Bruce Norris is joined this week by Leslie Appleton-Young. She is the vice-president and Chief Economist of the California Association of Realtors, a statewide trade organization with over 200,000 members dedicated to the advancement of professionalism in real estate. Leslie directs the activities of the association’s member information group. She oversees the analysis of the housing market and brokerage industry trends, member communication, and membership development activities. She is also closely involved the association’s strategic planning efforts, and she is a well-known speaker in the California real estate community.
- When did she first get started working with CAR?
- What was the market like when she first began?
- What stood out to Leslie and Bruce the last time she spoke on the ISRE panel?
- How has the market changed over the last couple decades, especially with affordability?
- What are migration patterns we are seeing?
- What is her take on how the realtors feel about their prospects of making a living?
- What does she believe to be one of the biggest challenges we face?
The last time Leslie was on the panel for I Survived Real Estate was the best panel they ever had. Bruce thinks it was because there seemed to be trust between the participants, which was really great. You had a lot of diversity and different opinions, and people were willing to listen and have fun with it. Leslie thought it was a very informative exchange of differing views. We are all at the point where we realize we have to listen to each other. Leslie said she tries to start every day by having a fabulous day and being a better person, so she hopes to spread this around to others.
Bruce said what was really good about that exchange was there were a lot of good ideas, and it did not seem like anyone was hesitant to give an opinion because it was received well and not aggressively fought. It was refreshing, and Bruce left the event that night thinking it was exceptional. You do not want everybody saying the same thing, but instead you want to learn from every exchange. Bruce has the skill of putting people together who will make this happen.
Bruce asked Leslie how long she has been the Chief Economist of CAR. She started in 1984 after living on the east coast for 8 or 9 years. The timing was perfect because 5 years after she started, her boss and the head of research communications, Joel Singer, received a head position at CAR. She was not formally called the chief economist at the time, but she was put in charge of the research department. She had spent her entire 20s years studying up on it, so she was a little late to the game. However, to be in an organization for five years and be able to get a promotion was really terrific. This was back in 1989, at the peak of the market but right before going into six crummy years.
This whole thing about housing affordability and affordability crisis is different every time, but we have been here before in California. It used to be a ten-year cycle, although she is not sure what it is now. It used to be we would gear up for another affordability effort every ten years in the first couple decades she was at CAR. It is different each time. If you look at the severity from 1990-1996 and compare it to where we were in 2008-2012, there is really no comparison. At the time we did not know what it could look like. What could come out of this is we know the market is correct. Sometimes it is brutal, lessons are learned, and you move on. Now we are in the sweet spot where people cannot get enough of real estate. It is an environment where real estate is a preferred asset again. However, ten years ago there were a lot of people who thought we would never be here again, yet here we are.
Bruce said people have a lot of equity since prices have gone up a lot from the bottom. Bruce asked how far off from the peak we are from where it was originally. Leslie said it really depends on where you are looking. Seven of the nine counties in the Bay Area are well above their prior peaks in 2005 and 2006. San Francisco is around 40% about its prior peak. In the Central Valley, everybody is still well below their prior peak. In Southern California, some are at, close to, or slightly above in the cases of Orange, San Diego, and Ventura. However, San Bernardino is well below. They had a cyclical peak of 350 in the summer of 2006, and their median now is around $245-$250. It really depends on where you are if this is the benchmark. This is one benchmark to look at in terms of gauging where you are in terms of equity.
Bruce asked if this separation has occurred before where you have a place like San Francisco go from $950 to $1.3-$1.4 million, while places like San Bernardino or Riverside are 30% less than their last peak. Bruce asked if we have seen this spread in prior years. Leslie said yes, especially in the Inland Empire, Central Valley, and Northern California have lagged the coast. However, we have never seen San Francisco like it is today where there is so much job creation, tremendous demand, and the inability or unwillingness to really respond to it in any meaningful way.
We are seeing migration patterns; and going back to the data in the last couple years we see how the American community survey data is showing what you would expect. People are moving from the Peninsula to the East Bay, from the East Bay out to the Alamedas areas. You also have people moving to Sacramento and out of the state. What Leslie finds so fascinating is that 30 years ago the only contenders were the two coasts and the flyover states. They were hit hard by the exit of manufacturing jobs. Now, if you look at the annual ranking of top-performing large and small cities, it mirrors the migration we are seeing. Californians are moving to Nevada, Arizona, and Texas as well as to Boulder, Raleigh, Austin, and Portland.
