Norris Bruce
Feb 03, 2017

Bruce and Aaron Norris Discuss Their Newsletter and Upcoming Event on the Real Estate Radio Show #524

Aaron Norris

Aaron and Bruce continue their discussion this week about their event today and their latest newsletter.

Episode Highlights

  • What are the wild cards Bruce will cover in his event tomorrow?
  • How is this market timing report different from any other?
  • What are the housing markets like in the different counties, and which have room to improve?
  • What is the dollar value now compared to years prior, and how does this affect the affordability index?
  • Has the market in San Francisco Bay peaked?
  • What does affordability really mean, and how does Bruce look at it when viewing charts?
  • What is currently happening in the rental market, and what does Bruce see happening in the near future?

Episode Notes

They began by taking questions about the different counties. They, unfortunately, could not cover all of them, but most will be located in the report. One caller, Josh, asked about Ventura County. Bruce said he did not feel like there were many areas maxed out in price. When they talk about what is next ten days from now. The least important thing will be the short-term, meaning in the next year. What will be more important is what happens in the decade that follows because there will be game-changing events that make the outcome different. If you are asking whether he feels the urgent need to sell in Ventura at the beginning of 2017, the answer is no.

The next question was how the U.S. dollar devaluation factors into the use of statistic payment price in the analysis. Bruce said it generally does not. The question is how it affects the foreign investor coming into it. In that case, he does consider it. However, he has not calculated the difference is because he cannot find it being important enough for its own category. Another relationship you may wonder about is rent price to payment price. The ratio here has to be important, except for when you do the history of it. In this case, it is not important.

San Francisco is a perfect example of this since it is the most out of control ratio there could be. Even though the rents were high, payments were enormous. Year-over-year, prices went up 25% when that ratio existed. There are some categories that seem important. This may be true for someone in China whose currency is being devalued and they are trying to park their money in a dollar-based asset. It would also make sense if you were in Europe when the euro and pound were devalued and you would buy less U.S. real estate. However, the question is whether it is the quantity that will tip us over, which Bruce said it probably will not.

Corey asked if Sacramento County still had room to go up. Bruce said it does, and this is why they do the math. Nothing in Sacramento, Riverside, or San Bernardino that scares him. When they cover this area in the report, they have to cover this and ask ourselves why they did not join the party. The first chapter in the report deals with 20 appraised properties. Rick Solis has appraised the same properties over and over again, and they do not touch all the areas. It is interesting how you have areas that have gone up way past their peak in 2007. You have areas like Sacramento, San Bernardino, and Riverside that are way below.

That dichotomy has not usually existed to this exist. You usually have high-dollar priced property go up first, then the money flows out from Orange County to Riverside, then from here to Victorville, then to Barstow. This is the progression as money tries to find some kind of sensible purchase price on something in order to get a yield. They did get their share of it this time in the other counties, and this is what they have to look at going forward. You have to see what was missing and if it will correct itself. Bruce said this is part of the story because the answer is likely no.

The next question regarded the dollar then versus the dollar now and if that is calculated into the affordability index. Is the dollar from ten years ago worth the same today as we are calculating affordability? Bruce said he takes what the California Association of Realtors says, but he does not think it is attached to anything other than what it is today. It calculates what percentage of the households can get a yes answer from a lender given the fact they are putting 20% down on the median price. You then end up with a loan balance and apply the interest rate. You look at the income and get a percentage.

What is fantastic about the chart Bruce was discussing is that it is inaccurate 100% of the time, yet it has been the most accurate projection for a downturn that he can find. Bruce said you can make the case that not everybody puts 20% down, and it’s never true. It is interesting how a chart that is completely flawed can be such an accurate projection. Bruce said he is not stuck on any chart; all it does for him is give him a better conclusion. If he found one that was better, he would use it. He spent a lot of time on this report, and this is the second chapter on affordability.

There are a lot of intelligent people Bruce really respects that disagree with some of the things Bruce says. This time he did a progression of seeing what reaction happens as the result of something else. This happens over and over again, then at the end of the day you can tell Bruce what chart told you what was next. Bruce does not really care about which chart it is, but he cares about avoiding damage. If you can find a better chart to help him avoid damage, he will pay attention to it.

David asked about Las Vegas, which Bruce said he is not really an expert on anything outside of California. This is why he hesitates to make a statement here, although Vegas bothers him a great deal. He says it is the phoniest markets that has existed. The foreclosures that could have existed here completely never happened. They basically passed a law that says you will have a very hard time foreclosing, so they didn’t. They created a housing shortage. You have a building boom in Vegas while you had 50% of the people upside down. Since they were not foreclosed on, you did not have a big ratio of foreclosures. You literally ended up with a building boom because you had a housing shortage that was completely nonsense. This is something Bruce does not trust and views this as a very speculative area.

