Bruce Norris with John Burn Part 2

 

John founded the John Burns Real Estate Consulting to help business executives make informed housing industry investment decisions. The company’s research subscribers receive the most accurate analysis possible to inform their macro investment decisions, and the company’s consulting clients receive specific property and portfolio investment advice designed to maximize profits. The team takes great pride in enabling the profitable development of the best places to live in the world.

John co-authored Big Shifts Ahead: Demographic Clarity for Businesses, a book written to help make demographic trends easier to understand, quantify, and anticipate.

Before founding John Burns Real Estate Consulting in 2001, John worked at a national consulting firm for 4 years and for 10 years at KPMG Peat Marwick—2 as a CPA and 8 in their Real Estate Consulting practice.

John has a B.A. in Economics from Stanford University and an MBA from UCLA, and works in our Irvine, California office.  He has attended home games for all 30 major league baseball teams, and regularly runs the hills in Southern California.

 

Episode Notes:

 

Narrator  This is The Norris Group’s Real Estate Investor radio show, the award-winning show dedicated to thought leaders shaping the real estate industry and local experts revealing their insider tips to succeed in an ever-changing real estate market hosted by author, investor, and hard money lender, Bruce Norris.

Joey Romero  Thanks for joining us once again, for part two of our interview with John Burns Real Estate Consulting CEO, John Burns, enjoy!

Bruce Norris  When the pandemic hit, what was your initial reaction as to what we’re about to see for the rest of the year? And how differently did it play out? Or did it play out the way you thought?

John Burns  It didn’t play out the way anybody thought.

Bruce Norris  I’m relieved to hear you say that.

John Burns  Fortunately, we were in the business and I had 70 plus smart people, we were paid to be people that figured it out. So, so, people were coming to us to figure this out. And we had the time to figure it out, and the resources and the know how so on that sense, I feel really lucky. And we started doing weekly webinars to educate our clients on what was going on. But the federal government was asking me to believe this, this is before it actually happened. That the IRS which has to be one of the most bureaucratic organizations out there, who’s, whose budget had been slashed, was going to magically get a check into everybody’s checking account or deposited everybody’s checking account. And the Small Business Administration, which probably is just second to the IRS, in terms of a slow moving bureaucracy, was gonna pay all the payroll for all the small businesses in America. And I know and I said, I just don’t buy that. I mean, it’s a great idea. It’s crazy, you know, and then they pulled it off. And then, and they did that they paid all that payroll for two months, the Fed started gobbling up more mortgage backed securities to get interest rates down and dropping their rates. And the analogy I drew, now, I thought was gonna be Armageddon until those checks actually started depositing. But the analogy I drew is going back to my earlier days, or the 2001 downturn, when Greenspan dropped rates, the Fed funds rate was six and a half and it went to one.

Bruce Norris  Right.

John Burns  13 years after the S&L debacle, or maybe 10 to 13, depending on where you are. And housing was in very similar shape. It was in balance. When Greenspan did that because of the SNL crisis. Housing took off. And you started this conversation with that what happened 2001 through 2006, that whole thing got started by the Fed, dropping rates using housing as an impetus to grow the economy, to offset all the other stuff that was going on. And I said, here we go again, this is the exact same thing. But you know, I don’t want to sound like I called it because I, everybody, especially my wife will tell you, I thought it was Armageddon in March. It wasn’t really until we suspended our forecasts. And I think we released them at the end of May, or probably early June. And I’m really glad we did because we had, we would have been completely flying blind. But we by the, by then I’ll tell you, so Orange County home sales, new home sales went from 103, a week, to three, and a couple. By then they were back, they were back up not maybe at 100, but 80 or 90, I mean, the market recovered really quickly.

Bruce Norris  Oh.

John Burns  So, that made us a lot more confident.

Bruce Norris  It was, it was amazing. Now, what’s interesting is looking at this, one of the things that I knew was not correct, is that, you know, California floated around 400,000 sales for the last decade plus or minus, you know, 20,000 or something. And the reason was given by people that were doing presentations that we didn’t have enough inventory. So, what happened in basically March and April and May inventory went down 45% and volume for the rest of the year, kind of kicked along and, and then additional 20%. So, got to about 480,000 units. On 55% of the inventory, the demand landed on that small of inventory. So, I think you had two groups that were urgent. There was a group of urgent people that said you can’t go see my house now. It’s pulled off the market, not going to show it. There were another group of people that said, I have to get out of wherever I am, and urgently buy one. And I think those two urgencies collided.

