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. Before bringing up the entire group of panelists, Bruce asked Sean if other countries are ahead of the United States with some of these technologies like Hyper Loop and whether it matters. 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 in California. In terms of technological innovation, a lot of that is still here. However, he thinks we are seeing a lot more investment worldwide.
Sean has overseas developers. At first it was a cost thing, but there are now places in the world where you will have kids who started writing software in elementary school. By the time they graduated high school, they had more software coding experience than our college graduates. By the time they are out of college, they are far ahead. There really are a lot of countries making a lot more investment, both with the internet and 5G. Those things are happening, and we cannot rest on our laurels.
Bruce asked what the penalty is for not being first in that world. Sean said when you look at something like 5G, the next thing after 4G, or a 4K movie, you think about how long that takes to download. You are talking about downloading a 4K movie in a few seconds. It’s not just about getting your movie faster. If you can download two hours of a movie in a couple minutes, you can now have streaming real time 4K. When you add that to AI, you can be interacting with things that look virtually real. Virtual reality can now be mobile; so you could be inside of a moving vehicle that is projecting different things in front of you in real time. If it is augmented reality where it does not completely block your eyes and you still see the outside world, imagine driving down streets like this.
This will probably happen first with advertising. You will probably drive down a street, and a big arrow will jump out in front of you in your car display point you where to go. We will have full real-time advertising jumping out at us. However, it will be safe since we won’t be driving anyway. Gary Acosta jumped in to say that not being first or a leader in technological development in the near future will have national security implications. He thinks the position the United States government and our country has right now in terms of leadership will be challenged if we do not continue to lead the world in that regard.
Gary went on to give his pitch on immigration reform. He thinks the worst thing we can do is have people come into this country, get educated from our institutions, and then send them out of the country. This includes intelligence, skill, and education. Educated young people are the biggest resource we have in this country right now, so we need to keep them here.
Bruce brought up the entire panel. He began by covering what he has heard are concerns. One is the sale of homes. All the flippers have talked to him about sales slowing, and he has even had meetings at the office. Sales are down, but Bruce wondered why this is. Historically, where affordability is in California right now, the volume of sales is normally exploding until we get to 17. It is higher at 26 than it is at 30 and 20 than 26 because there has been momentum. Maybe because of lending restrictions, 26 is the new 17. We may be budding up against that ceiling earlier than we ever have because people cannot really qualify.
Doug Duncan said Fannie Mae surveys 1,000 households a month, and the survey is targeted toward the next twelve months. They produced the Home Purchase Sentiment Index, which has flattened off and tipped down a little. They looked at two questions in particular a couple months prior. The first question is whether it is a good time to buy a house. Of those who said it is not a good time, for the first time the survey was done since 2010 the number one reason was house price. The next question of whether it is a good time to sell a house, the number one reason for those who said it is a good time is house price again. In last month’s press release, they said they believed this means a plateau in home sales.
In the most recent month, both those numbers strengthened. They concluded it is a good time to sell a house if you have a lot of equity in it; but if you buy another one, you will just have to give it away to that other person. At the national level, they have clearly seen a topping of the market. Sean O’Toole added one thing you have to remember about the Index is that it is not based on affordability based on all available loan products. It assumes a 30-year mortgage; so when it hit a 17, we had pay option ARMs. He would actually say that at the 17 we had much higher affordability in terms of what the average person walking off the street could buy and afford than we have today. It hit 17 in 1980, 1989, and 2005. This is why he buys into 17 being a legitimate number instead of 11.
Bruce next asked about the priority of owning a home. John Burns had broken down the generations in a different way. This is why Bruce asked him if homeownership has regained some of its strength in the way people want. John said all the surveys he has read say the desire to own a home has never waned this whole time. They broke the generations down by the decade people were born. The people born in the 1970s got absolutely crushed during the last downturn, and that is where most of the homeownership fell. They had the highest homeownership rate ever at their ten-year high school reunion; and by their 20th, they were 11% behind. They are making a comeback; but there is some distaste there, and that is the move-up buyer.