Another caller asked about the San Francisco Bay area and if it has peaked. They wondered if you should buy and sell in the other areas charted for an upside. Bruce said the hard thing about a speculative area is the human being will keep on investing in things until it goes down. Bruce cannot tell you it has peaked because it is like telling you bit points have peaked or other crazy things. It is over-priced compared anything in history. For Bruce, this is a speculation, so you really have to decide. If you are in Sacramento you are an investor. If you are in San Francisco, you are a speculator. Could the speculator make more money? The answer is yes until they don’t, and that is the danger.

Aaron liked how Bruce was very conservative looking at going back a year before lending got really crazy. We are looking at the payment in 2005 before the nonsense loans got us to blow through this. It is a rather conservative chart, which is good. While it may be conservative, it is more accurate than the other. If you think about it, we are still not there price-wise either.

If you were to ask Bruce if he had an urgency to sell something in San Diego in the early part of 2017, the answer is no. He did not say the upside was 0, negative, or speculative. They just said it is within 20% at 4% interest. What will be really interesting will be to see where interest rates go. Bruce said one of the reasons he covered the wild cards is because if some of that materializes in 2017, this could filter into the economy. If it filters in and creates a recession, what will happen with our interest rates?

Another caller asked Bruce about his rentals and if he sold everything. Bruce said he has virtually sold everything he had as a rental, and the reason he did this is it made sense. He bought one for $64,000, fixed it up, and sold it for $275,000. He was able to do a 1031 Exchange and ended up with two brand new houses in a great area for twice the rent. This property was in Florida, where his best friend lives and he is comfortable with all the demographics here.

This is why it made it made sense. He did not sell because he thought it was maxed out in areas like Moreno Valley. He was not afraid of this; rather, he was being a good investor. He was returning to his investor roots and saying he wanted to hold them long-term. He did not want to hold the Moreno Valley property long-term, but he bought it with the assignment to grow in price. It ended up going up three times or more. This was why he sold it.

Bruce said he has not stopped speculating and had just started building 4-5 new houses this year after having just finished about this many over the past year. Bruce thinks what will happen in the next year is insignificant as to what happens in the next ten years. This is a much more important question that will take him a while to explain.

Going on to the table of contents in the book, Bruce and Aaron next discussed each of the chapters and why they are in the report. This will really help people who have never been to a timing event to have an idea what to expect. The first chapter was titled “20 Appraised Properties.” Over the years Rick Solis has appraised properties for the Norris Group. They have 20 properties, one being in Riverside, one in San Bernardino, another in Victorville, and more. They were likely appraised from the peak in 2006 or 2007, and he would appraise it again every few years. They have this little trail of what it was worth in 2007, 2009, 2012, 2016, and maybe another year in between.

What is revealing about this is how different this comeback is. You do not normally have an area that is still half of what it is valued when you have another area that is 50 miles away at over 100% of where it was in the last boom. This tells Bruce that there is a chance to be an investor in some of these areas. In the report in another chapter they talk about why this happens.

In the early 70s, California and the United States was almost exactly the same median price of $32-$34 grand. This was the big spread, then all of a sudden California went crazy. It went up to double then 250% of it. The question is what would happen if the things that made this happen are not present in the next decade. This report discusses this and tries to determine if the elements that made this happen are still existing. If they are not, why would we be capable of making this ratio? This is why the chapter is so long. Bruce will methodically go through 24 reasons why this outcome will be different. This does not mean he will not participate in California real estate. He will simply understand better how the game is different this cycle.

The next chapter is about affordability, one of Bruce’s favorite topics. It is his favorite because he remembered looking at it and thinking there would be a lot of problems when this tilted over. It was a warning light for him to really look at what affordability means. It means the ratio of people who can receive a yes answer from a lender. When this gets too low, it makes perfect sense that this would have ramifications on other charts. What happens with affordability is it is looked at the opposite way. High affordability never means wonderful things and always coincides with a billion REOs. It is great for the industry because they know how to deal with it. Bruce looks at charts in a reverse order than somebody who may have a PhD in economics. People think high affordability means everybody can buy, but the problem is they don’t buy because they are scared.

In this report Bruce tears apart affordability and watches the progression happen. He asked the question if this chart is an initiation of something else or all-inclusive in its own. Bruce said it will be fun to go through all this because it is the first time he has actually taken people through the drill that helped him land on affordability being the most important chart to determine a downturn.

The next chapter deals with sales and inventory. Most of the categories are rated 1-5, and a lot of these 20 chapters land in one of the five categories as really important because it can be a big deal if they get skewed one way or another. With sales and inventory, in downturns you sometimes have a large buildup of foreclosures. Your inventory changes in nature, and this takes a really good look at this and sees what the numbers are when you are in very dangerous points. Their sales have mimicked something that is very unusual. In the last 5-6 years in California, prices have doubled and these years have almost exactly mimicked the years 1990-1996 when prices decreased 20% in California.

