Bruce Norris with John Burns of John Burns Real Estate Consulting Part 1

 

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.

Bruce Norris  I thanks for joining us. My name is Bruce Norris and today our special guest is John Burns. He is the CEO and founder of John Burns Consulting, John founded the company to help business executives make informed housing industry decisions. The company research subscribers received 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 and the best places to live in the world. John co-authored Big Shifts Ahead: Demographic Clarity for Businesses. John is one of the most sought after expert speakers in the real estate field today. And he has a B.A. in economics from Stanford, MBA from UCLA. And he has been on our panel many times over the years that I Survived. So, John, thank you for that. And welcome back.

John Burns  And I’m a huge Bruce Norris fan.

Bruce Norris  Thank you very much. Um, what’s interesting, you know, I always think about when people start, start a business or get into a field. And so you started the Burns Consulting in 2001 and you had, you had been with other consulting companies before that. But for the run that you had, let’s say from 2001 to 2007, in your first six years, builders just had a pretty good time, didn’t they?

John Burns  Um, yeah, the first few years actually, the first year was a little rocky, we there was this thing called a recession and a 911 hit. But then 2003, and especially 2004 through 2005, we’re, we’re unbelievable. And it’s feeling pretty similar right now.

Bruce Norris  Yep, that’s interesting. Yeah, we’re definitely going to get to what you look at say, we got to be careful here. What was the year, because 2006, you invited me out to speak or debate in front of the, your, your group? And so, what year was it obvious to the builders, that the volume that they were expecting would collapse? What year was that?

John Burns  So, that it was 2006. I remember specifically Centex Homes in Sacramento was offering $100,000 off a $600,000 home, the day after the Superbowl. So, it was like February 1, or something like that.

Bruce Norris  Wow.

John Burns  But what I will, will say is that the suppliers and the trades and the other guys that were relying on that, you know, information to run their businesses, when, it was at least a year before they got it. And it was another two years before Wall Street figured it out, or really until Lehman Brothers blew up.

Bruce Norris  Right. Well, you know, that was interesting, because I didn’t feel a very warm audience that night. Talking about the end of the cycle, so, that was interesting.

John Burns  I probably misspoke to, uhm, stock, builder stock prices peaked at the end of ’05. So, Wall Street in terms of, you know, putting your money where your mouth is. God, we got the timing right. It was just a lot of the analysts and things that you know, the investment bankers and others didn’t want to hear it. So, the bullet- the bullish case persisted until Lehman Brothers blew up.

Bruce Norris  So, what’s interesting about your business model is those in 2006, 2007, 2008, even 2009, if all you did was stand patent, say all I do is consult for builders and in their new projects, there’s a good chance you wouldn’t have been in business. So, how did you switch gears to not only help people that were really hammered by the events of that downturn? Also, it seems like you probably got new clientele as well during that cycle.

John Burns  A big time. So, I actually was more I felt like I knew what I was doing more in a down cycle than an up cycle. Because I started in real estate in 1989 in Los Angeles.

Bruce Norris  Perfect.

John Burns  And I worked for KPMG, which had a huge Japanese real estate practice, you know, buying golf courses and doing all sorts of stuff.

Bruce Norris  Wow.

John Burns  You know, I was in my mid 20s and got to see the housing market fall apart in LA, and then plug for you. You’re the first I think, who called it. And KPMG fortunately, for me had a as a big financial services practice. So, the banks and the distressed investors that came in and made a lot of fortune that were were KPMG clients, so I got to work for them during a downturn. And I really saw how much money was made. But then also related to starting my business. I, when I was at KPMG, we were working for commercial real estate and residential real estate. And the commercial real estate guys were just so sophisticated and, and knew when to step on the gas or take the brakes off, and we’re doing a lot of analysis, and the residential market really was not. So, that was really the crux of my business. I thought, well, gee, I can go do that for the residential guys. And they amortize the cost of it across a lot of companies, and that’s what we’ve been doing.

Bruce Norris  Okay. Did you start to negotiate the debt that they had with the lenders during that cycle?

John Burns  Oh, yeah.

Bruce Norris  Okay. Okay.

John Burns  In fact to 2000– until recently, 2008 was our best year ever.

Bruce Norris  Well, that means you put on the right hat. That’s all I can say.