This is her view of how this will play out. She will never stop fighting for more housing in California. Given the political environment, the solution will be an acceleration of this movement towards more affordable housing out of state in these clusters that are attracting younger people who are just starting out and cannot afford California. They want to go where they can live affordably and raise a family. Bruce asked if it would be accurate to say 100% of the gain of population in California other than birth is immigration. Bruce also said we are losing domestic migration, although Leslie said we are not losing the millionaires. We are actually losing the middle and working class as well as those with high school and college educations, and on top of that, millennials.
This middle part of the income distribution is getting hollowed out because they just cannot make it. To a certain extent, the immigration has been a real plus for California in terms of jobs and keeping our demographic young. Without immigration, we would be a much older state with a much more constrained labor supply. Obviously you have the lower-skilled immigrants, and then you have the higher skilled people. It is a little bi-polar here, but this has actually been one of the pluses of the state compared to other areas.
Bruce asked if this program had not always been around where somebody can basically bring in a business. Leslie said no, but she does not know when it really first started. However, it has been really important for Silicon Valley. Bruce asked if she has any concerns about the national immigration policy going forward. She says it depends on how it plays itself out. If you deport the 3-4 million undocumented people in California, that will have a significant impact on agricultural workers, for example, in the Central Valley. She has not seen any full-blown analysis of it, but this is certainly a concern. The barriers to trade, if there were a trade war, would have a big impact on Silicon Valley in particular. We are a very open economy here and have a couple ports that are extremely large. Out in the Inland Empire, you have all this transportation happening based on goods coming in. There are all kinds of scenarios that are troubling that you can tell about what could happen. We are waiting to see what happens.
Leslie is in front of audiences many times a month, so Bruce asked her what her take is on how the realtors feel about their prospects of making a living and how happy their clients are that they bought something. Leslie said they are notoriously optimistic, and she is too. She believes the cup is not only half full, but it is refillable every day. You need to have that mindset to go forward. She thinks they are optimistic because they remember what it was like ten years ago, and that is not where we are today. We have good price appreciation, things sell very quickly, and it is not helpful to look 5-10 years down the line and figure out what the new issues will be. The increase in rates we have seen so far has stimulated the market because it has given people a reason to act and inject some urgency into the market.
It is certainly understood that if rates go up 300 basis points, it would be a problem for the market, particularly at these prices. We have such a wacky industry where there are people who are very productive, then we have a lot of members who are not engaged in the business. She said the rule of thumb for most MLSs is that 50% of the MLS participants have not had a listing in the last year. The productivity is highly skewed.
One of the things she loves about the industry is you can be a new realtor, and in a couple years you can be having a very healthy business. It is hard, a lot of work, and it is not an easy profession. What is interesting is the perspective is skewed when you show up. If the first year you were in real estate was 2004, you would have a different opinion than if you got in during 2009 or if you just got in last year. Whenever you start, you think it is the norm. If you got in during 2009, you would be a short sale specialist and hopefully be able to dig deep in that market as long as it lasted.
One of the things Leslie always says is that this business for the individual realtor is about market share. It is not about the level of market activity necessarily. She pitches about learning as much as you can, being the market expert, knowing the inventory, talking intelligently about some of the key macro elements. These include what will happen to the mortgage interest deductions, where rates are going over the next couple years, how your timing is. You need to be able to engage in those kinds of conversations in a meaningful way, but don’t let it define your year. There will always be people who need to move.
Bruce said what is interesting is the buyer can have a different perspective on what their expectations are for buying a house. Bruce asked Leslie to speak to that since he remembered a time when buyers were very interested in real estate since they knew it was going up 25% the following year. This is why they were a participant. However, if you were buying in 2017 you are probably buying for a different reason than that participant back in 2004/2005. Leslie said during this time a lot of people were buying for shelter. Price appreciation made it look attractive, but you still need a place to live.
She thinks one of the biggest challenges we face is lack of financial literacy. She hopes CAR and many others would realize that kids are graduating from schools without understanding what homeownership is, how to make it happen, and why it is a long-term good investment. At CAR they did a survey of renters who were planning to buy within the next 5 years. One of the questions they asked was if they knew the could qualify with a low down-payment program, would they be out looking now? 2/3 of them said yes. They followed up by asking if they knew about the FHA program, and 80% of them said no.
