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.
- What is the public’s current attitude on the fiscal problem, and what can be done about it?
- What are entitlements and how do they compare to Social Security and Medicare?
- Which segment of the home buyer population could we not do without?
- What options do we have to solve the big deficit problem?
- Could we see an increase in reverse mortgages in the future?
- What things should we be excited and scared for in the future market?
This podcast begins with Bruce asking 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 and 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 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. We just don’t think that way anymore, and that is causing problems and putting a lot of stress on the economy.
Doug said part of the issue is we don’t have a coherent national policy regarding housing. There is not a structured view socially of what should be the role of government. Doug said at Fannie Mae this is something that is near and dear to their experience. For example, if your intention was to advantage first-time homebuyers in the tax code, a one-time tax credit is much more effective than the mortgage interest deduction. This is because entry-level buyers do not itemize. If you eliminated the mortgage-interest deduction, you would see a price adjustment and would not get the tax revenue that you would get by the CBO. People would adjust their behavior, the consumption of housing, and move down the price scale. You would then see prices of lower-priced houses rise as people moved in that direction. You would then see either upper, middle, and middle class houses either stabilize or fall somewhat. This is a one-time adjustment that would take place.
Gary thinks the one segment of the home buyer population that we cannot do without is the first-time homebuyer. Every other segment is effected by the first-time homebuyer. When this person suffers, everybody suffers. This is why he thinks the tax credit is something that is worth exploring. John Burns said there is almost this falsehood of thinking people move a lot, but 53% of homeowners live in the first home they bought. The other part that is interesting has to do with first-time homebuyers. Last year, 63% were first-time home sellers, and the majority were in the Gen-X side.
People are buying because interest rates have been low, and affordability has been good for a number of years. They are getting into that house where they can have kids and expand their family, and there is no pressure to move up. It is fascinating how much people are not moving, but you should also think about 15-30 years. Part of the problem with folks retiring with these big mortgages is the refinance piece, and we should not be refinancing for cash if we are not improving the property. It is a false loan that gets a lot of people in trouble.
Sean had just talked to his mom, who is 77. She does not have a huge mortgage, but she does have the money to pay it off. She gets a ¼% for it, and he is trying to get her to do something smarter with the money. She has a mortgage at 4%, so Sean asked her why she doesn’t use the money to pay off the mortgage. She said it was because she would not get the mortgage interest deduction. The question is how many people are of that mindset where you are getting a deduction, so therefore you should have a mortgage and spend double. A $300,000 mortgage would turn into $600,000 over 30 years.
Nick and John had talked earlier wondering if we were going to see an increase in reverse mortgages. As the average net worth of people retiring is so low, will they have to live on the equity? If the age of Social Security continues to increase, there will be a gap in which they need cash flow. John said the typical retiree is retiring with very little savings and a lot of equity in their house. The question is how you are going to live for another 20 years with a reverse mortgage. John believes to solve this a lot of people will start renting out rooms in their house. It is either this or you move out and become a renter.
Now you see things like Uber where we are climbing in cars with strangers or Airbnb where we now go into homes with strangers. Airbnb has 250 people that vet the landlords and tenants to make sure you have a decent background. Technology will help people be more comfortable with this, but it could also hurt household formations. The biggest housing supply out there is empty bedrooms.
Sean jokingly said it seems in California they are making it illegal to build. His dad, in addition to being a professor, built houses in the summer. His friend built these really cheap houses that were not water-proofed and leaked in the winter. However, they were starter homes and the ones in which everyone started. This then gave them motivation to fix it up or move up, and we have made it illegal to build starter homes. Bruce saw a statistic that said 4 ½-5% of builder construction is for rentals. John thinks it is actually less than that, but there has been so much discussion about “build-to-rent” now. It is actually not very feasible, although it totals to about 50,000 units a year. However, John thinks it has actually remained at 30,000 for a while and not increased a lot.
Sean had counted everything that hedge fund clients had bought. Bruce asked if there was a plan to exit that inventory at some point and become market-makers. John said the big guys are not going to exit because most of them have gone out and borrowed money that is secured by these houses. They need cash flow and are prevented from selling the houses. He was worried about everyone in the room at I Survived Real Estate who owned 10-100 houses deciding Riverside would go down in price next year and the smaller guys and not the big guys who needed to exacerbate the downturn. They blocked themselves in and cannot dump houses.
Bruce said we cannot get hurt because we cannot borrow more than 10 times. However, you can choose when to buy and sell. John turned around and asked Bruce if he would be selling his houses in the next downturn or hold them. Bruce said he has actually already sold things in California to go somewhere else. Bruce did not do it because he thought things would get bad, but rather because he saw other opportunities.
Bruce ended by asking what the one thing is they are most excited or concerned about for the future of the industry. Sean O’Toole said the thing he loves most about the industry is that it really does not move that fast. Sean and Bruce decided to get out at the end of 2005 when Ben Bernanke was saying it was a contained problem. He was saying this into mid-2007, and the rest of the world did not wake up until September 2008. There is a lot of talk right now about corrections, although a lot of people are saying it is not different this time. Sean believes it is truly different this time and that we have a completely different regulatory framework than we have ever had in our history, 2008 vs. pre-2008 when it comes to foreclosures.
Sean said he does not see a lot of upside in the market, but he almost wishes there was a 10-20% correction in California for affordability reasons. However, he thinks it is a pretty safe market to be out working in if you are a real estate investor who buys and flips homes. We need to pay attention clearly to the market, but he thinks it is as good a time as ever to be in this business.
Gary Acosta agreed and said in the long-term business investments there is very little downside in the housing industry. The demographics are basically driving that. In the short-run, there are still some blips and always the risk of a catastrophic event. He likes to leave every panel by saying the Hispanic market is not for everyone, just for people who want to be in business in five years.
Nick said what he is most excited about being in the business 20 years and starting with MLS books and no lock boxes is where they will go in getting information to the public. For him what he is most excited about is transparency. The more transparency they can create throughout the entire industry for buyers, sellers, investors, and consumers, the better they stage them to make really good informed decisions. This helps everyone in the process.
John Burns said he is most concerned about when the next recession will hit and what will cause it. This keeps him up at night, and his company has been doing a lot of research on what historically happened. Usually recessions are caused by some industry or industries growing way too fast and then having to pull back. He is looking at healthcare and seeing how biotech companies are buying each other like crazy. People are getting huge insurance premiums every year, so it is all falling back on John’s company. At some point that industry will have to pull back, and that will hurt. However, John does not know when this will happen, and this concerns him. What he is excited about is how fast the world is changing and technology businesses getting disrupted. John said for him this creates opportunity for people who pay attention and work hard.
Doug Duncan he is an optimist for a real simple reason. People have always lived in a structure built on land somewhere in proximity to where they worked. This is something he does not see changing. It is like accounting for businesses. On the side of worry, he is concerned about the structure of monetary policy relative to fiscal policy. This could bring on those accidents that you worry about that are the short-term trouble that real estate faces
Tune in next year for our tenth annual I Survived Real Estate 2017. 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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