John Burns  We put on, we put on the right hats but you know, what happens for consultants is that when people who don’t know the industry get involved in the industry, they need some help. And so that’s, you know, banks who never thought they’d be taken back $300 million unsecured loans all of a sudden were, distressed guys are coming in and from other industries and say, I can see this industries and in distress, in fact, I won’t, I won’t mention names, but I’ll give you one example, is a very, very large, pretty famous debt fund, made a huge investment. And one of the public Home Builders is no longer with us.

Bruce Norris  Oh wow.

John Burns  And then called me that evening after they made the investment and said, ‘What are you doing for dinner?’ I said, ‘I have dinner plans. I was in New York’, and they said, ‘Okay, you’re having dinner twice, because you need to tell me what we just bought.’

Bruce Norris  That’s, yeah, that’s a little late. But my gosh. When did you first deal with Wall Street when they decided to get into the real estate buying business? And were they, were they intentional, intentionally buying rentals at that point? Or did they think they were buying flips?

John Burns  You’re talking about this cycle? Or last?

Bruce Norris  Yeah, yeah, no, well, the cycle where I would say 2008, and ’09, whenever they joined the party of buying properties at trustee sales, let’s say or lender on properties.

John Burns  You know, I don’t remember the exact year, but I remember when it started. So, it was actually February ’09.

Bruce Norris  Okay.

John Burns Where if you remember, at the time Congress was passing laws with $10,000, tax credits, and all sorts of stuff to try to rescue housing.

Bruce Norris  Right.

John Burns  And it didn’t really seem to me like they were doing any sort of analysis. It was just kind of policy in a, in a reaction. So, I had met this guy who was formerly a treasury who was very well connected. And I said, Well, why don’t I just put together a deck of what’s really going on the housing market? Because that’s what we do. And then you just set up meetings, I’ll just share with all these policymakers what I see going on in the market. You know, I’ll get some insight into what’s going on with policy. It would be, it’ll be great. And when I met with FHA, HUD at the time, I think it’s okay if I mentioned his name Raphael…

Bruce Norris  Raphael Bostic? Yeah, no worries.

John Burns  He was one of the top people there.

Bruce Norris  Yeah.

John Burns  And Raphael and I were talking this through and it came to the, we came to the realization that what is, what is HUD and FHA doing here, we’re going to allow, you know, all these foreclosures, we’re going to drive people out of their homes. We’re going to be driving down prices on FHA by doing that as we sell these things, and then FHA is going to come in and provide rental assistance to these people. Right? So, we’re like, why, why wouldn’t it be better for everybody, if you just kept them in the house? You know, if you have to turn them into a renter, that’s fine. But everybody be better off if you if you didn’t do this. And so, Raphael said, that makes a lot of sense. I don’t think the government’s a good landlord, can you go find somebody who is a property manager, and we’re going to need some capital to pull this off too. And so, I went around Wall Street in 2009 pitching that. A couple of, a couple of my clients had, I mean, just pitching it to a couple of my clients as a favor to them, two, two of my clients are three of the most famous people that made a fortune during the downturn shorting mortgages.

Bruce Norris  Okay.

John Burns  One of them was very interested in taking his fortune and turning around and getting on the other side of this. But FHA, it just never, you know, the government wasn’t able to do it. So, the story got written there. But I think when Blackstone and others decided to come in big a few years later, they had heard the story from 2009. And that’s what kind of got us going.

Bruce Norris  Okay. So, now that you can’t buy houses below replacement cost, the build to, build to Ah, there you are. Let’s see if I can start a video here. Can you see me? Here we go. All right. Well, after all those below replacement cost houses left the building and now you’re involved in clients that are starting to look at rent-to-own not only rent-to-own, scattered homes for rent, don’t start from scratch, build track holes. So, do you see that as a, as a big player going forward?

John Burns  Yes.  That is a massive play going on right now. I think, I, the capital seeking that is almost unlimited. So, you’re in. I won’t mention which client this time, but we used to have this argument about what is replacement cost anyway. And that’s your whole thesis and buying below replacement cost. And it was you know, it didn’t take long before they were buying at replacement cost.

Bruce Norris  That’s right. They were competing against them. We know that.

