On Friday, September 28, the Norris Group proudly presented its 11th 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, tech disruption, and opportunities emerging for real estate professionals. All proceeds from the event benefitted Make A Wish and St. Jude Children’s Research Hospital. This event was not possible without the generous help of the following platinum partners: the San Diego Creative Real Estate Investors Association, InvestClub, Inland Empire Real Estate Investment Club, ThinkRealty, Wilson Investment Properties, Coach Fullerton, First Lending Solutions, PropertyRadar, the Apartment Owners Association, MVT Productions, and Realty411. Visit www.isurvivedrealestate.com for event information, and see Amazon Prime or YouTube for past events.
This segment opens with the second half of I Survived Real Estate. Bruce brought up Gary Acosta, the co-founder and CEO of the National Association of Hispanic Real Estate Professionals. This is the nation’s largest minority real estate trade association. He is also a 25-year veteran of the housing industry. He is also the co-founder of the Mortgage Collaborative, a cooperative of mortgage companies focused on increasing market share and profitably. He was joined by Sean O’Toole.
Bruce began by asking Gary what the Mortgage Collaborative does for the industry. Gary said it is a 5-year old organization that is a co-op. Essentially, it is a group of small to medium-sized mortgage banking firms that pool themselves together and use their collective buying power to negotiate better terms with vendors, partners, secondary market providers, and more. It helps them become more competitive, so they can compete with some of the bigger guys. The challenges, opportunities, and process of managing smaller mortgage banking firms is different from the big firms. You have the Mortgage Bankers Association that focuses on the entire mortgage banking industry.
Co-ops like the Mortgage Collaborative focuses on specific issues that are relevant to small and mid-size companies, which are serving many of the local communities across the country. Bruce said during the course of between the Crash and now, NAHREP had a lot of input on the legislation that finally ended up happening, such as regulatory legislation. Gary actually served on the Consumer Advisory Board for the CFPB. He was part of the initial group to serve in that capacity, so there was about 25 of them who provided input to the CFPB as it started the rulemaking process. They were there from the beginning, around 2012 a couple years after Dodd-Frank was passed. This was when most of the rules became implemented, like QM and all the rules now known in the mortgage market that are affected in a substantial way.
They did not set the rules as a governing body, but they provided input to the staff and helped guide them. Had they not been there, things may have been even more rigid than they turned out to be. Bruce asked if the final changes have been implemented this year and are ready to begin by January. Gary said if you saw the Dodd-Frank bill, it was a huge stack of papers. It was intended to be phased in over a number of years, so we are just barely at the tail end of it now.
Bruce asked what the effect will be of the last part of the phasing in. Gary said the process has been going on for several years now. The qualified mortgages rule was established 4-5 years ago, and they are starting to see the outcome of that. It is interesting because on one end we are implementing the last phases of that regulation. On the other end, you have a new administration that thinks we need to scale back some of the regulations that were implemented. This is happening on a duel track right now; so the net result is we will see regulations take a little bit of a step backwards. From a business standpoint, most think the pendulum swung too far the other direction.
Clearly before the Crash, the rules were too liberal, and it really made for an environment where lenders were doing loans that they should not have been doing. It was necessary to come in and tighten up those regulations. However, in doing so it created an environment where now there are people who should be getting loans who are not getting loans. The regulatory environment has become so rigid, so seeing that roll back is becoming good for the market.
Bruce next asked Sean about a 3D printed house he said he would have in the back of his house in Truckee. Bruce asked what the snow load was he had to have, which Sean said it was a combination of a 100-year snow event and a 100-year earthquake at the same time. The 3D printed house is designed to be structural for the snow loads in Tahoe. It is a 400 square foot guest house. It would be just like an ADU with a living room with a kitchenette, bathroom, and a bedroom.
Bruce asked Sean if he sees 3D printed homes as always being at the smaller or less expensive end of the market or if that will meander its way through everything. Sean mentioned the Guggenheim in New York with the swirling structure. There’s no reason things of that scale can’t be done since with 3D printing it becomes easier to do. It was a marvel when they did it. Bruce asked if Sean knew the price difference per square foot, whether it was a half or less than half. Sean said for his 400 square foot it would be 20% of the cost of the site built.
