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.
- Who is Kyle Bass, and what are his thoughts on stagflation?
- What should we see happening with population growth, and how will this affect demand?
- What is the biggest millennial population demographic?
- How many of this particular demographic owns their own home?
- Could we see immigration reform happening anytime soon?
- What is the public’s current attitude on the fiscal problem, and what can be done about it?
This podcast begins with Bruce and the panel discussing the economy. Kyle Bass, who Bruce pays attention to, is the founder of Haman Capital Management. He warned that the U.S. is headed towards stagflation, and Bruce was not ready to hear this. Part of the stagflation is high inflation and no growth, so Bruce asked the panel what they all see coming in the next couple years. He asked if they have a recession that is possible or stagflation.
Sean O’Toole said he would go with stagnation, not stagflation. If you look at the growth of GDP since the 1970s, it perfectly tracks the growth of debt. We have been financing the growth of the economy through debt since the 70s, and we hit the zero bound. First we skipped on it with the tech bubble, and the response to this was lower rates. This allowed us to jump back on the horse. We then had the housing credit bubble, and the response to that was also lower rates. Now we have an all debt bubble, including corporate debts up, student debts up, and more. It used to trend lightly with GDP, now GDP is stagnant while everything else is up or all over the place. GDP was not impacted in the least. Now with that debt ceiling and that debt burden, it is not known how you would have growth with this.
Sean does not see how you would have higher interest rates with this burden. To the degree you allow interest rates in any way, shape, or form to come up, that burden grows as well. In a way you are stuck in the middle, and it is pretty stagnant and ugly.
Gary said you have a surge of population growth that is coming down the pike in the next couple years. That is going to fuel demand. A lot of these folks are younger, and the perception originally was that millennials were not as interested in homeownership as previous generations. However, this is not as true as people once thought. He does think demographics dictate a lot, and we have more people moving into prime home buying years in the next few years than we have had over the last ten years. This will surely have a continued impact on demand in the housing industry.
Nick Bailey agreed with Gary. Looking at a makeshift conspiracy theory regarding the slowdown from 2008-2012, if you take the loans and finance out there were 80 million boomers, 40 million Xers, and 80 million millennials. If you look at how that homeownership cycle goes through with life events such as graduating, getting married, and having children, there were 50% less people after the boomers over the next ten-year period of time who would be in the home buying cycle. The conspiracy theory says if there were 80 million Xers, would we have had the downturn or the retraction even with subprime lending and the other things we knew happened.
Gary and Nick talked during the break about how 20-25% of the millennial population is Hispanic. They represent a much bigger segment of the home buying population for this particular generation than they have for previous ones. Roughly 10% of the homeowners in this country right now are Hispanics. However, 17% of the millennials who purchased homes last year were Hispanic. This is significant because it is a demographic that is passionate about homeownership.
Fannie Mae does studies every year gauging consumer sentiment, and Hispanics have out-indexed the general population year after year in terms of their enthusiasm for homeownership. They are a substantial percentage of the workforce when talking about the diminishment of the workforce population. In these terms the Hispanic population has the largest workforce participation number, around 66%. This is about 5 percentage points higher than the general population. We do have a surge of population, but that population is also made up of people very passionate about homeownership. This is something a lot of researchers are missing.
Bruce asked what percentage of the Hispanic households now own their own home. Gary said right now it is about 44%. Interestingly enough, this is lower than the general population at 63%. A lot of this is due to age as Hispanics tend to be much younger than the general population by 10-15 years. They are moving into prime homebuyer populations. One other interesting factoid is the Hispanic population was the only racial demographic in 2015 that actually had an increase in their homeownership rate. The general population and every other racial demographic had another decrease.
