On Friday, October 16, the Norris Group proudly presented its 8th annual award-winning black-tie event I Survived Real Estate. An incredible lineup of industry experts will join Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and opportunities emerging for real estate professionals. Proceeds from 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: HousingWire, PropertyRadar, the Apartment Owners Association, the San Diego Creative Real Estate Investors Association, San Jose Real Estate Investors Association, InvestClub for Women, MVT Productions, and White House Catering. For tickets and information, visit isurvivedrealestate.com
Over the next few weeks, the radio show will be from the I Survived Real Estate event. On this week’s radio show, Bruce wraps up his discussion with David Kittle and Doug Duncan as well as brings up his next guests. Bruce asked them if within the next 24 months they see any ability for the mortgage world to become more aggressive with loan products and policies. He asked if undue stimulus will be a factor that is not present now. David Kittle said if you believe MBA’s statistics, the greatest portion of homebuyers will be Hispanic or African American. Whites will be at the low end. They need loan programs developed so they can purchase the house. They do not exist today for some wanting to buy. The answer is the market is set to explode from a single-family purchase perspective over the next 6-8 years. Incomes are down, interest rates have to be released and increase. It has a negative effect initially when rates go up. You get an initial bump. When rates go up, everybody gets off the fence and starts to run out and buy.
A lot of this is occurring today. According to statistics that came out this week, we are still in a decreased type of economy. Both the Philadelphia and Chicago Fed is below where it should be, and job creation is still low. David said he expects us to have a lousy market for the next 18 months. We then have an election, and depending on how it goes, you should see some changes and the market will come back. It is poised to come back, and we will have a very hot market for anywhere between now and the next 8 years. This is his prediction from a single-family purchase perspective.
Doug commented on David’s statement about credit conditions. At Fannie Mae they survey lenders on a quarterly basis. They do this in part to understand whether lenders have different views than consumers. The only other data out there on that is the Fed survey, which is heavily weighted toward large banks. In the most recent quarter, there was a statistically significant easing of credit conditions among large and mid-size institutions. To Dave’s point, in the FHA space there has been a big shift away from that market by the big lenders. At Fannie they have seen this in their data as well. The share of the business from the large lenders has fallen for about 2/3 to about 1/3 over the last three years. It is actually the smaller institutions that are better at finding those people Dave spoke about in the prior segment. Fannie Mae is optimistic about it as well.
David said you have the big banks pulling out of the FHA market because you are worried about repurchase. David is an underwriter and used to be able to make a business decision on an FHA loan. If somebody had a one-time life event and did not make their payments because, for example, their wife had cancer. In this particular example, they documented, made the loan, signed it, and closed it. They had 30 credit cards charged up, and you didn’t make the loan. You can still make that decision today, but you will not make it today because you are afraid of repurchase. There are people out there today, regardless of their ethnicity, with 550 credit scores and deserve to be homebuyers. They are afraid to make those loans because of the repurchase. You cannot make a business decision anymore on a loan based on performance. Because of the repurchase threat, it is still there.
David talked to his friends in the business who still owned companies and risk everything they have. They are not the big banks, they are lenders. Everything they have is tied up in their company, and they are afraid to make that loan that should be made. This has ramifications because if that person had gotten their own home two years ago, they would have had 30-40% equity and had a running start at being an entrepreneur. This is a big deal. When Bruce was invited to Washington, D.C., he got in front of one of the HUD gentlemen. He said you used to be able to do simple assumptions. You did not have to qualify; you just had to send in $35. The gentlemen said he did not have any problem with that, and Bruce asked him to put it in writing. Bruce was told this could not be done.
The next people to come up to the stage were Leslie Appleton-Young. She is the vice-president and chief economist for the California Association of Realtors, a statewide trade organization with over 195,000 members dedicated to the advancement of professionalism in real estate. She directs the activities of the association’s member information group and oversees the analysis of the housing market, brokerage industry trends, member communications, and membership development activities. She is also closely involved in the association’s strategic planning efforts and is a well-known speaker in the California real estate community.
Next was Eileen Reynolds. She is the Vice-President for Government Affairs at Tejon Ranch Company, a diversified real estate development and ag business. An owner of the largest contiguous piece of private property in California located between LA and Bakersfield, the company is committed to responsibly using its 270,000 acres of land and resources to meet the housing, employment, and lifestyle needs of Californians. She manages the company’s political advocacy efforts in Sacramento and Washington, D.C. Reynolds serves in a variety of leadership positions at CBIA and is an active director of the California Business Properties Association and president of the Foundation for Environmental and Economic Progress at the Federal level.
Last but not least was Sean O’Toole. Prior to launching PropertyRadar, Sean successfully purchased and flipped more than 150 residential and commercial foreclosures. Leveraging 15 years in the software industry, Sean used technology as a key competitive advantage to build his successful real estate investment track record. Sean has always thrived in start-up environments, and as such became a key contributor at technology acquired by real networks, ISI Global Center acquired by Global Crossing, and Akereon, Inc., acquired by Workstream, Inc.
Bruce started with Sean O’Toole and talked about how when Ward first used to teach trustee sale buying, it was a very different journey to get updates and to the opening bid. Sean revolutionized this by taking what he did in the computer world and plugged it into the foreclosure business. Bruce asked what the ramifications of this were as far as if you were a participant trying to buy the trustee sales. Sean said it really all comes back to the employment participation rate that has been going down for the last 40 years. He started in the software business when he was 14. Reflecting back on this and what he has done in the industry, most of what he has done is make things more efficient. This means you need fewer people to track sales. One gentleman came up to Sean and told him he used to have three people full time tracking sales, and now he can have them doing other things for him. This made them a lot more efficient. The information access also helped others get up to speed much quicker. They were able to go from 0 to 95 inside a very tight time period that was not true previously. The cost of access changed. There used to be thousands of dollars a year, then it turned into $50. You had a lot more people able to do this.
