On Friday, October 24, the Norris Group proudly presented its 7th annual award-winning black-tie event I Survived Real Estate. An incredible lineup of industry experts joined Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and opportunities emerging for real estate professionals. Proceeds for the event benefit Make a Wish and St. Jude Children’s Research Hospital. This event could not have been possible without the generous help of the following platinum partners: Auction.com, HousingWire, PropertyRadar, the Apartment Owners Association, the San Diego Creative Real Estate Investors Association and President Bill Tan, The North San Diego Real Estate Investors Association, InvestClub for Women and Iris Veneracion, Wholesale Capital Corp, New Western Acquisition, MVT Productions, and White House Catering. For event video and information, visit isurvivedrealestate.com.
The previous segment ended with Doug Duncan and Christopher Thornberg discussing the numbers for home prices interest rates. Doug thinks interest rates in the U.S. are going to stay low for some time, and it is a function of the fact that the U.S. economy is the strongest economy on the globe. If you are seeking a place to place your capital, you are going to place it where it has the best combination of return and safety.
We have a strong dollar that has made some impressive gains. It is up 4 ½% in the last few months and still down 20% from where it was 50 years ago. It is a pretty modest adjustment and does not have any negative impact on things like exports. This is mainly against the Euro and Chinese juan. Compared to these, it is still stable. It really depends on what you are holding it up against. Against developing countries it is still where it is, although it has come up against it, especially against the euro.
Bruce asked Doug when he looks at the employment situation and the unemployment chart where the total number of jobs in place what it tells him. He said they look at a couple of things. One is that it is true that the U.S. has a little bit more now of total employed people than we had prior to the crisis. If you look at when we will have the total number of full-time employed people, projections are we will see this about a year from now. If you adjust for the change in the working age population to get back that same number of employed people, it will likely happen in 2016. If you are working with the workforce population adjustment and the same number of full-time jobs, that will be early 2018. If enough job growth accelerates beyond that, then those numbers will move forward.
They survey people monthly; and now that we are five months past the average length of an expansion in the US since World War 2, we still have 55% of surveyed people who think the economy is headed the wrong direction. What this does is show there is a bifurcation driven by uncertainties with employment. The other chart they look at is Obamacare shifting jobs from full-time to part-time because of the cost implications. They take a look at this at full-time and part-time employment, and at the beginning of this expansion almost all the jobs that have been created since the expansion began have been full-time jobs. What happened during the crisis was roughly 3 million jobs went from full-time to part-time and have not returned. Maybe one person took a part-time job and the person who was in that job went to full-time. Basically, you converted about 3 million workers to part-time.
Within the population, there is a sense in which this has not been a recovery and there is a bifurcation of attitudes in the public as a result. You are hearing about this in the discussion about income distribution as an after effect of the public policies. Bruce asked how California plays out and if we are in better shape than the whole US. Christopher said we absolutely are. The labor market is still out of whack. We have to look at distressed workers, under-employed, discouraged, and long-term unemployed workers before the recession began. Before there was 7 million, peaked at 9 million, and now it is under 13 million. If you want to talk about growth, you have to look at where the trend is going, which is down. They had twenty and now we are at less than 13. We need to get back to 8 in order to call things normal, which is a couple years off.
It is moving in the right direction, and when you are talking about growth you are referring to home price growth, permit growth, or whatever growth you are talking about, the important thing is that the trend is down. You have to keep in mind that we are moving in the right direction. We are not healed, but we are getting there and that is important. California is ahead in this game. We lost more jobs in the downturn, but now we have added them all back. When you look at growth in the state, it is not just San Jose and San Francisco. If you look at it on a year-on-year basis and at the third, fourth, and fifth fastest growing economies in the state, they are Kern County, Fresno, and the Inland Empire.
Not too long ago Christopher was at an event, and someone said they were shocked the Inland Empire was coming back. Christopher was not shocked. This state has something that everybody in this world wants, which is one of the most amazing living environments you can have. People want to be here. It is a difficult business, and Christopher gets this since he deals with it on a day-to-day basis. As a result of its sheer desirability, this place continues to succeed and we are certainly seeing it bounce back now. The numbers are clear that we are in for a good steady run. His biggest problem with the state’s economy is a lack of housing. We just don’t build enough to support the kind of growth we should be having. This is an enormous constraint on the economy.