Bruce asked about unintended consequences. You have this invention that can lower housing costs by 80%. However, you have trillions of dollars in debt already established against values. Bruce wondered if it could become an issue that you could get it for so cheap and if it would take care of the debt. Sean said it could be an issue. However, what degree does land value come up to offset that? The house itself was always supposed to be a depreciating asset, and it should decline in value every year, at least if it is an investment. That is still the way the IRS treats it. The fact that we have pulled so much life out of these homes is good in a lot of ways, but it is not catastrophic if it becomes easier to replace them. It could also bring up a lot of questions also. This includes what would happen to the old home and what it would do for waste and the environment. There is a long way to go around all this.
Bruce told Gary that every time he looks at the news, every week or two he sees lenders writing a $1 billion check for something they did 10-12 years ago. Bruce asked if this has a chilling effect on any kind of aggression going forward when the industry is still seeing what they did back then in paying for a decade a more later. Gary said he thinks it has, and it is not just the fines. It is also the cost now because of the regulations to service loans. There is no question that lenders are gauging their underwriting guidelines and factoring in that potential cost down the line. It is affecting cost, and that trickles down to consumers.
However, it is also causing a lot of lenders to scale back lending on the margins. A lot of the major lenders have completely abandoned the FHA program all together, so most of the FHA lending is coming from independent mortgage bankers and smaller mortgage enterprises. This includes Chase, Citi, and Bank of America. They have curtailed their FHA lending because of the regulatory situation as well as the fines being levied on almost every major lender through something called the Safe Act. This gives the government the capacity to sue lenders up to three times what the actual loans were made for originally. Gary said it has affected credit availability, and it is one of the things that needs to be solved.
When he said they abandoned the FHA program; their feeling was even if they did it perfectly correctly and crossed every T and dotted every I, they could still have a losing effort. Gary said the feeling is if you are doing a large volume of loans, you can do everything to try to minimize the potential for error as much as possible. But, there will still be error. You will still have individual underwriters making mistakes and calculating income incorrectly. You could also have an appraisal or used comps that were not really the correct ones to use, at least in the opinion of the Federal Government. There are so many gray areas in lending that there is not one lender who can solve for all of those things to be certain they are not doing any loans that could possibly be construed as done incorrectly. With that risk out there, it has caused people to say it is not worth it.
Bruce asked what borrowers he feels are out there who cannot get a loan but should be able to safely. Gary said one of the things he thinks is a little bit camaflouged is that there is so much demand out there right now and so little supply. There isn’t really the sense that people who should be getting loans are not getting them. For every property going out in the marketplace today, there are multiple offers. As that supply and demand situation starts to balance itself out, which we are seeing already with interest rates creeping up and affecting affordability, we will start to see the impact of people who really should be getting loans who are not. There will be buyers out there who want to buy properties but cannot.
Those people on the margin and not getting served are self-employed borrowers. Lenders have gone back 50 years in terms of the way of qualified risk and calculated income. They are afraid to make mistakes because the penalty for that is so great. They will want to do loans for W2 wage earners and things that are safely in the box. This also includes people who make money through self-employed mechanisms who have second jobs. This could include driving for Uber, which is a big part of our economy today. They are not being served in the mortgage lending capacity to the degree they should be. As the market starts to normalize, we will start to see that. Fannie and Freddie are starting to recognize that is an issue that needs to be addressed. They are starting to pile up programs to quantify income differently, but it is a gap right now that is a challenge.
Bruce was watching the panel as Sean O’Toole was describing Blockchain and the sharing of the one house where someone gets this piece and somebody else gets another piece. He was so happy to see it because there was the same glaze that went over his eyes that he was happy somebody else was having that same issue. Sean introduced Bruce to this thing called Hyperloop. He went online, looked at it, and it is amazing that this is in process. Some of it is under construction as far as an attempted trial run in China from an American Company. Bruce wondered what this is, which Sean said the idea is you take a tube and remove the air from it since it has a lot of friction. If you remove your hand, you will feel the friction of the air. When you remove the air from the tube, you magnetically levitate a car. You can then push it, and it will go really fast. The theoretical speeds they are talking about is maybe 700 miles an hour. He came down from Tahoe that morning; and if there was Hyperloop from there to the Nixon Library, he would have gotten there in 35 minutes. For the places where there are these tubes, it obsoletes air travel.
This has really interesting implications for real estate that occurred to him when he was driving. He was taking some dirt bikes down to Sedona, and they drove from Reno to Vegas. As he was driving, there is a gas station in Fallon, then you drive an hour and there is a town but no gas station. There used to be a gas station, and you could see it since the pumps were there. However, it’s dead. You drive another hour, and there is another town with a gas station. However, it is every other town where you are making this 7-hour drive, and half of them are dead. He started thinking about it on the drive, and it has to do with the increase in range in the fuel economy of cars. You don’t need every one of those towns anymore. These towns still have 150-200 people, but they have to travel an hour to get gas.