Leslie thinks this is an opportunity to go out and explain what is available. When you ask people how much of a down payment they need, they will say 20-30%. The VA program shows that it is possible to do solid underwriting with low down payments. The big problem in 2008 and 2007 was not about down payments, but rather a lot of other things. On the buy side it is education and staying in for the long haul. You still have a market where over half of the transactions have multiple offers. Many of them have double digits and more multiple offers even now. At the high end of the market you are not having this situation so much, but at entry-level housing it is the case.
Bruce went through several of Leslie’s presentations, and the chart that surprised him was the one that showed such a low percentage of people knew an FHA loan existed with a low down payment. If you think 20% is what you have to save and you are way far away from it, you are not even engaged in thinking you can buy one. You are not doing any preliminary research. Today we talk about housing affordability while rental housing is very expensive as well. If you add in student loan debt, there is less of an opportunity to really say that it would take a long time. If there is a way to qualify and get into a home with the low down payment government program where you are fully vetted, then why wouldn’t you want to do that? The only answer is they do not know about it, and this is why this is an issue that needs to be addressed.
Bruce does not want to see the owner-occupant numbers go down and continue to go down. He wants people to own their own properties, and he wishes they could make a practical decision. They have suggested this program before , but they have a nothing-down Fannie Mae program that would be really safe with two little caveats in the loan. If some reason there was a default, they should be allowed to walk to a new buyer. It used to be called a simple assumption where somebody would take it over without formally qualifying.
If nothing else works when you open the bid at a trustee sale, the principle is not at risk and the bid could be $15 or $20 grand of back payments. Someone else will then take it over. That one change in these programs would allow us to get the percentage to go back up to the mid 60s. He really thinks this is a good idea, and you would take out the risk with just a couple policy changes. He thinks it is just hard to sell.
The times he has been in front of people who make those decisions, even if they thought that what he was suggesting was a good idea they did not think they could sell it and get it past whatever the cut is. You would hope you are dealing with people who are data-focused so they can run the numbers and see that it would work. The homeownership rate in California right now is less than 53% and 10% below national. In her speeches she says that within five years we will be a majority renter state.
There are cities such as Long Beach that are 38% homeownership, and she should see this playing out in micro markets today. There is tons of data about communities and the health of families being correlated with having a stake in a home. This is much bigger than realtors and their transaction. This is really about a quality of life and community.
This goes back to what Leslie was saying about getting a loan. It fixes your house payment, so you are on this journey. You might be consistently making more money for quite a long time. If you have a rental payment, it will be variable and will change and take the biggest share of your income. If you fixed your payment, you will have spendable income going forward in ever-increasing amounts. What the policy-makers should think about is that we will have some high bills to pay with people who are retiring. We need to allow the person footing that bill to have some extra spendable money by getting creative on the housing side.
Leslie said having certainty going forward and a fixed payment is an incredible plus for people. The rental market is really tight, and rents have been going up very sharply. In some areas they are pulling back somewhat. You have this dance between condos and rentals, but just in general for the health of the budget for the family moving forward, having a 30-year fixed rate loan as long as we have them is an incredible gift that should not be missed.
This is especially true with the rates we are at now. We cannot complain about 4, even if we are sad we missed the 3. Leslie agreed 4 was not bad; and having been in much tighter environments she sees where they are now and where they might be going the rest of the year. We are still in that sweet spot. Bruce and Sean O’Toole visited the Library of Congress and stayed there 3 days. They pulled up newspapers from about 1850 on looking at advertised interest rates for 100 years. They wanted to make sure they knew how special these interest rates were. This is a very unique subset that Bruce represents. He has always wanted to figure things out himself. Rather than take somebody’s word for it, they have to go see it.
For information about CAR, you can visit their website at www.car.org. They have public information, some of which can be found on their forums and things just for members. However, they do have information out that is available to the public. They try to be a source of educational material and information on the housing market and real estate transactions. They unveiled a new website about 2 months ago with an excellent search function and historical data.
Tune in next week as Bruce continues his discussion with Leslie Appleton-Young of the California Association of Realtors.
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