Bruce asked if they thought builders are holding back, but Christopher said it is SEQUA, or the California Environmental Quality Act. If you look at what happened in Lancaster recently, you see the big picture. The Japanese company comes in to build an enormous plant to build railcars. In the end, the reason they decided to leave California to go somewhere else is because the unions, which wanted a better union contract were threatening to sue them under SEQUA. The Japanese left since they did not see why they should deal with an environmental lawsuit on the basis of a contract negotiation. SEQUA has become this tool used to abuse any particular interest by a group of lawyers and small interest groups, including unions, that has held back a small increase in our housing supply. If you put this in perspective, we have 12% of the nation’s housing supply, more than the national population growth. Yet over the last twenty years we have produced about 8-9% of new homes. We are so short of supply right now.
A couple years ago the state was panicking over the Homeowner Bill of Rights since they were thinking everybody has to protect themselves from these big evil banks since prices will just continue to fall. Now we are on the other side of this equation, and the reality has shown itself that the problem they should be worrying about was never falling prices. Instead, what they should be worrying about is spiking prices, which is going on right now since we do not have enough housing.
Doug said his he has two favorite recent anecdotes about the California housing market that came up when he was speaking with a group of investors in San Jose. One lady there had some rental properties. She said with most rentals if you have a pet you have to pay a pet deposit. Doug was going to try to get his wife to move to California to reduce the pet supply. The other anecdote was a builder he talked to about six months ago who had 2,000 developable lots outside of San Francisco and had gone through 13 public hearings over three years in an attempt to complete the permitting process. It was still voted down; and the San Francisco mayor said the reason for this was it was not going to be affordable housing. This was shocking as now 2,000 people making a lot of money and now denied housing will go down to one of the middle class neighborhoods.
The long-term implication of this is if you cannot find housing at an affordable level for your workforce, you will start to see the migration of businesses to a place where they have a better labor capital cost ratio. It is a little bit more of a delicate dance than this, but this is absolutely true. All the time we hear about how Texas has grown so much faster than we have. This is not on a per capita basis. The reason Texas has grown faster than California is because they have approximately 2 ½ times the rate of population growth. This is 100% a housing issue. We would have more people if we only had more vacant houses available.
We look at a chart of sales, and it is down. If you take sales, you should subtract foreclosures since sales in the investor wave are one part of the cycle. Next you have to look at retail demand. If you take sales plus new home sales and subtract foreclosures, then take a look at six months ago you see that it came down and is now bouncing back up. The investors are fading because the foreclosure are fading. However, now you are starting to see a second surge in the market, which is retail buyers coming back. This is because of easier credit conditions and Fannie Mae is out there doing their job. Credit conditions are becoming easier, and people have equity now since the price have increased due to the investor wave pushed prices up and took 12 million people underwater. There is a whole second wave starting to come online right now, and there is a whole second surge in the real estate markets. Next year is going to be great for real estate if there was only something to buy.
We have painted a really rosy picture when we talk to a builder about why they are not building more homes. Their answer is that they are not selling what they are making and don’t have enough confidence to build spec homes. They are building homes that are literally pending, then they build them. There are 40,000 permitted lots in Riverside, and Bruce is in a neighborhood of them and they are making them one or two at a time. They are falling out of escrow and sitting vacant. Bruce remembered them saying back in 2005 that we were not building enough homes, which was true. Bruce asked Christopher if it was his opinion back then that we were not building enough homes, which he said it was. Even in the middle of the crisis he kept telling people California has the lowest housing vacancy rate in the continental US. We were going to bounce back and do it in a big way.
This whole cycle was never about supply and demand ever. Ultimately the last cycle we went through was about the credit quality that was driving the real estate market. If anything today, the credit quality is more than good. The pendulum is still too far in one direction. In a year and a half when the credit pendulum starts swinging over and we start having ninja loans again, then we can start pushing the panic button. However, this is not what is happening out there.
Bruce asked Doug if he feels the buyer has more willingness than capacity or is really hesitant because they look at housing and are not sure if they want one. Doug said he recently went over to the Fed and talked to Janet Yellen. What was said is the sentence we use at a national level. California has very special characteristics that are different, and it is 12% of the market. Therefore, it is substantive. The sentence is, “Today, demand weakness trumps credit tightness.” This does not mean it will last forever since we are not sure how long. It also does not mean that credit is not tight. However, what it says is particularly among younger households they see based on the Census data that in almost every metric they are buying homes at much lower levels.
One of the biggest triggers of buying a house is marriage. If you look through the Census data, you see that the rate of marriage is substantially lower from the same age cohort than it has been 15 years ago. Part of that is people went to school and you did not have good job prospects in the middle of a crisis. You go back to college, delay your marriage, then the next trigger is finding a job after marriage then having children. One of the things you learn in the crisis is if you lend money long at fixed interest rates, it is a good thing if the borrower has a job and a related income. They looked at the most recent American Community Survey data and segmented it out for those who are married, have a college degree, a child, and income over $95,000. They were significantly lower in terms of their acquisition of homes.