John said what is different this time with existing-home sales is we are requiring documentation. The stupidity that happened during the other cycles cannot happen again. Interest rates are higher, so people are not wanting to give up their fixed-rate mortgage to go get a higher fixed-rate mortgage. Those two things, as well as the price issue, are contributing slower sales. This is not Armageddon or a downturn, it is just three differences. Marnie added by reiterating how her company had just released their latest consumer report at Zillow that said 42% of the buyers right now are millennials. In addition, half of all buyers are first-time buyers right now, which is a big factor in this. They do not necessarily understand how it works, and the affordability is a factor. There are so many pieces of the puzzle there; so when you have these younger buyers coming up, it will naturally change the game and how it works when they become first-time homebuyers.
Bruce asked the panel if they think there are tailwinds for housing and what they could be. John first began by talking about mortgages and how, while he agreed with everything Gary said, had a difference in what he thought the conclusion was. He and Doug had discussed it a lot and was planning to speak on it at their upcoming event. The documentation is extremely tight, but 24% of all mortgages today are FHA mortgages. While the banks aren’t making them, Loan Depot is. The FHA programs are definitely there.
Dodd-Frank said you should not make a loan above 42%, or all their debt should not be above 42% of their income. However, they exempted Fannie, Freddie, and FHA since it was 2010 and they were in a housing crisis. We are in 2018, and they are still exempt while 44% of mortgages are above that number now. We are very high debt-to-income ratios, and we have the highest LTV mortgages ever. While the documentation is tight and the banks are not doing some of this, he does believe the mortgage industry, which 71% of is controlled by presidential appointees, makes it not that hard to get a mortgage if you have the documentation. If you are self-employed, you may not have the documentation. But, it is really not that hard.
Doug Duncan said there is pressure to ease underwriting criteria. If you think of the fact that demand is growing faster than supply, if you ease credit conditions in that environment it is pro-cyclical to price. If you are approaching a recession, the very people for whom you eased credit to get them on the wagon are likely to be the first people off the wagon. You want to be really careful about whether you are not creating conditions where you are putting people into a very highly leveraged asset at a time when there will a change in asset valuations.
Bruce said we could have said forget it back in 2009 and anybody who is breathing could get a loan. Now, their house would have gone up by 2 or 3 times and we would have solved a lot of affordability issues. We let loose of the reigns late in the cycle, but we don’t do it when it is most appropriate or most affordable. Doug said in debating whether to attempt to halt the price declines, we introduced policy to prevent that. This means that prices never actually reset according to market fundamentals. If you look at the relationship between incomes and prices, the price never got back to its long-term relationship with fundamentals of income.
Bruce thinks there are a lot of safeguards in this market. The fact that we have a certain percentage of FHA loans right now, you have to ask about all the loans that are in place. To have a price decline going forward, you would have to have a glut of foreclosures emerge from this pile of loans that we have. Bruce cannot see how this would happen. You have the biggest bunch of trillions of dollars of equity, and we haven’t refi’d our equity out this time. This is probably not because we would not have wanted to, but they didn’t let us. You have this huge pile of equity, and everyone has a fixed-rate loan by and large. There is no teaser rate, and there are no programs that could explode. You don’t have a two-year program that two years from now a lot of people will have and it will be a problem. We do not have that. We have a fixed-rate loan that starts with a 3-or 4 predominately, and it left the equity in place. The last 8 years, people have actually had to have down payments and credit they care about. They have had all the thing you care for, so how do you end up with a gigantic pile of foreclosures out of that? Bruce said for him, this is the driver of price.