John Burns  Right. But then, you know, the big question is, what is the land value in that, and that, that usually fluctuate through the cycle. But I, but anyway, I, there were a lot of skeptics, as you know. And I was skeptical, too, because I’d never seen this before that somebody could buy 1000s and 1000s and 1000s of homes and manage them effectively like the apartment guys do where they’re all right next to each other. And I learned along the way that thanks to some new technology that basically was being developed at that time. You can make it work. So, the model wasn’t proven until really invitation homes did their first securitization. And then, then they went public and American Homes 4 Rent went public, and everybody could see their financial statements as and these guys are making money with homes scattered all over the Metroplex. Can you imagine what they would do if they were all the exact same house with the exact same refrigerator right next to each other.

Bruce Norris  And new.

John Burns  And new. So, there’s going to, you know, the Cap X risk is gone. And a third of the people, a third of the world, a third of renters rent apartment complexes, and we build brand new complexes for those willing to pay a premium for something new all the time. Why don’t we build something for the two thirds that are in a single family rental home that had never had the opportunity to rent a new house, or it’s very difficult. And even going a little further into that as we did a lot of consumer research on this. If you’re the renter in a neighborhood, the homeowner kind of snub their nose at you a lot of times when you pull into the driveway.

Bruce Norris  Right.

John Burns  Now you’re in with like minded people, and nobody, you know, you’re all in the same boat. So, I actually think it’s a better experience in many, many respects, than just renting a single family home in an old neighborhood.

Bruce Norris  Let’s talk a little bit about Big Shifts Ahead. You wrote that in what year?

John Burns  2016.

Bruce Norris  ’16. And I read it in a day, and I have a feeling it took a long time to write.

John Burns  9000 painful hours.

Bruce Norris  I guess it must have been painfully since you’ve carved the ball. But yeah, I know you’re passionate about it, though, too.

John Burns  Yeah, I didn’t do all 9000 hours. But my wife will attest it was many nights and weekends. It was, it was a side job for at least a year.

Bruce Norris  Yeah. One of the keys in the books was renaming the generations and reducing the years that those groups represented. So, why did you make that decision to do that?

John Burns  Oh, well, what, what I think we’re pretty good at is taking complex stuff and making it simpler. And it just dawned on me that, you know, we’re comparing Boomers to Gen X one is 19 years, one is 17 years. Millennials, people can’t even agree on the start and end date. As we’re doing all these apples and oranges comparisons, and the analogy I used was Mark Zuckerberg born in ’84 and my daughter born in 2000 we’re both millennials

Bruce Norris  Right.

John Burns  Kind of in different stages of their lives.

Bruce Norris  Yeah.

John Burns  And so, we just went to, if you went to decade born, nobody’s going to argue what year you’re born, you’re going to be comparing 10 year periods to 10 year periods, the timeframe is going to get a little tighter. So, you can really talk about this is the period of time where they’re doing household formations or buying homes. We actually broke it down by year and then five year and that was just too many breakouts. So, we went with, with decade born.

Bruce Norris  Okay.

Joey Romero  How many… So, how soon do you start naming the new one? Because we’re in the new decade now. So, what is…

John Burns  Yeah, so in 2016, we call those born in the 2000s, the Global’s so the youngest of which was six, and I was sticking my neck out a little bit at the time. But every generation, we gave a name for how they were, we thought they were changing the world or changing how we live and we just thought that group was going to be more sensitive to what was going on globally, not knowing that end up in a global pandemic, probably during their, their, their, the most important formation here. So, I think we got lucky on that one.

Joey Romero  “The Quarantinoes” is that we’re gonna call them?

John Burns  I think they’re, they’re “Globals”. But you know, but those born in the ’90s were the “Connectors” because that’s when we shifted to being connected 24/7 on cell phones, and they were also being helicopter parented. So, there was a connection there. Their group born in the ’80s, were called the “Sharers”, they really developed the sharing economy, and they were doing Airbnb and Uber and all those really cool companies were started by those guys to just share things. So, everybody can have nice stuff and less of a cost. And then we can go all the way back if you want but…

Bruce Norris  Well, the the generation that I’m part of let’s, let’s talk about there’s people born in the ’50s.

John Burns  Yeah.