John Burns  Yeah, I mean, if you, if you asked a homebuilder what was their number one wish, it would be that people would save a downpayment. So, all of a sudden, people stopped spending money because there was nowhere to go, they didn’t take a vacation, they got a stimulus check, you only need 5%. With FHA, they got a down payment, the mortgage rates would go below three, which they did, that everybody would be locked in their house and stare at their ugly kitchen. And then be forced to be on zoom calls while you’re wife is running the blender. And, you know, all of that combined to I believe a lot of people said, ‘No, we’re thinking of moving anyway. Now’s the time.’

Bruce Norris  Or the other thing happened is let’s fix the place.

John Burns  Big time. Home Depot $100 billion a year in sales, and 23% year over year surge in demand. During a pandemic, when they were limiting people, they could come into the store.

Bruce Norris  So, that’s, you know, we have people listening to this. And for this next section is, this is what they’re very interested in. So, I’ve been looking online trying to figure out what’s going on with the prices of the lumber and all that stuff. So, I started reading about it. So, one, one of the things that happened was construction of homes was considered a necessary business. So, they could continue, correct? Okay. And Home Depot was a net- a necessary supplier of their stuff. So, they were allowed to open even if we, even if it was a limited, they were still allowed to do that. You did have that group of people that stayed home and looked around and said, I think we need a new kitchen. And they did that. What was interesting about that, is that they didn’t open the supply chain, to the lumber yards, which were not necessarily businesses. So, all that demand landed on a business that couldn’t play catch up right away, is that accurate?

John Burns  I don’t think the lumber yards were closed, because I think they were a part of the construction. So, so, we’ve got a guy, Tim Sims, who actually for a long time, worked in a lumber yard, before he went back to college and worked for Nichiha and now, now he’s with us. He put together this and we did a whole 20-minute segment for our clients last month on inflation and what’s going on in the supply chain. And let me, let me, there’s more to the story than this. So, the tariff started in the ’80s. There were a bunch of beetles infestations in the ’90s. During the great financial crisis, 150, sawmills shut, and a lot of them were never reopened. Then particularly in the West, we had all these fires, then we had a bunch of environmental regulations that were restricting habitats. So, that just leads up to the pandemic. And we weren’t building that many homes. So, lumber prices had never really gone out of control. Well, then during the pandemic, a lot of the mills shut down, frankly. But it was more the social distancing was my understanding. They just couldn’t make it work. And like me, they thought, you know, I have more mills than I need.

Bruce Norris  Right.

John Burns  So, I’m going to shut it down, then they have to, when they reopen them, they have to have COVID precautions. So, you’re right there, there was a supply shock if you will. And at the same time, the government-induced a demand shock not only for new construction but also for remodeling. And it was, it was a perfect storm, less, less supply, more demand. What happens to home prices and lumber prices.

Bruce Norris  Now, where do you, where do you see that headed for the rest of the year? And what supply chains are not only, not a lumber you have been, we’ve been involved in finishing homes and appliances have been difficult to get and that type of thing.

John Burns  I mean, that’s I’m just going to repeat what my building products guys have educated me on the, those mills that were stopped in the spring of last year are restarting and coming back online. So, we’re going to see some more supply there.

Bruce Norris  So, they’ve been stopped for like eight months?

John Burns  No, no, I’m not. I mean, every mill is different. So, I, I’m not exactly sure.

Bruce Norris  Okay.

John Burns  But we are going to see supply come back. But demand is surging at the same time. So, the bottom line is they don’t think it’s going to change very much. You talked about the appliances, what, the rumor is, but it’s from a good source that they’re one of the builders, actually ordered, like a year’s worth of appliances from one of the appliance manufacturers and shoved them in a warehouse. Because they were, they were not able to close homes due to lack of appliances. So, they essentially hoarded all the appliances.

Bruce Norris  Okay.

John Burns  So, a big home builder that builds you know, 10s of 1000s of homes a year can hoard appliances making it hard for you and me, when those appliances are stuck out on a boat, or not being shipped from, from China.

Bruce Norris  Okay.

John Burns There’s a big shortage there. And I’ve learned that there’s a, there’s apparently a chemical shortage that’s coming, and a lot of raw materials need chemicals. So, we’re not out of the woods in terms of shortages here.

Bruce Norris  What are, how are the builders reacting with their clients? So, they have a client interested in buying a new home, how do they, how do they fixed the price and sign a contract?

John Burns  So, that, that’s the big debate. So, I know a couple of private builders that were ecstatic about their home sales last year but didn’t lock in their costs. So, they, you know, they agreed to sell a home at a nice profit margin. And by the time they got the home built in close, there wasn’t much profit margin-left. So, pretty quickly, they, they learned let’s not sell too far ahead of construction because I’m taking all that construction cost risk.