Bruce asked Leslie how access to information for the consumer has changed the world of the realtors. He would think most were self-shopping until a much later point. She thinks there is a wealth of information out there, but not always a lot of wisdom and ability to analyze and figure out what to do. Everyone has access to the same information, and you still have wonderful teachers who make a difference in people’s lives. There are different ways of thinking about and analyzing things. The realtor used to be the key to the information, and back in the 80s you would have a large book with grainy black and white pictures. What has happened is the whole value of the realtor is not about finding the home, it is really about navigating the whole transaction. The prior panel talked about how difficult this is today, even with efficiencies, programs, and technology. To get from point A to point B is a lot.
The makeup of the buyer when Bruce was younger was a married couple with 2.5 kids. Now, it is a very different makeup. Many times there was one adult worker per household. Bruce asked how this has changed, especially with what they are able to buy and their willingness to say they have to rent. This is a segway into the housing affordability crisis, which we are facing again today. It seems to be on a ten-year cycle. The homeownership rate for millennials is only about 10%, and many of them had boomer parents who could write checks to write them in. The down payment hurdle is really tough.
You will also have a flourishing of almost alternative lifestyles. 30-40 years ago it was the mom, dad, and two kids. Now it is people choosing to be single because it is less stressful. You have same-sex couples and partners, and everybody is great. It is a very diverse world. Millennials really do want to buy homes, but because of the economy and their co-dependent boomer parents, adulthood for them has been delayed about ten years. Now that the pickup in household formation and job creation in California is much faster than the nation, you are seeing more homeownership actually happening for millennials. Leslie agreed with David that you will have a renaissance once we get through the next couple years since they will have families. Once you have kids, you will have a whole different attitude of homeownership and have to focus on schools.
One of Bruce’s favorite topics is affordability. Bruce welcomed Eileen to the panel for the first time. On her bio she talked about a big project with Tejon Ranch Company. This is her day job, and she is based in Sacramento. For her volunteer job, she is the chairperson for the California Building Industry Association. With her big project, she entered into negotiations with 5 environmental groups with which she had been in negotiations for 2 years. This included the Sierra Club, Natural Resources Defense Council, Planning Conservation League, and others. They were in the confidential negotiations over their property for a good 14 months, then the Center for Biological Diversity saw that there was not going to be an agreement and decided they needed to leave the table. This was not their style and they preferred to roll up their sleeves and sue people. What they did was they had 4 development projects. If you have driven over the grapevine and going south to the Tejon Pass, there is the Tejon Commerce Center where they will build a master plan community called Grapevine, made up of 12,000 units. You go up the mountain into Lebeq, and they will do a second community called Tejon Mountain Village, made up of 3,000 units in their most beautiful stretches of land. Further down the freeway in Los Angeles, there will be 18-19,000 units in a master plan community called Centennial. There is actually something that could happen as far as new development in California. From the standpoint of the industry she was representing, one of the toughest things to do in California is to build anything.
Bruce asked if the role of the environmental sector going to become more of an issue in the next few years. Governor Brown seems to be pretty aggressive with his stances. 50% of our electricity coming up is supposed to be renewable. Bruce asked how this changes for the builder what they can do and what they can get approved. Eileen said she would argue they have been strong here for as long as most of us have been alive. When all the environmental laws came into effect in the 70s, California was at the forefront of it. We have a governor and part of a state senate that want to make California the climate change leader of the world. They want to reduce greenhouse gases and ratchet down on every sector in the economy, including development.
There were some bills in the legislature that are believed to be stalled for the time being. Essentially, they meant if you built a new home it required zero net energy. Eileen said they have not figured out yet how to do this. They ended up having to pay a great deal of money to commission a study by some experts on both sides of the aisle. Both Republican and Democrat former experts of the Department of Finance and the Legislative Analyst’s Office brought a study that said if you want zero net energy, it will be at least $58,000 per unit. This is an addition to a lot of the other societal problems that are put on the backs of new home buyers, such as increased taxes. Right now there is a big movement on housing affordability where some courts have said there needs to be no nexus between local government’s ability to raise money on new development for housing affordability programs. In some areas of the state they are raising fees up to $30-$60,000 per unit to pay for affordable housing that does not even need to be related to the provision of what the new developer is doing.
Eileen said there is a situation specifically in California where the legislature is against them from the get-go. At the same time we have layers of regulation upon the industry, and it is as if people want to outlaw any growth in California. There are some who do not want to see any growth because they think if you don’t build it, they won’t come. In some cases, there are places in existing neighborhoods where 2-3 families are living in one house. This is not addressing our housing crisis, and we need to build more.
Bruce next spoke with Leslie and Sean about the water issue. Bruce is suspicious of radical elements on either side of the fence, but this is like a real drought. There is a real chance that you can say, “Here are the rules, and we can find you a whole lot of dollars if you don’t do anything.” Bruce then gets concerned about the building industry being told that they cannot build anything new since it will use water. Bruce asked Sean if he is concerned that this type of mood could reach into the investor world and the investor will be the target.
To find out Sean’s answer and more, tune in next week as Bruce continues his discussion with Eileen Reynolds, Leslie Appleton-Young, and Sean O’Toole at I Survived Real Estate 2015.
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