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 continues his discussion with Eileen Reynolds, Leslie Appleton-Young, and Sean O’Toole. Bruce 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. Sean said this certainly seems to be the mentality. On the affordable housing issue, how anybody thinks housing in California can be more affordable by adding fees to new housing doesn’t make sense. You are increasing the cost of housing to try to make housing affordable. It was the Supreme Court in the state of California that approved of this, and now it is being appealed to the U.S. Supreme Court.
To the degree you have this kind of inane argument that in order to have affordable housing you have to add fees to housing is not logical. Lesle Appleton-Young added that you can point the finger at government, but the whole “not in my backyard” attitude is a huge part of the issue. Anyone who drives the freeways in Southern California has every right to feel we cannot have one more housing unit in Southern California. This is not rocket science, and there are global capitals with examples galore. It is high density development along viable transportation corridors. Unless you are going to have a one child rule or deal with population growth in another way, you have to get rational about new construction. Part of the explosion in the market in 4-8 years is not going to happen in California. It is happening in Texas, Denver, Seattle, and Portland because that is where the young families can go and actually buy affordable housing. They will not be able to do it in Southern California, and that is a real shame. At Tejon Ranch you are not dealing with existing homeowners. SEQUA is the go-to place for suing and stopping a development. It is not just the environmentalists and the government, but it is the public not being able to envision a different future.
Eileen said if they are successful at Tejon Ranch, they will have affordable housing. However, it was not for some sacrifice. One place they did not get to was they may have signed an agreement to set aside 90% of their land for the environment, but they got the 5 nationwide environmental groups to say they would stand down in a SEQUA process. They are not going to challenge their developments; and if they do anything near that they can be stopped. They will be able to develop these areas without being nickeled and dimed to death by these environmentalists. They did not give up land over it, but they gave up the ability to develop other future land holdings.
Sean said at the end of the day, there are places in Texas where you can build a house for the cost of a permit in certain places in California. Sean agreed with Leslie in regards to affordable housing. You have to think about the structure, and recently in Tahoe they tried to build a school. Folks in the high-end communities are living on a golf course, which is not really a sound environmental use of land. Here they are with their golf course homes and they don’t want this other land developed. The land was entitled for the school, and they were not asking for a zoning change or anything else. It had been entitled for the school forever, and here they were saying no. It is not a reasonable argument when a piece of land is entitled and people are second guessing on everything. This just adds a lot of cost to the process. Maybe we need to put our heads up, call for a do-over, re-entitle everything, and come up with some compensation for those people who gain and those who lose.
The current situation is you have people with land that is properly zoned and entitled having to face years. There are people trying to develop property that have been at it for 20 years trying to get their property entitled. They are not a wealthy couple, but they have this gift of land with which they cannot do anything. 20 years is not right to spend on a project like this.
During the break it was suggested Bruce ask a question, and it was all in their best interest. A lot of people in the audience are risk-takers, investors, and they use leverage. They are very interested in the panel’s take on whether or not we have a bubble forming or if we are at that point where we have some concern about prices declining from here. Leslie began by saying “never say never.” The homes that are being bought today are being purchased by people with real incomes, real down payments, and real money. As noted earlier, they are getting real mortgages with fairly strict underwriting. The things happening that lead up to the 2007/2008 meltdown are not in play. However, it does not mean things could not happen that would impact housing prices.
For example, are equities overvalued? Some would say yes. Are all of the companies in Silicon Valley providing these incredible gains to employees sustainable? Do their valuations make sense, and what happens if there big adjustment? There are ripple effects that could happen; but in terms of it coming from inside we do not have those conditions today. A bubble could be the end of a pricing cycle and may not be accompanied by a crash. It is great to focus on rates, but you also have 25% of the market that is all-cash. The numbers vary from area to area, so that is a little higher than has typically been seen.
Doug said he was going to give a reading assignment to go along with the quiz. John Williams, the president of the San Francisco Fed, wrote an economic newsletter where the title is “Monetary Policy and House Prices.” It is six pages long and without any equations, and he asks the question about if you believe that the prices of an asset is discounted cash flows, then given where interest rates are would assets be overvalued? It is worth reading and thinking about this since this is the interest rate play.
Bruce and Sean were talking in the limo about his San Francisco house that was $3 ½ million with a rental value of $6500. They equated that the tax value of that house was half the rental income, so his net yield was 1 ½%. It is definitely crazy again. A big picture on this bubble question and one thing we have to keep in mind is that homes are less affordable today than they were in 2006. The basic definition of affordable is how many people can afford a home today. In 2006, anybody with a pulse could afford a home. The stat says we have 17% affordability, while in 2006 we were at about 80%. There is no question that homes are affordable today and we are more over-priced given lending terms and income than we were in 2006.
Bruce said one of the things he counts on is that affordability chart. It has similar endings, and one of the things that he definitely was concerned about was you could have a very different affordability this time because of saying no to so many people and the inability to make price progression. There are also some other elements in play for the first time. If the bulk buyers and single-family conglomerates decide to exit, Bruce wondered if there is a concern about them being market-makers as they go out just as they were when they came in. Sean said after period of inflation Doug referred to earlier, we hit a point where we were very used to high interest rates. During the inflation period in the 70s, we pretty much wiped out debt, and this allowed us to grow the economy for the last 35 years through cheaper debt. It was grown mostly through the growth of debt. We have hit the zero bound of this, and there is a much bigger issue in play here than just the housing cycle.