Bruce Norris  Right.

John Burns  So, they just started jacking prices to slow it down or just limiting sales all together. Because it’s really hard to raise prices 10% and then take them back five. So, prices were ratcheting up pretty quickly. But what I’ve seen this spring is they’re ratcheting up even more. There’s one publicly traded home builder that announced publicly they raised, they’ve got I think, close to 150 communities, they raise prices 5% in five weeks, across the entire portfolio.

Bruce Norris  Wow.

John Burns  Just to slow down sales, and they slowed him down to only being up 27% year over year instead of something like 80.

Bruce Norris  Okay. But they could, they could easily have a 5% price increase during that too correct?

John Burns  They could.

Bruce Norris  Okay.

John Burns  You know their goal was actually to slow down, was to sell fewer homes, because I can’t deliver them, frankly, for probably a year at this point.

Bruce Norris  Yeah, it’s interesting, you know, we built, been building homes in Florida. And so, you’ve had delays that you think okay, well, I couldn’t, I couldn’t have dreamed that one up. So, there’s health inspections in Florida, the people that their health inspectors were taken off of what they normally did to give shots.

John Burns  Sure. Yeah.

Bruce Norris  So…

John Burns  Fuse boxes is another one, you don’t think about some of these things that these little tiny components that come from other countries, you can’t close a house without a fuse box.

Bruce Norris  Right.

Joey Romero  That was a story in the Wall Street Journal talking about the freeze in Texas is gonna slow down PVC or materials, things like that.

John Burns  Right. That’s I mean, there’s, there’s chemicals and things that go into the manufacturer of that. And yeah, there, I think there were some problems there before the pandemic that just got accelerated during the pandemic.

Bruce Norris  Would it be fair to ask what a typical margin of profit is to a national home building?

John Burns  Sure, there’s like 25 of them, you can look it up. They’ve all got publicly financial, I think they, it’s about a 10% profit margin.

Bruce Norris  Okay. So, I’m thinking a big price increase. It’s not like, okay, we could absorb that and be completely fine. That’s a big, that could be a big chunk of what they make.

John Burns  Yeah, but remember, too, that a lot of the cost is the land?

Bruce Norris  Sure.

John Burns  So, if I raised, prices go up 5% on a $300,000 house, that’s 15 grand more in revenue.

Bruce Norris  Right.

John Burns  Let’s go up 500– 5% on 170 grand, which is your cost not land.

Bruce Norris  Right.

John Burns  That’s not as much. There is a, if the percentages go up the same, their margins will grow.

Bruce Norris  Okay, got it. Okay, you had us set right at the very beginning that you were to see kind of set the same signs that we did toward the last peak. So, what is, what are the things that you look for, I’m not saying it’s the same situation, but what are the charts that you pay attention to, to say, ‘Oh, I mean, we’re closing in at the the peak again.’

John Burns  Yeah, I want to rephrase that because I didn’t say the same signs as the peak. We were talking about the early 2000s. So…

Bruce Norris  Okay.

John Burns  At the very beginning of that, when you start to see double-digit price appreciation, that’s what I’m seeing.

Bruce Norris  That’s what you’re saying again, okay, so we’re not, you’re not seeing anything like a 2006 or seven. And I don’t mean that event, but you’re approaching that price. So, okay, give me a, give me a, do you think we’re, we’re in 2002, or three in the cycle?

John Burns  Um, in terms of volume? Yes. So, you know, 2006, we were near all-time high levels of construction, we’re not anywhere near that. And then downturns are really, really bad when you have 2 million empty homes that need to be filled.

Bruce Norris  Yeah.

John Burns  We’re not doing that. The affordability in relation to income is out of whack. In most of the countries but not nearly as out of whack. And I’m talking about the payment now not the price, as it was in 2006.

Bruce Norris  When you say out of whack, you made the payments may be a little higher than it typically is, but it’s still okay. In the margin.

John Burns  If you look at the ratio of payment to income in each, each area, most areas, it’s slightly higher than normal right now. Thanks, thanks to very low-interest rates.

Brue Norris  Right.

John Burns  But what happens if we see double-digit price appreciation for the next three years and incomes grow 3% and mortgage rates stay flat or go up a little bit? You could see the payment in relation to income grew by 40% or more. That it would be 2006-ish all over again.

Bruce Norris  Do you think the lenders have the ability to say yes, at that level? Are the policies in place? It’s just uhm, I know you want one. But the answer is no.

John Burns  Mortgage Lenders?

Bruce Norris  Yeah. Mortgage Lender saying to buyers, I know you want one. But you can’t get a yes answer right now.