Bruce Norris  I like to just ask a few questions just says comparison, so percentage of ownership of the home for the “Innovators” that were born in the ’50s, compared to the “Sharers” of the, born in the ’80s. What percentage, and I know that we’re older, so we do own more, but do you have an idea of the same timeframe? The percentage of owners?

John Burns  I do, I don’t have it up to date.

Bruce Norris  Okay, well, obviously, it was a lot, a lot more of us owned homes. So, how, how does how does Sharers view homeownership in general.

John Burns  So, the way we did that is we’ve looked at the ages of kind of 28, 38 and 48 is kind of your 10, year 20, year 30 year high school reunion is a way to do the math on that, Bruce. And if I remember correctly, the ’80s group was about 5 or 6%, behind your generation at the same age at the age of 28.

Bruce Norris  Okay.

John Burns  However, they were also having kids four years later, and getting married, I believe it was five years later, talked a lot of them having the kids first and then getting married. So, I think some of that is a little bit misleading, because it’s not just the age that the impetus to become a homeowner, it’s the change in life stage.

Bruce Norris  Okay.

John Burns  So, I actually was optimistic that not that they would completely catch up, but that, that some of that gap would be closed, just as they as they moved into later life stage. And then actually, you know, when you buy a home at 32, instead of 26, you’re making more money if you’re actually a little more able to buy a home. So, I, I, I didn’t think they were ever going to completely catch up because I made a bad assumption that mortgage rates, that mortgage financing would not get looser, or easier. After Dodd Frank. And I don’t think the documentation is getting easier. But clearly rates have gone down, and FHA has taken a lot of market share. So, certainly, some things have been much more favorable for homeownership than I envisioned.

Bruce Norris  What were some of the ideas in the Big Shift were that you expected to see, some of the big shifts rather, that you expected to see after you wrote the book in 2016? So, big shifts ahead, what shifts were you thinking?

John Burns  Um, well, we came up with this rule called the Four, Five, Six rule, which is how I help remember these things. I need acronyms. There were as we studied all the generations and what caused them to form households and be homeowners and there was a government policy that drove it. I mean, your generation was not that far after the GI Bill. In the group before you were all that’s because they were drafted. So, everybody was a GI you know that, that, that helps.

Bruce Norris  Sure.

John Burns  So, government policy, we thought Dodd Frank was gonna be much more stringent and no, it’s tougher to get them mortgage. So, we were wrong on that. You know, I never envisioned that the government would be printing money like it’s printing now, either, so we’re wrong on that. But uhm, anyway, the reason I say this is if you look at the four policies, government policy, what the economy is, what next new technologies are, which I already told you how that impact of the single family rental business, and societal ships, like getting married later go into college, having student debt? If you look at that, across the five life stages, you come up with different conclusions. And people were generalizing, well, you know, the economy is going to cause this to homeownership, well, falling interest rates are going to cause this well, it’s going to do something different to a young person who’s buying their first home than somebody who already owns a home than somebody who’s in retirement who thought they were going to live on interest income and no longer can.

Bruce Norris  Right.

John Burns  So, I think taking those, those four disruptors, and looking at them by life stage allows people to answer the six questions, which is what, why when, where, and how are people going to buy my products, or rent, rent my house?

Bruce Norris  By the way, it’s one of those books you have to have on your shelf. You don’t just read it. You look at it, whenever you want to answer a question about demographics. It’s just really an important like, Encyclopedia. It was, it was fun to read. Not very many people read that in a day. And I had a yellow marker. So it was pretty fun.

John Burns  It’s got 100 color charts in it so that we decided to make it easy to read.

Bruce Norris  Yeah, that was good. One of the things that I recall was that you thought there were going to be some demographic changes or migration changes, they were going to be states that grew more than they used to compare the states that were going to grow less than they are used to. So, has that occurred in what states were, were they?

John Burns  Yeah, so at the time, I remember, if you define the South is Nevada, through Texas, through Florida, all the way up into the Carolinas.

Bruce Norris  Okay.

John Burns  42% of America lived and in that swath of the country, but 62% of the growth was going there. We, we believe that that was going to accelerate, primarily because of those pro growth policies in the south that were attracting jobs and home, being more homes being more affordable. And that is played out in spades, frankly.

Bruce Norris  Right.