John Burns said Kyle Bass was actually one of his clients during the downturn, so he would not bet against him. If you look at the demographics, stagflation, and the lack of growth for people ages 20-64, this all means the economy will not grow very much. These are the big spenders, so here you have your stag. It could also mean there is some real wage pressure going on, so there’s your flation. The immigration in this country has shifted dramatically in the last five years. Because of the growth in the brick countries, you have all these upper and middle class people getting on airplanes here with a huge cultural preference to buy a house. The homebuilders have communities all over the country, 80% of which are foreign-born buyers. The net migration for Mexico has actually turned negative in the last few years, so these are all big changes we have seen.
They next went on to discuss immigration reform. Bruce asked them if he sees this occurring and how it could affect real estate. John had a whole chapter in his book, Big Shifts Ahead, about this exact subject. From 1990-2010, in that 20-year period more people came into the country than the prior 60 years combined. We had massive immigration. 23% of those born in the 1970s are foreign-born. If you study history, every time we have had a surge in immigrants there tends to be an uprise against immigration and they cut the policy. This is where the conversation is coming from, but he does not really know where things are going.
Gary said it is not realistic or economically feasible for the illegals to all be deported. Clearly we have to curb illegal immigration. Many of them have been here 15-20 years, some married citizens and had children here. They also participate in the workforce and pay taxes, so once we get past the political noise we need to get to the point where we make pragmatic decisions. This will likely happen since we need the labor. We have an aging population and more people moving into retirement years. Somebody has to support those retirees and participate in our workforce, and we will not get there just by new births. We need at least some legal immigration to fill those gaps.
John said there is a massive construction industry shortage of skilled labor. There are 570,000 fewer Mexican-born construction workers in the United States today than in 2007. John’s homebuilder clients cannot cut them back and are wondering where they went. If you are in construction right now, you are getting a good raise. Doug said along those lines, their biggest trading partner is Mexico. They are actually their number one trading partner and the 11th largest economy in the world.
People have been focused on China as a significant economic threat to us, although Doug believes this is a false concern. They have terrible demographics, an aging population, and the one child policy has generated an imbalance of men vs. women. In order to get away from the investment component, they have to raise consumption. In order to raise consumption, they have to raise wages, and that takes away their competitive advantage. One of the countries that is benefitting from this is Mexico. The input supply chain runs through Mexico, and this is an economic subtext that is often lost in Washington.
Nick Bailey said at the Zillow Group they have a huge problem with immigration. However, theirs is digital and is what they call digital immigrants or digital natives. The average real estate agent is 57 years old, and their revenue comes from real estate professionals. However, they are digital immigrants and did not grow up with them. People today have so many devices they use that have become a part of their life. It is not how your brain operates daily to think through the digital piece. They have people buying homes that are digital natives. Nick’s two sons who are 11 and 7 were born with smart phones, and kids today know how to use them at 2 years old. Zillow will have entire discussions to figure out how the customers who pay Zillow can be taken care of but can also deliver an experience that is coming through the natives whose way of life this is. It is a balance they have to try to address every day. As far as the real immigration, it is a talking point that stirs up emotion, and Nick does not think there will be a policy change in his lifetime.
Bruce said the reason he hopes we do have a policy change is because we have to get along on a lot of things and make tough decisions. Bruce said it is the same with fiscal policies. What we currently have is we have a very fortunate interest rate environment. Right now our national debt is $20 trillion. Bruce asked what the typical interest rate would be on this, whether or not it would be 4%. If it was 4% of $800 billion just in interest, then the national debt can be ridiculous if interest rates change. It is one of those things where we better reach across the aisle and say we need to change some things or we will have a problem.
Bruce next asked the panel if they feel there will be that attitude in the next few years to fix the fiscal problem. Sean said he personally hopes so as he thinks it is clear that monetary policy has failed to get us going again. Sean thinks there are some easy things to do that are not even a problem across the aisles if they can at least sit in a room together. They have $2 trillion in corporate cash offshore that they cannot bring back because of taxations. There was talk of a holiday bringing that back. If you bring that $2 trillion back, no tax, but require that they invest 15% of it in infrastructure bonds to rebuild infrastructure, then you could see $300 billion in infrastructure improvement.