John Burns  Have you ever met a mortgage executive who didn’t want to grow?

Bruce Norris  No, but I did meet a few that decided they didn’t want to not be able to sell their loans? In other words, are there other, other policies in place you think that we’ll let that go? I mean, can really tell prices can go?

John Burns  So, I mean, you hit the nail on the head there, mortgage companies originate mortgages and get them off their books as fast as possible.

Bruce Norris  Right.

John Burns  So, I don’t think the mortgage guys are very incented. To de-risk, as long as they feel they can get a pool of mortgages and find a buyer, the de-risking will be done by Wall Street, or whoever or the Fed who’s now buying those mortgages.

Bruce Norris  Okay.

John Burns  But who buys those mortgages is generally debt-oriented pools of capital, whose alternatives today are what 1% treasury.

Bruce Norris  Right.

John Burns  So, again, a 3% mortgages use yield compared to treasuries. And that’s the same thing that happened last time is that all those subprime mortgages that you and I, and actually a friend of mine was the head of a company that was doing a ton of them, and he quit because he knew this was the end.

Bruce Norris  Right.

John Burns  But Wall Street just kept going, because there was somebody to keep buying. To the ultimate regulator I don’t, I don’t know if the regulators can actually come in and stop this. If things get out of control, they would, it would have to be nobody’s interested in buying them anymore.

Bruce Norris  Which really interesting right now, again, you and I have a pretty good historic memory of the chart. So, the projections of GDP growth to me have this I’ve been astonished by. So, I was interviewing Doug Duncan, and Fannie Mae has a three-year projection of GDP. So, in January of 2020, they looked out the 2021 and said, 2%, in January of 2021, they looked out and said six and a half.

John Burns  Yeah.

Bruce Norris  So, 12 months later, we’ve gone from two to six and a half. And I mean, because I really respect him. You know, I had to sit down and think about that instead of just going well, that can’t be right. So, and now he’s, I think somebody came out from the Fed or somebody was seven and something.

John Burns  Yeah.

Bruce Norris  Now.

John Burns  I would take the over.

Bruce Norris  Yeah. Now what’s interesting, okay, no, why do you think, why do you think that is the strength of the economy? Because of the money that they’re shoving into it?

John Burns  Absolutely. Two things. So, we think, and actually, there was a great New York Times article on this using good Bureau of Economic Analysis data that we did a summary of for our clients. I’ve got it memorized, basically, on average, because there were some people that really struggled last year, but on average, Americans made a trillion dollars more last year from February to November than they had made the prior year, mostly due to government stimulus to handouts. And they had spent five I think it was $535 billion less, because they were stuck in their house. They added up and you get almost $1.6 trillion in additional savings, and that’s, you know, JP Morgan is publishing how much everybody’s savings accounts are up by quintile, even the lowest income bracket, their savings accounts are up. And people have been stuck in their house.

Bruce Norris  Yeah.

John Burns  So, you got all this cash, what are you going to do?

Bruce Norris  Interesting.

John Burns  I mean my son works in an Escape Room, which by the way, they’re still open. And he said, as soon as those checks hit, we got booked up to the max, because everybody just wanted to come in and play.

Bruce Norris  Yeah.

John Burns  And I think that’s exactly what’s gonna happen.

Bruce Norris  Okay.

Joey Romero  I saw that infographic. You guys put out such great infographics.

Bruce Norris  Now, wait, now, let’s, so, let’s get back to when’s the last time we had GDP growth at seven and a half percent or six and a half percent? It’s 1984.

John Burns  Okay.

Bruce Norris  And interest rates were slightly different in 1984. So, the Fed fund rate is 10. And over the, yeah, and the mortgage rate was 12. Can you put John back on the main screen? So, what is this do we have in a quarter percent Fed fund rate?

John Burns  Now, you’re above my paygrade, Bruce.

Bruce Norris  Well…

John Burns  You’ve got one of the best track records are crawling interest rates, if anybody I know. So, I’m gonna let you answer your own question.

Bruce Norris  Well, I think it’s completely manufactured. And that’s what’s scary. So, we have no business being in a quarter percent. If you have a 7% GDP growth. That’s, that’ll be really interesting. Do you think the Feds going to entertain, what is it called Project Twist? Where they, or Operation Twist where they buy the tenure and drive interest rates back down for the mortgages?