John Burns said it would mean massive job loss since most people are living paycheck to paycheck. If a lot of people lose their jobs, you will have a lot of defaults. However, it is not anything else. People just need a new job. Bruce asked what a lot of defaults is. In the 1980s, that would be high unemployment. In the beginning of the 80s, we had 9 ½ to 10% unemployment. We had 1,000% increase in foreclosures and no change to the median price. This was about 1 in 4 trustee sales to sales. If you go to the 1990s, you have a ratio that got to about 40%. This is 4 of 10 comps that are theoretically REO. The latest one in 2008 was 80% trustee sales to sales. When Bruce looks at that, in the 80s we did not have price damage and in the 90s we had gradual price damage and a catastrophe.
The question is how do you determine what the next downturn, slowdown, crash will look like? He tries to look at the ratio of trustee sales to sales, and that is where he is coming from. You will have all those charts go negative, and you will have unemployment and a rise in foreclosures. If it only gets to 25% of the market, or 1 in 4 comps is an REO, then your appraiser can go out there and say that is not the market. The market is the other three. If it is 4 of 5, they cannot do that since it is the market.
Gary Acosta said real estate crashes on a national level are extremely rare. However, they happen more frequently in local markets. The scenario Bruce described, while it may not impact prices from a national standpoint, there are local economies that could be devastated if there are dramatic losses in jobs. Depending on where those markets are, you could see large price reductions in some of those markets. Gary thinks that is the way it operated for decades before 2008. After 2008, we think again about the likelihood of another national housing crash. However, the fundamentals are extremely different today than they were in the early 2000s. A lot of it has to do with lending.
FHA loans are being made by independent mortgage lenders. There are multiple buyers for every property that comes for sale right now, so the impact of not having enough qualified buyers has not really been felt. However, that can change as the supply and demand balance changes. Also, independent mortgage bankers tend to be the first ones out of the market when the market really gets soft. If 95% of the FHA loans and first-time homebuyers in general are being serviced by the mortgage bankers, that is fine. However, when the market turns, a lot of those companies will retreat if not get out of the business altogether. Not having the big lenders in there can have an effect down the line. John said they could stop lending during the next little bit of a slowdown since they do not have the capacity to lend. The question then is who will be making those FHA loans.
Bruce said some legislation being voted on is rent control. Bruce wondered if this will pass, which Gary said he thinks it is a mistake. In general, manipulating the market like that always has unintended consequences. He understands we have a rental affordability crisis, but you solve this by adding more supply into the marketplace. This is challenging but the only way to get it done in the long run. Sean O’Toole said the only way you solve affordable housing is to actually build more affordable houses. Sean said his dad hated this one builder near San Luis Obispo because he would build these crappy homes with T111 siding and terrible windows. Everything about these homes was awful, but they were half the price of the rest of the homes. You cannot legally build that home anymore. You have to have Title 24 and all this environment. You are talking about a home that cost half as much and maybe $50 more to heat. However, this is a good tradeoff. We need to bring back the ability to build some subdivisions of really bad homes.
When you look at NIMBYism, we are the reason we do not have affordable homes. Sean lives in Tahoe, and there is a local nonprofit who has two missions. One is to preserve the area as it is. Meanwhile, their other mission is affordable housing. You’re not going to get everything in a small town to stay the way it is, not in my backyard, while also getting more houses and affordability. Everybody wants affordable housing if it is far away, and that is the fundamental problem. We have state legislatures that are not quite as local that are trying to shove this down the city’s throat as we heard mentions to earlier. For the cities and local homeowners, as soon as it is at a subdivision, you could have an ADU with an Airbnb rental next door, and people have a real problem with it. If we come to a consensus around that, we solve affordable housing.
Bruce said according to CAR, California is building 80,000 less homes than they feel like could be occupied. He wondered what the process is like for a California builder versus any other place. John said it is hilatious. He has national clients who basically build the same home here that they built in other markets. There are some elevation differences, and they are hundreds of thousands of dollars cheaper. The affordable housing solution is in Texas and Arizona. Interestingly, 62% of migration is going from Arizona to Florida and Georgia. The public builder with the best margins, fastest growth, and best stock prices is a company named LGI Homes. Their average sales price is $80,000 less than everybody else’s. They just came to Rio Vista, California and sold 80 homes in 30 days.
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.