There are plenty of things we can do, and there are lots of opportunities to earn it. Sean actually thinks it is sad we are not having more conversation about that. In all these debates, there has not been much talk about how monetary policy has failed and what can be done on the fiscal policy side. This is the conversation we should have had these last three debates, not anything else that was heard.
Doug feels the current contingent liabilities we face are actually the biggest danger to the economic future of the company. It is not an external threat, but rather an internal threat and an inability to address what are essentially unpayable commitments. To the point about monetary policy not working, it is actually working against that in how it is undermining pension earnings and insurance company earnings. There needs to be a rebalancing of monetary and fiscal policy.
Bruce next went on to discuss entitlements, which he said is aggravating to him because he does not like feeling like he is entitled to something. When someone works hard all their life and pays into social security, entitlement seems like the wrong word. It seems like a freebie. Bruce asked how the math works for social security and for Medicare. Doug said social security is actually the easiest one of the entitlements to fix. All you have to do is adjust the actuarial age, which you can do over time. You can then make it solvent for 75 to 100 years. This is actually easy. It is just the political and dogmatic issues that stand in the way of that. Medicare and Medicaid are not that much different.
Bruce wondered how these things would be solved. Even if it is painful, it is better to do it earlier than later. Gary said there is not a political upside to doing earlier versus later. Bruce said on one panel that he wishes for one year people would not be a Republican or a Democrat, but would be an American. Gary said we did have one year like that in 2001 right after 9/11. Sean said that was what he was most excited about with the then upcoming election. When he watched the debates with his son, he would ask his dad why those two were running for president. He also asked what the Electoral College is and said it did not make any sense to him. Sean said at that point it did not really make any sense to him either. Looking at it through his son’s eyes at how crazy it is, Sean is quite confident by the time his son is his age he will not be stuck in this.
When Sean and everyone on the panel were kids and watched presidential debates, they thought pretty highly of both parties. Because of that, we are stuck in the mindset that it is our job to pick one or the other. There cannot be a third or fourth. We are still stuck in the mindset of when they were kids, and Sean thinks his son will not be stuck in that mindset. He will not put up with what everyone else is. Gary agrees with this and thinks that generation is probably the least prejudice generation ever. They do not see color or sexual orientation or anything with which the previous generation was obsessed. He absolutely agrees that there is hope for the future. The thing about change is nobody wants it. If everything is going fine, nothing will change. Things have to go bad for things to change, not that you should hope for things to go bad. When things are going bad, you should be saying things will change soon.
Bruce said we have this big deficit and need some way to solve it. We will either reduce the deficit or another way. Bruce asked everyone if they felt real estate is a target for having some of our chips taken away. John Burns has a chart on interest rate deduction that shows most people don’t have any benefit from the interest deduction because the standard deduction is so big. He said the standard deduction for a couple now is $12,600; and the typical mortgage is $200 grand a year times 3 ½%, which is $7,000 a year. If you get out of expensive Southern California and go to Dallas or Phoenix, there’s no kick in the pants every April 15 to become a homeowner. John thought this was an unintended consequence of low interest rates.
Bruce asked if this is ammunition to say it is not hurting anybody, so we will stop it. John said he does not know what they are going to do. They have no incentive to make tough decisions, and that is the problem. The ones who get blamed are the people who voted them into office.
Sean talked about the mortgage interest deductions. If you think about our parents and generations before us, you have a 30-year mortgage, stayed in the house, and paid it off. One policy involves the mortgage interest deduction and the $250-$500k being pulled out of your house. We turned people into flippers and turned it into being good to have a mortgage. Your goal should be to get rid of your mortgage so that at 60 it will make it a lot easier to retire. Sean talks to people and tells them if they are 45 they should have 20-year mortgage, and at 55 you should have no more than 10 years left. If you are going to move and move up in house, don’t move up into the most house you can afford with a 30-year mortgage if you are 55. Instead, move up to the one you can most afford with a 10-year mortgage so you are paid off when you are 55 and can have a decent retirement.
Tune in next week for the final part of I Survived Real Estate 2016. 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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