John Burns  Well, let me challenge you a little bit on the interest rate thing. So, so, we mentioned you know, as 2,000,000,000,006 in savings, where’s that going to go? So, that you know, all that capital is seeking a home and banks and other places. And I think that’s what’s driven interest rates down is there’s so much demand for yield. And going back to your earlier comments about the trend and built to rent, that’s what we’re seeing. This people are saying, you mean, I can invest in houses with yield versus, you know, something that’s only backed by a promise of the federal government or something that’s, you know, not yielding very well, or there’s negative interest rates all around the rest of the world? I think that’s an important part of this discussion, Bruce, and why home prices are growing up as we’re seeing investment capital flow into something, frankly, that makes sense to invest in, in my view, compared to other investments that are out there.

Bruce Norris  Okay. Well, that’s why I love to talk with you. Because, you know, I said some of the stuff I look back at, okay, well, what in the world are we doing at a quarter present? It just seems so manufactured for, for a, we have to have this outcome. So, how do we get there? What’s, let’s pretend we don’t have. Are you concerned about inflation, then at all?

John Burns  We’re very concerned. I, I, I think we have inflation right now. It’s not across every single product. I don’t think it’s super heavy in the non-discretionary items, like food and rent, which, which is growing but not substantially. But in discretionary items like buying a house, or I bet, you know, going out to dinner. All those things that are going to be in huge demand, I bet I bet the airline fees are going to get very expensive. You know, assuming this second, we don’t have a second round of a different strain of the virus coming through and people are really going to go out and spend I can see revenues and costs going up pretty substantially.

Bruce Norris  What’s interesting, I haven’t ever checked this source for what my feeling is about the economy, but a gentleman happened to go look for a boat to purchase in, in March and talk to the boat dealer who had 700 boats on the, on the lot. And he was he was busy. And two weeks later, the Coronavirus hit and he lost all of the sales and he literally was depressed thinking he was going to go out of business. By the end of May, he had 50 boats left.

John Burns  Yeah, and there’s a boat shortage. So, he’s raising those prices on his boats.

Bruce Norris  That’s right. I think they’ll make them out of wood? Probably do.

Joey Romero  John, we, Bruce just interviewed David Kittle and in one of his big concerns about throwing all this money at the economy was that when somebody gains somebody loses, so he’s really concerned of the losers. Who do you see? Do you see a loser on, on the other end of this?

John Burns  Consumer standpoint, the winners are the ones that just locked in a sub 3% mortgage rate for the next 30 years and are confident they’re going to be able to maintain employment. And the losers are probably in home prices went up because of that. And losers are those that haven’t done it yet. You know, particularly those maybe who are in college or something and aren’t ready to do that yet. We’ll probably be coming into a very expensive housing market.

Bruce Norris  Do you think interest rates will gradually go up or down? I’m just curious.

John Burns  I, the, so, I looked to the futures market and the bond market and the bond market is projecting, they’ll go up about 60 basis points over the next three years. So, I’m going with that. I, I’m not smarter than the bond market.

Bruce Norris  Well, that’s interesting. So, if, if the Fed comes in and buys those.

John Burns  Yeah.

Bruce Norris  Then, then they can reverse that. And that’s kind of been talked about, so…

John Burns  But I think bond-. I think the bond guys know that.

Bruce Norris  Oh, yeah.

John Burns  That’s, that’s my favorite and all this stuff out. You know, but the bond market has been forecasting increases for quite some time. And obviously, they’ve been wrong. But I, I’m not gonna say that I somehow I’m smarter than a bond guy.

Bruce Norris  You know, you know, what’s fun about what you do is you sit across from people that rely on the information that you give them, but you’re sitting across from the table from the smartest people in our country. And so, what’s nice about that is you see how they, how they think, and how they operate and how they react to challenges. And that’s, that’s worth, I don’t know what and, and just for your own benefit to see him, see how they do that.

John Burns  Well, that’s where I love my job.

Bruce Norris  Absolutely.

John Burns  I learned so much from my clients every single day. And then, you know, I get the good fortune of kind of pulling it all together for everybody. Because they all look at the world with a different lens.

Bruce Norris  Yeah. The best thing I’ve ever heard anybody say that does what you do, is that you once told me that you don’t give much thought to what you know, what keeps you up at night is what you don’t know.

John Burns  Yeah.

Bruce Norris  And if you know if somebody is looking for a consultant, they can’t do better than that. They just can’t.

John Burns  I borrow, I borrowed that from Warren Buffett.

Bruce Norris  Well.

John Burns  Wish I came up with that idea, yeah. But that, that, that, that is how you lose money. Is there’s something going on that you’re not aware of? And there’s always something going on to talk about.

Bruce Norris  Yeah, absolutely.

Narrator  For more information on hard money, loans and upcoming events with The Norris Group, check out thenorrisgroup.com. For information on passive investing with trust deeds, visit tngtrustdeeds.com.

Aaron Norris  The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669.  For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.

 

 

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