If you look at Japan where 1 ½% 30-year mortgage is the standard, if we are headed into that kind of environment because of these bigger-picture issues then we cannot raise interest rates. We have too much national debt, so the question is how we pay this back without making things worse. If we are now in a permanently low interest rate environment, will we look back five years from now and say that a 2-3% return on a house looks pretty good. On the one hand we are less affordable than ever and in more of a bubble than ever. On the other hand, in this kind of environment if they do not lose the game and we stay in this low interest rate environment, it could get worse or better depending on what you want to see happen.
Bruce asked if there is any concern about the maturing of the equity lines where people are going to have to start paying on the equity line and not have access to it. Bruce asked if there are enough of these to impact price somewhere. Sean said there is. In the world we live in, banks are no longer held to regulatory standards that say you have to clean up bad assets. They say instead to do everything you can to help and protect the homeowner. If we get into position where those HELOCs start to have default issues, at the end of the day there is going to be protection for those homeowners and protection from recognizing those losses. For this reason he does not think it will be an issue. The big picture that will likely not be an issue is if there is an opportunity for folks to go after them and potentially do a deal. Sean thinks so as well as thinking it will impact certain individuals. However, he does not think it will be a big downturn. If it was a systemic danger, could you have enough of these to where you have a price decline on the backs?
David went out on a limb to say he does not think we ever came out of the recession. David was a pilot for 30+ years and equates everything to flying an airplane. When you have altitude, you have everything. It has been like you taking off and not quite being in the center of cg gravity, and the plane just will not climb. We have been like this for the last 6 ½ years and cannot get it up and going. If you put that into perspective and talk about millennials wanting to buy a house, they are thinking about how their incomes are not real and not increasing. They have that one thing that hangs out there and the increasing costs and fees of healthcare. The state of Kentucky has a governor that embraced the Affordable Health Care Act. You have to think about how it affects everybody. They raided Medicare for $500 billion to pay for the states that did the exchanges. In Kentucky, that money runs out next year, so how are we going to pay for it? We have a governor’s race coming up, and they are going to pay for it by raising taxes.
The average cost of healthcare is about a $500 increase on average in Kentucky, which is not a lot of money compared to what you pay in California. If you think about perspective, this is a lot of money for a young millennial sitting around a table. It is the difference between buying a car and buying a house. You really get down in the weeds about how we feel about all this and how the economy is really doing, and they continue to get slammed with student loans and healthcare costs that nobody is mentioning. They are not buying a car, and they are not buying a house. When you do a loan, you have to put down your monthly payments as if you had bought a car, but you do not have to do this for your healthcare costs. This is a bite on affordability that is under the radar. You suddenly have to consider that you cannot afford it because of this, and this is a growing concern.
When Doug invited Bruce and Sean to Washington, D.C., they did absolutely no good as far as getting anybody to say they would go from ten loans to 50. The private sector stepped in, so now there are billions of dollars chasing investors who have rentals or flips, and this has been a healthy thing with interest rates decreasing. They were on a panel in a room full of hedge funds that raised $1 billion, and they all wanted to send it to the next group of rentals. This is something they will not find at this point.
Bruce asked if there is an appetite for private funds to enter into the occupant sector of financing to where the rules may be different. They could create programs where there are pieces missing to where they could really do well. Bruce was not sure if this was possible for this vehicle to even be allowed. With owner-occupancy, you have stated income loans that are for self-employed people that we cannot seem to fund in the current environment. Doug thinks it is happening, but a lot of it is happening in the jumbo space where the rules are different. Whether this happens in the conforming space has yet to be seen and will involve the non-QM space. It depends on if the returns are sufficient at the risk of legal action.
He would argue one of the reasons you do not see the extension of credit to the degree you would like is because a lot of institutions have paid a lot in penalties. This will tell you when you go back to your shareholders that maybe we will not go all the way to the stated boundaries of the credit box. We would need to leave a little cushion, and this is clearly what is happening today. Whether the private equity world enters that space should not be expected on a large scale basis. The private label market is not going to come back yet because there still has not been established a solid set of standards so people can understand the collateral and risks related to it. He wanted to support Dave’s comment on consumers since the headline survey says “Is the economy on the right track or the wrong track?” There has only been one month since June 2010 in which the majority of people thought the economy was on the right track.
Bruce said when he looks at charts of promises that have been made, he sees that real estate is one of those investments that has a lot of goodies. There is no other place in the world where you can make $500,000 every two years tax-free. 1031 exchange, millions of dollars of asset, never pay taxes until it becomes your estate and it turns to 0. We have all these goodies, including Prop 13, so Bruce wondered if there is an appetite to look at that box and ask if they can have any of the goodies. Bruce wondered which ones are too sacred to touch and which could go by the wayside.
Find out the answer to this and more on next week’s broadcast of I Survived Real Estate 2015. 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, Elite Auctions, iMortgage, In a Day Development, Inland Valley Association of Realtors, Jennifer Buys Houses, Keller Williams Corona, Keystone CPA, Kucan and Clarke, Las Brisas Escrow, LA SouthReia, Leivas Tax Wealth Management, NationalREIA, Northern California Real Estate Investors Association, North San Diego Real Estate Investors, Pasadena FIBI, Pilot Limousine, Orange County FIBI, Real Wealth Network, Realty411 Magazine, Resonant Lens Photography, Rick and LeeAnne Rossiter, Sacramento Real Estate Club – Capital City Wealth Builders, Southern California Chapter of the Appraisal Institute, Sonoca Corporation, Spinnaker Loans, Tri-Counties Association of Realtors, uDirect IRA Services, Westin South Coast Plaza, and Wilson Investment Properties, Inc.
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