John Burns  But that wasn’t earth-shattering. I think most people do that was…

Bruce Norris  Why did… you know, I’ve talked a little bit about this, but looking at, looking at prices, we both have a kind of a historical perspective. And knowing Torrance, California was almost on par with the US median price in ’74, 34 grand to 31 grand, and then in a very short period of time it doubled the national price. And basically, it’s been parked there they’re about, you know, 170 to 210. Was that, what drove that? And is that? Is that being underwhelmed by losing migration constantly now? I’m just curious what your take is on that.

John Burns  I think the main thing that drove that was supply constraints. And there was a notion on the west so you couldn’t expand west on long coast of California. There’s there’s some mountains along the east. They just weren’t making more land in LA and Orange County and people didn’t view Fresno and Bakersfield as uh, as acceptable places to relocate instead, they started relocating.

Bruce Norris  Okay.

John Burns  And it was mostly it was mostly supply. Can I call it the Manhattan-ization of California very expensive in the ’70s. Because of supply constraints. Same with California.

Bruce Norris  Do you think that’s, that’s kind of still intact, right?

John Burns  Absolutely.

Bruce Norris  Okay.

John Burns  Absolutely.

Bruce Norris  Interesting. So, California losing people on an annual basis now, which is basically even the migration that comes in is less than the migration the coming out. California gains population only by birth over death right now.

John Burns  Right.

Bruce Norris  But because of the constrained supply, you’re not thinking they will have a negative price event going forward because of the supply constraints.

John Burns  Well, I mean, I wouldn’t go that far was supply constrained during the last two downturns and we had negative price events. So, what I was answering is why it’s essentially a permanently more expensive place to live in it, and it’s always been at least in ’74, permanently more expensive than the rest of the country.

Bruce Norris  That’s right.

John Burns  So, you know, but it can. Because of that, I do think it can cycle harder because prices when demand exceeds supply, prices can run up more quickly when you really can’t provide supply. And that’s the other difference in California. It’s not just the lack of land to build on. But the the extent there is land, the jurisdictions here make it very, very difficult and very, very expensive for the home builders to provide anything affordable.

Bruce Norris  Let’s switch gears and I want to talk about what you saw in coming for 2019. So, let’s say we’re in, January 2019. And I’ll kind of give you my take looking at the charts and again, being pretty familiar with it. We had record low unemployment, no foreclosures to compete with, inventory levels were pretty normal, reasonable construction levels, economy was growing, and it felt certain kind of like you enter 2019 thinking, everything’s pretty good. And then at the end of the year, prices grew by a very meager percentage. And that, that surprised me because it was the same set of charts that we had in ’87 and ’04 which we did double digits. So, what did what, what did you seen at the beginning of 2019, and it play out the same or differently than what you thought?

John Burns  So, you know, and I’m a real contrarian on this. So, I think in the middle of 2019, I’ve explained this many times, and nobody agrees with me, so, that’s what a contrary. But if you look at the middle of 2019 until the very end, we had 2.08 adults per household, which was the long term norm. So, you can’t really say in terms of shelter, we’re we’re under supplied.

Bruce Norris  Okay.

John Burns  And home prices and rents were both growing at three to 4% per year, and incomes were maybe growing at two to three. So, I thought 2019 was a stable housing market, just boring, stable. We had a forecast for some similar numbers to what we’re going on. But the other piece of this that we calculated in 2012, I think it was that we had overbuilt the country by three and a half million units.

Bruce Norris  Okay.

John Burns  And we kept building from 2012 to 2019. Until eventually, it took us a long time, but we got back to equilibrium vacancy, if you will, we have a right number. And I think it was in the middle of 2019, where all of a sudden, I finally was the last person on board and said, you know, nationally, we do have a supply shortage. Like everybody been saying that forever.

Bruce Norris  That’s right.

John Burns  And they’re still saying now. And so, you had, you had a supply shortage that was starting to play out. The multifamily guys were building for it. We had a 30-year high end construction so they could see it. And then rates fell. And, you know, that bad combination caused a pretty strong fourth quarter of 2019, but a really robust first quarter of 2020 until the pandemic, I mean, housing market was much stronger than I had forecast. I mean, it was off to the races.

Joey Romero  That’s gonna do it for part one of our interview with John Burns of John Burns Real Estate Consulting, be sure to tune in next week for part two. Thanks.

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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