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
This week’s radio show is the final part from the I Survived Real Estate event. Today, Bruce wraps up his discussion with Eileen Reynolds, Leslie Appleton-Young, and Sean O’Toole, Doug Duncan, and David Kittle.
Leslie said if you are in a smaller house, such as 1,000 square feet, you are using a lot fewer resources than you are in a 4,000 square foot home. We are seeing this in the office market with these companies where everyone has a stand up desk in the middle and conference rooms around it. She thinks the whole idea of how much space you need and how much time you are actually spending outside your home is a very different aesthetic. The wonderful thing about living where we live is you can do it all, but it is happening because they are valuing their time above that kind of lifestyle. They like the energy of being in a higher density environment.
For anyone who has not trekked to downtown LA lately, it is amazing what is finally happening there. David asked if this was a free market, to which Leslie said she really does not think there are any free markets anywhere, although there have been a lot of subsidies. David said if the millennials are looking for that, the market will dictate where the builders will build. In downtown LA, what you are essentially seeing is urban reuse where they take old bank buildings and old office buildings and making them into condominiums. There are a lot of creative, wonderful things going on that do not have anything to do with government. It made sense for the developer to do that since the demand was there and you had these urban pioneers.
Doug said there is one development that gives more credibility to that than what might have back in the past. This is the development of charter schools. Part of the flight to the suburbs was to get access to good quality schools since a lot of the urban schools are not very healthy. To the extent millennials would like a closer urban setting and have access to charter schools, there has been some development here. If you match what they say is an aspiration to their actions, the majority are renting single-family homes. If you look at the American Community Survey, this is what they are actually doing. There is a statistical thing you have to be careful of when looking at any group. When you go back ten years, there were lots of predictions that the boomers like to party. When the kids moved out, they were going to sell their suburban home and get a condo downtown to party the night away.
He and his wife live in Cape Coral, Florida, which their kids call God’s waiting room. If you are going to get a reservation at a good restaurant in Cape Coral, you have to wait until about 7:30. What people saw was there were some boomers that were selling their suburban home and moving to the city. However, there are so many of them that the number out in that behavioral tail was larger than their parents’ population group. Numerically you saw it happening, but proportionally there was not a behavioral change. He thinks the same thing is going to apply to some degree with the millennials because they are a larger population group than the boomers. Some of them will do that, although we do not know for sure if it is going to be a behavioral change. However, you do need to watch this characteristic. The fact that a number of them do it is important, although it may not reflect a behavioral change.
In respect to affordability and baby boomers, one of the key distinguishing characteristics of this cycle is lack of inventory. This has to do with baby boomers who want to sell and party downtown. However, they are stuck and cannot afford to do it. Even though their home has increased in value a lot, what they want to do is even more expensive. They may be giving up a great low rate mortgage since they may be giving up a great tax base, particularly with Prop 13 in California. They have capital gains to worry about, and they may not be able to qualify for a mortgage like the one they received ten years ago. There are all kinds of reasons that have made listing inventory so sticky. People are stuck. One of the portals took a survey asking people how satisfied they were with their home. Everybody loves being a homeowner, but they want to tweak it. They would like to move, but they simply cannot afford to do it. This is a structural impediment that may be with us for quite a while.
One year Sean was in the limo talking about 3d printers, which Bruce had never even heard of prior. He was surprised to hear he was buying his ten year old son one. He went home to take a look at it, and all of a sudden he heard they were building a house with a 3d printer. Bruce wondered if there was any future in this becoming a competitor. We get these little house shows with an 80 square foot house, so the question is how long it would take a 3d printer to whip up one of these. Sean said we are so overdue for technical innovation in the building industry. If you look back at Robert Shiller’s chart, there was a period back in the 20s where prices dropped quite a bit, and it was not due to loans. It was due to the fact that gypsum board and stick frame construction became popular, and the cost of building a house went down dramatically.
Sean does not see this happening next year or within the next five years, but he could foresee a time when it costs half of what it costs today to build a house. If you look at what they are doing in China and other places where they have robots welding bridges, the robots are riding on rails that they printed to literally print the bridge. They follow themselves out over this bridge and connect it on the other side. The ability to do a lot of these things is a lot closer than we think. The particular building standards and building code today does not envision any of those things. They talk about certain clips and other things that have to be used, the opposite of this progress. How these two things collide and what jurisdictions care about affordability that will allow these experiments to happen will need somebody willing to break those molds.
Bruce said the first time he looked up a 3d printer, he had read an article of a baby born with a heart defect. They took a 3d scan and made a copy of the kid’s heart. The doctor got to hold the kid’s heart outside of his body when it was a replica. They saw the defect in his heart and did the surgery right where it needed to be. Sean’s son has been working on a project with a company that is an open source for building prosthetics. You can contribute by either helping out with designing new prosthetics, or if you have a printer at home you can print a whole prosthetic arm or hand for somebody.
Eileen thinks the building industry is screaming for something because they are having a hard time finding workers who will build what we need to keep up with what little demand we are able to fill because of all the regulations. Their workers left during their session and never came back since they found other things to do. They are screaming for a way to do development with fewer people, but the whole regulatory overlay at the state level and local level in the most over regulated industry will do everything it can to make it traditional as they see fit at the regulatory level. Their only hook at this point is building new homes. Eileen does not think anybody at the regulatory level is thinking outside the box that they want to go to 3d printers and make a home more affordable.
