. As long as agents are still saying that, it is hard to think we are already peaked out and there is still room to go.
John Burns said they put out more than a 50-page report on 70 markets every single month, and he cannot find the fundamentals trending down in any market, except maybe Houston. There we have a 2% price decline forecast in Houston, but that is about it. He thinks there are 5-6 markets getting frothy that will crash hard once the next recession hits, but it is not hitting right now.
Bruce next asked about interest rates and the opinion of the Fed’s next move. If we did have an interest rate hike, how would that effect real estate? Doug said he has been telling lies about interest rates for a long time. He does not have the privilege of not being public. He has to publish a public forecast, which shows rates not being much different at the end of next year as they are now. There has been some upward movement on the ten year-treasure, which is the important metric for mortgage rates. This has to do with the market’s assessment of what global central banks think about the value of negative interest rates and a couple changes made by the bank of Japan and the EU. Whether the Fed moves a quarter of a point in December or June has essentially no bearing on the mortgage market. If them moving a quarter of a point brings down the economy, we have much bigger problems.
John Burns said the market is betting the ten-year treasury will only go up 40 basis points over the next three year, and mortgage rates trade off of this. This is what the bond market is betting at, so he is running with this. They were actually putting out a white paper on this the week after I Survived Real Estate. Mortgage rates have risen 100 basis points or more only ten times in the last 42 years. Three of them were associated with recessions, but the other seven showed home sales only fell about 7% on average. If that is the moniker, and there is a lot of discussion a rise in mortgage rates will kill us, John does not think this is the case as long as the economy keeps growing. This is what has happened historically.
Doug agreed with this, and there is a misunderstanding about there being a causal relationship between interest rates and house prices. The relationship is between interest rates and the level of home sales. If interest rates are rising because the economy is growing and real incomes are rising, the rise in that interest rate and the mortgage payment related to it is offset by the growth in real incomes and housing does just fine. If interest rates are rising because there is an increase in inflationary expectations at the household level, they look at housing as an intermediate term hedge against inflation. In this case housing does just fine. If interest rates are rising because the Fed believes inflation is growing and they are attempting to slow economic activity, the number of home sales falls.
Bruce asked next about the Fed’s overall policy and if it has been correct. Doug said he has shown his chart on the relationship of the height of the Federal Reserve chairman and the level of interest rates. Paul Volcker was 6’6” and taller than Greenspan. Sean said there is no question that interest rates in the mortgage backed security market would be much higher if the Fed had not broken their rules and started buying mortgage-backed securities. This was a very big change in policy prior to 2008. Cleary they stepped in and are really the only reason we have a housing market today.
Doug argued that long rates after 2012, when the Fed did its first QE and Operation Twist, have been a function of global issues. While the U.S. economy is not great, it is still the best looking horse outside the glue factory. They have looked at the relationship of investment by foreign domiciled corporations in the U.S. net from U.S. domiciled corporations investing overseas. The U.S. is clearly the beneficiary, so in order to invest in the U.S. there is a capital inflow here that has pushed long rates down.
Sean said even that was dependent doing this. If they had not provided that backstop, there would not be a confidence in that product. Nick said at Zillow they look at a lot of consumer behavior and how these things impact, so the question is what their next step will be. Last year 47% of all sales were first-time homebuyers, and 50% of those were under the age of 36. What was interesting was when 87% of first-time homebuyers were pre-approved before they even go shopping. This has been a huge shift in the last ten years on mentality. However, they are asking what their payment is and if they can afford their payment. The interest rates are either 3, 4, 0f 8%, so the question is if they can afford their payment. If they get up to a point where it will effect first-time homebuyers, we will see them get into true starter homes.
If you look at last year’s first-time homebuyers, the average property was 1900 square feet, 3 bedrooms, 2 ½ baths, and pretty new. Because they see it as a reflection of themselves now, it is almost as if the young people buying today want to live in the same quality of homes they were raised in like their parents. In Zillow’s mind, where it will shift in consumer behavior is they will still want to own a home but will have to settle for the 2-bedroom, 800 square foot bungalow that has to be fixed. Bruce said this actually sounded like the first house he bought.
This segment ended with Bruce discussing Kyle Bass, founder of Hamen Capital Management, warned that the U.S. is headed toward stagflation. Tune in next week as Bruce delves more into this topic on the real estate radio show. The Norris Group would like to thanks its gold sponsors for supporting I Survived Real Estate: Auction.com, Coachella Valley Real Estate Investors Association, Coldwell Banker Town and Country, Elite Auctions, In a Day Development, Inland Valley Association of Realtors, Jennifer Buys Houses, Keller Williams Corona, Keystone CPA, Las Brisas Escrow, L.A. Green Designs, LA South REIA, New Western, North San Diego Real Estate Investors, Northern California Real Estate Investors Association, Orange County Investment Club, Orange County Building Industry Association, Pacific Premier Bank, Pasadena FIBI, Pilot Limousine, Real Wealth Network, Realty411 Magazine, Realty Executives Inland Empire, Rick and Leanne Rossiter, Sonoca Corporation, South Orange County Real Estate Club, Spinnaker Loans, uDirect IRA Services, Westin South Coast Plaza, Wholesale Capital Corporation, and Wilson Investment Properties Inc. See www.isurvivedrealestate.com for sponsor links and event information
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