They surveyed young renters and asked them how much of a problem it is to get a mortgage. It was the fifth ranked consideration in their view. The aspiration to own homes is the same. They have seen the damage when people got in too soon. They wanted to be mobile since the job market was difficult for those coming out of college. There was no reason to hurry, and renting was an option until they had the money saved up enough. A lot of them were also living at home. Doug used to say with the highest share of adult children living at home they have ever had in the reported data, both parties of the transaction see it as an adverse situation. His staff asked if he knew it was really true, to which he said he did not.
They surveyed households with adult children living at home and found some interesting things. They did not survey the children since they did not want to start a fight. If you segment them from 18-22, which is prime college years, what you see is that is what is happening for that group. Then if you look at the 23-34 year old group, you see something very different. In that younger group, only 54% of those households have a full-time working parent. This was a number that was much lower than they thought. Only 20% of the kids are working full-time since most of them are college age. 72% was the number of parents who said it was a good thing while 20% said they wished they had chosen a different option. In the older ones, the interesting thing there was there were only 38% of those households that had an older adult child that had a full-time working parent. 48% of the children were working full-time, so it was clearly a different economic transaction in that household.
Doug said in their view it reflects the bifurcation in the view of the public about whether this has been a good recovery or not when it comes to jobs and income. Bruce said if they sent a memo to build homes in California, this could fix everything.
The next people featured on the panel included Dave Cogdill. He was a former senator and is now the president and CEO of the California Builders Industry Association, a position he has served in since 2013. Prior to serving on its board, Dave was the county assessor for Stanislaus from 2011-2013. He also served as a commissioner on the California Water Commission. He was the chairman of the Maddy Institute at Fresno University after departing from legislature. After his years in office Cogdill worked often with leaders to resolve issues relating to rural, health care, and education.
Sean O’Toole returned to the panel this year. Prior to launching PropertyRadar, Sean successfully purchased and flipped more than 150 commercial and residential foreclosures. Leveraging 15 years in the software industry, Sean used technology as a competitive advantage to build his successful real estate investment track record. He has always thrived in start-up environments, and as such became a key contributor at Exing Technology, which was acquired by Real Networks.
Bill Cosgrove is the Chairman Elect for the Mortgage Bankers Association. This is in addition to serving as the Chief Executive Officer of Union Home Mortgage. He was named the company’s president three years after joining the Union National Mortgage Company in 1994, which he purchased in 1999 and is expected to close over $1.2 billion in lending this year. On October 19 he was officially sworn in as the chairman of the Mortgage Bankers Association. He first began his career in the mortgage banking industry in 1986 as a loan officer. Since then he has served in many positions for the MBA.
The final panelist was Gary Thomas, a realtor in Orange County. He is the immediate past president of the National Association of Realtors, the second generation of real estate professionals. Thomas is the CEO and founder of Altura Real Estate and has been in the business for more than thirty years. He has served the industry in countless national and state leadership roles including vice president and liaison to government affairs for the National Association of Realtors. He has served on several presidential advisory groups, including Real Estate Settlement Procedures Act, and the Housing Opportunities Advisor Board.
Most of the gentlemen have served for a lifetime in their industry and were great assets to the panel. Going off the topic of building more homes, if you look at a chart of California home construction, a lot of times it gets blended with apartments and does not look so bad. However, when you look at single-family construction, Bruce wondered if we have ever been this low since the 70s. Dave said it has been a while, but we are definitely below where we are supposed to be at this time. With the projections at the beginning of the year for 2014, we were hoping to see 100,000 starts, and these numbers have been modified to 85,000. This is close to what was done in 2012. He said for his industry the recovery is here, although not at the rate we would like to see it.
The Norris Group would like to thank its gold sponsors for supporting I Survived Real Estate: Adrenaline Athletics, Coachella Valley Real Estate Investors Association, Coldwell Banker Town and Country, Costa Mesa Marriot, Council of Multiple Listing Services, Elite Auctions, In A Day Development, Inland Valley Association of Realtors, Investor Experts, IRA Services Trust Company, Jennifer Buys Houses, Keystone CPA, Las Brisas Escrow, LA South REIA, Leivas Tax Wealth Management, Personal Real Estate Magazine, Pilot Limousine, Primary Residential Mortgage, Northern California Real Estate Investors Association, Real Wealth Network, Realty 411 Magazine, Resonant Lens Photography, Rick and LeAnne Rossiter, SJREI, SONOCA Corporation, Southpointe Companies, Spinnaker Loans, Tony Alvarez, uDirect IRA Services. See isurvivedrealestate.com for video of the live event and more on our sponsors.
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