Sean said it is not all on the regulators. If you walked into an architect and told them what you wanted to do, they would not have the capability. Structural engineers do not have the capability or training and background, so all of this will likely change. Doug asked how much of an increase in costs of housing has come from the building itself versus the land, building costs, and availability of land. Eileen said the cost of land in California is huge and a big factor. What is crazy is the fact that we do not know the answer. If you look at the major markets, including stocks, bonds, commodities, real estate, and money markets, it is only real estate where they self-report 30 days after the fact on what happened. Everything else is known down to the second, such as how many trades happen and what they were for originally. This industry is a joke when it comes to instrumenting what is happening on a day-to-day basis.
Leslie said it is undocumented. People call her all the time asking her very reasonable questions such as the share of Chinese buyers in the California housing market in 2014. She tells them she is not sure but refers them to a survey they did. On the other hand, there are privacy issues. Nobody fills out a form and sends it to Sacramento or CAR when they buy a piece of property where they could be told all this great information that should be available. It is really a problem, and Leslie could not agree with Sean more. Sean thought one thing that would for sure come out of the downturn would be that somebody would say we need to fix the recording system so we can see it coming next time.
It would be a very cheap solution to fix the 3,150 county recorders, have all documents filed electronically, have all the data available the minute it was filed, and add some additional questions. Ask if they are a citizen or a foreign national who is buying, anything that could give an understanding of what is affecting prices in Silicon Valley. Is it just tech workers coming in, or is it people coming in to buy a home and leave it vacant since they just want the appreciation and it is too much work to deal with a renter. David said these questions will now be forced on lenders since they are worried about what happened after October 3. This was when TRID happened. However, people have been given two years to collect all this additional data. They don’t exactly know what this is.
All that data is being collected, and something they have as far as recording goes at First American is a product called Data Tree. Right now they have about 89% of the counties covered, so that information is close and you will have it at your fingertips. Hmda data is the fear of lenders after TRID, and this is really what is affecting David’s side of things from an origination standpoint. They have no idea how it is affecting since it has only been enforced for ten days. They have to disclose now to the borrower, not only their good faith estimate but their total cost three days before closing. David wondered when this has ever happened. They survived for years and did just great, and they had this one little window where it was not so good. They are making better loans today than they have in twenty years, and they keep adding on onerous regulations and driving up the cost. If you think the consumer is not paying for it, then you are not awake. Sean said for the cost of implementing hmda, we could have fixed the recording system. This would have been way better for everyone.
Bruce went down the line of analysts and told them to answer one of two questions. He first asked Doug what one positive change he wanted to see in 2016, and what outside of real estate causes concern that could impact housing in an indirect way. Doug said the Fed will have both direct and indirect impact, so he is concerned about the Fed’s posture in the market. He thinks they are way late in the game, and they are distorting asset prices.
Eileen said at CBIA they are going to change something in 2016, and that is to continue the existing process of how schools are financed. If we ran out of money at the state level for new school facilities to be built, all bets are off and builders and developers must pay 100% of the cost of new school construction. No more state money or school district match, only on the builder developer. They have circulated petitions to qualify a school bond for the November 2016 ballot, and that will maintain the 3-way sharing of state local builder match for funding new school facilities out well into the future. This is the positive change they will affect for their industry so that fees for schools alone will not go up $20-$30,000 per home.
Leslie said what keeps her up at night that is related to schools is the educational attainment quality skill level of our kids, our future, and our inability to compete globally. A lot of things we have talked about in terms of housing affordability comes down to income growth, jobs, skills, and getting on a career path that is very positive. For a series of reasons this has been compromised, and we are lagging behind in engineering, science, and math. These are the cornerstone of this new economy. This is something we really need to get back to, and it is likely on a household-to-household basis.
David said what he would really like to see is the people who make the rules for us really understand what they are making. They have to realize how it affects the people since they never have to live by them. There is no accountability right now, and that is just the way it is set up by Dodd-Frank. The CFPB has no accountability and reports to the Department of the Treasury, which reports to the President. They are unchecked, and they have done a good job in some areas while in others it has been really difficult. MBA, the NRA, and all the homebuilders have done an amazing job as an advocacy group working with the CFPB and reigning in some of these onerous regulations. He would like to see the people in Washington, D.C. understand and listen to the people when they make the rules.
Sean said his biggest hope for next year is that we can start to have a serious debate among presidential candidates around some of these important issues. Hitting the 0 bond on interest rates and not being able to grow our economy through debt are issues, but a big issue is that technology makes us need fewer people. We are 40 years into technology, and you have places like McDonald’s that are fully automated and do not need a single worker. There is a lot more of that coming, and to not have a single conversation about anything that matters in these debates kills him. Bruce said he hopes every elected official next year will not be a Republican or a Democrat, but an American and do what is best for the people of the country.
Bruce thanked everyone for participating and hoped they all found it a very enjoyable evening. 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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