This is what our sales have done. Here we have a boom in prices only because we crashed, so it is a little bit of a weird doubling. We gave up 55% to double, so we are really where we were before, somewhat less. Their sales are just not going anywhere, so you then have to ask why. Is it going to change? If not, what is the future of our pricing power? If you do not have a big pile of sales, it is really hard to push people into unreasonable prices.

The next chapter is on lending. The question is whether it will get aggressive and produce the buyer who is at the margin to where we can have a lot of volume. It may be repealed with Dodd-Frank, but you have lenders getting fined all the time. He does not know how aggressive they are going to be in the short-run.

Interest rates is a wild card, and for Bruce this report did not attempt to project this as much as it did to take into account whether it is 3% or something else. There is a real interesting progression they do at the very beginning of that chapter. It is basically a journey for his life. With 17 ½% interest at $100 grand, Bruce asked what your payment would be. The same payment emerges at $350 at 2 ½%, and this is how important this answer is. However, who knows what it will be.

The next chapter is on employment. You have pockets of employment doing great in areas like Northern California. You also have construction employment that has virtually not showed up in areas like Riverside and Sacramento. Aaron wrote a really important chapter in the report that will talk about how things might change in the next ten years. This includes when you are employed and if you could be replaced by something called a robot.

With trustee sales, the next chapter, Bruce looks at trustee sales and the ratios in the past. He then asks how you could have three downturns and then have one in the early 80s with no price hit. In the 90s you saw a 20% price hit, and in 2008-2010 you saw a 50% price hit. The difference is in the ratio of trustee sales to sales. They will then project what they think is going to happen with this going forward.

In the next chapter Construction and Commercial, Bruce explained how construction has not done very much. They almost missed the cycle for single-family homes, but on the commercial side they built a lot of apartment buildings. Commercial real estate is about 126% of the peak, so overall it is much stronger. This breaks into some categories that have gone crazy. Storage units have gone up 180%. If you own a hotel, Airbnb has kicked your butt and it has gone down. It is not an even sum game. The question is if the cap rates people are paying really creating a value for them or if it will be a big negative if interest rates increase.

The next chapter is on retired readiness. Bruce looks at the people who are retiring, their net worth, how much problem this could be going forward, and how unlikely it is you will take anything away from this group. Demographics and migration show that we are definitely going to have this great group of people turn over 65 and all the things that matter math wise to that.

The next two chapters are pension math and national debt. Bruce said he changed the chapter title after looking at it. He also changed the title of the whole report from $30 trillion to $40 trillion because it looked like we were likely going to do that because of the presidency and past financial outcomes. He took a look at what a Republican president does when they come into office. He is saying he will cut taxes, which will create revenue. The bill will go up as far as deficit. We will have a lot of infrastructure spending, so all these things come into play when you ask if we could have a $40 trillion deficit and things still be okay. The answer is yes. You just spend the money on the right things that create a future profit for infrastructure.

Bruce had discussed oil in the last segment, and Aaron will discuss the chapter on changes to technology. They will end with rentals as well as discussing where we are and how we end. This is a lengthy chapter of about 50 pages; so at the end you should feel Bruce has thoroughly explained where he has landed and why he felt it was comfortable to say ten years out where the market will be.

The last chapter is top-timing takeaways. This includes 30 tips and “Ah Ha!” moments over the last 20 years. If you want to see the newsletter with all the charts, especially by the county, go to

Aaron and Bruce went back to taking questions, and one caller asked about leverage. They asked about using this when changing your rentals in California to Florida. Bruce said at 64 he virtually has no leverage, but he does not really care to have it. He said if he did use it he would use intelligent leverage to make sure that he does not have a problem with payments in any case. One of the things he has spent time on this year is going back to Washington, D.C. twice. He really thinks there will be a new attitude toward investors because it will be the main growth area for housing. If you are a lender, you might want to get good programs with fixed financing for investors. Bruce sees this coming within two years and believes Fannie Mae will open up the doors to where instead of it being 4-10 properties it will be a number much different.

The next question regarded rents and what Bruce sees happening with these. Bruce thinks there will be more demand for rentals than there will be for occupant owners. Bruce thinks we are in for a recession in a couple years. Generally what happens is you lose migration in any area in California. Sometimes it is less severe than others, but it is a little hard to have rental increases while you are losing people. Bruce said he would not count on a lot of increases going forward. There is a point where you have to say that’s it, especially if you have migration loss.

If you are going into a rental market, Bruce said he does not understand why your first investment would be in San Francisco, even if you could rent a 2-bedroom condo for $5 grand. He would not want to pay $2 million for it and have that make sense. There is a point where you have to say you will not start at that particular spot. He does not see rents being really aggressive for the next couple years since they have really been aggressive. All the charts in the rental chapter show we have had some pretty healthy gains, some areas showing ridiculous gains

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