Thinking of that in terms of Hyperloop, you have all these suburbs right out of San Francisco or down here, but now you can have a suburb 350 miles away that is a 20-minute tube ride. What happens to everything in between? It suddenly becomes really interesting to go land bank property in the Sierra foothills. He finds it fascinating, and he thinks it is one of those things where there will be big winners and big losers. If it exists at some point between Riverside and San Francisco, you could make a San Francisco wage and have a Riverside housing cost. You get to work in less than an hour, and you are not driving.
Bruce wondered about the unintended consequences and if you would really have a $2 million median-priced house in San Francisco. You probably would not. Sean said what you might have is those houses converted to high-end work centers where people don’t really live in San Francisco anymore. If they all hop in a Hyperloop to a Utopian residential-only area and find a place, there are all kinds of possibilities.
Bruce learned years ago to listen when Sean says things. He has told him things starting ten years ago that he didn’t even know what he was talking about at the time. When he was ten years old, his dad bought him a computer. Obviously, this turned out to be a special gift. It was in 1977, so this was the first Apple 2. When his son Ryan was 10, he thought out very well what he would buy him. He ended up buying him a 3D printer, which he mentioned to him on the ride to the Nixon Library 6-7 years. His son is now 16, and he started a company almost at this time last year in 3D printing. So far in the last 10 months, he has earned $20,000 3D printing out of the garage of their house.
Bruce asked Sean if he would get him a different gift if he turned ten next month and knowing what he knows now. Sean said yes, but it is really tough. One of the things he thinks back on is when he was ten and the gift of a computer was incredible, and they were so simple. He really understood the computer top to bottom. He understood how a dot went on the screen, which you really cannot easily understand with a modern computer now. The level of technology has grown so much, so where do you do that? He thinks we will still see a lot more automation and robotics, and anything in those areas will be important.
Sean has a bone he picks with all the stem programs at schools. He wants them to have a robotics program, which is pretty rare. It is really the stupidest thing ever because it is the last step. First, you need to learn something about mechanical engineering, materials, software, circuit design, and artificial intelligence. The last thing you do is you build the robot. There are all these other pieces, and there is not a Stem program he could find in the country that really walks you through the building blocks to get you not to assembling a robot out of a kit, but to really actually understand how the whole thing works. We don’t teach that, and that is a problem.
Gary responded by saying he bought his son a basketball on his tenth birthday. Bruce jokingly responded by asking if it was 3D printed. Following that, he asked him about NAHREP and what percentage of the growth of real estate buyers is likely to be Hispanic within the next decade. He said 55% of all first-time homebuyers will be Hispanic nationwide. It is a substantial part of growth in the marketplace for the foreseeable future. He said 47% of Hispanic households are owner households. One of the reasons it is lower is Hispanics are a much younger demographic. It is approximately 14 years younger than the general population. They are just moving into prime homebuying years.
If you look at the Hispanic homeownership rate of Hispanics over the age of 50, that rate is about 63%. Homeownership is something central from a cultural standpoint for Hispanic families in general. They have a passion for it, NAHREP has a passion for it, and it is great for all their businesses.
Bruce ended by asking Sean if other countries are ahead of the United States with some of these technologies like Hyper Loop, and does it matter. Sean said if you follow Hyper Loop, when you look at the projects for the companies that are U.S. companies building this and the companies initially interested in it, they are places like Dubai and Japan. When it comes to fast public transportation, we have certainly not been doing it as well.
The Norris Group would like to thank its Gold Sponsors for supporting I Survived Real Estate: Coldwell Banker Town and Country, Guaranteed Rate and Nathan Chabolla, In A Day Development, Inland Valley Association of Realtors, Jason Thorman with Coldwell Banker, Jennifer Buys Houses, Keystone CPA, LA South REIA, Las Brisas Escrow, Michael Ryan & Associates, New Western, NorcalREIA, NSDREI, Orange County Real Estate Investors, the Outspoken Investor, Pacific Premier Bank, Pasadena FIBI, Pilot Limousine, RealWealth Network, Rick and LeeAnne Rossiter, SJREI, Spinnaker Loans, South OC REIA, Tri-Counties Association of Realtors, uDirect IRA Services, White House Catering. See www.isurvivedrealestate.com for event information.