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 is the final segment for I Survived Real Estate. Bruce thinks we could have said back in 2009 that 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 through 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 in Northern California and sold 80 homes in 30 days. You have to drive to get there, but they are $100 grand to $200 grand below everybody else. They build the same house over and over, so they get it done more quickly. However, a lot of the homebuilders look at them and say it is not a nice house since it is not what the other guys built. However, people moving into them are saying they are a palace compared to their Class C apartment in which they were raising their family.
Sean O’Toole said the homes his dad hated got upgraded over time. This included getting stucco and dual pane windows. This happens over time. However, those folks had a way in to where they could do that. When you force all those things at the start, then they cannot afford it and can never get in.
Bruce ended by asking each of the panelists about the upcoming year. What is the one thing keeping them up at night or the thing they are most excited about? Gary Acosta jokingly said it is his son just starting college that keeps him up at night. He went on to say he was on CNBC prior to that, and the outlook for housing right now based on fundamentals is strong. Investing in real estate right now is one of the best times ever. Demographics are what is really driving that, and the whole process of buying a home has been so difficult for so long. The regulatory apparatus and unique nature of housing has suppressed innovation to a certain degree. The process of a home will likely improve dramatically, soon if not in the next 12 months. He thinks that the demographic demand will be there for a long time.
Sean O’Toole said his son having a driver’s license and being free in the world is a scary thing. However, in the world of real estate, the bigger picture that keeps him up is not so much with affordable housing since he does not think there is anything with that we cannot solve. He has incredible confidence in that, but we have to find a way to move past such polarized views on everything. This country was built on compromise from people with very different views but realizing they needed to come together to solve problems and move things forward. Everybody is right, but about different things in different ways. Finding that thing in the middle is going to be really important, whether they talk about NIMBYism and affordable housing or larger issues.
Sean said the thing he is personally the most excited about is the loosening up and trials and building codes around some really innovated things. We may be getting close to that Sears Modern Home Catalogue of 1908 where we do see a big shift in how homes are built affordably with much better quality and environmental impact.
Eddie Wilson said his son just started college as well. He went on to talk about the election cycles and the struggle when you look at the state of the current economy, where we are, and what is going on. The thing he is most excited about, being someone in his 30s running multiple corporations, is ten years ago he had to search all over the country to find the technology he wanted to build. He had to find people who wanted to build it. Today, young guys and girls coming out of college know how to write code; and writing code for a living is becoming the new blue-collar worker. The innovation that they bring is amazing. You sit these people down in a room, and the solutions they come up with are incredible. These are bright minds coming into the workplace. As much as people look down on the millennials, Eddie finds them to be extremely intriguing and being the fulfillers of all the dreams he has.
The second part to his answer is along with that, he is interested in watching the industry as a whole legitimize itself. It is interesting how he gets more invitations than ever now to come to Washington. The real estate investor is now the new unicorn to a degree since there is so much invitation and so much happening around it. He is excited to see the industry as a whole to legitimize and grow and for their opinions to matter. As they innovate, invest, and move forward, he thinks it will be a great year.
Doug Duncan said in the large picture, he worries about the accumulated debt we are leaving to our children and grandchildren. To him, this is a representation of the loss in confidence of market functions and the benefits of markets for creating wealth and income because of the government shift. On the optimistic side, he looked up on his phone when the Apple Watch was invented. It was in 1946 in Dick Tracey when they introduced it. This was 72 years ago. He sees lots of optimism because of all the technological change that will affect processes, costs, and structures. You may have to get the local building code people out of the way to solve some of these problems. However, he sees lots of benefits coming from technological innovation.
Marnie Blanco said her two almost teenage daughters keep her up at night and how much Snap Chat they have going on their phones. However, she learned if you call it Chat Snap it really gets under their skin. She actually said it so much that they ended up saying it and confusing her. The thing she is most excited about is re-imagining the entire real estate transaction and what technology and data and AI will make the consumer’s life easier. We have things like Amazon out there and expect thing immediately. We get deliveries in a day, and God forbid it would take two. She envisions and is excited about what that transaction will look like when her kids grow up and buy homes. It will be completely different from how we do it today. She hopes it is easier, seemless, and a wonderful experience.
John Burns also has a daughter starting college, but he was excited for her. However, the most exciting thing for him is how much the industry is changing and how fast it is. This includes what is going on with Zillow and the consumer-driven or construction space. We will have a new person overseeing 44% of mortgages very soon, so things will change there. What gets him fired up is what he does not know. A couple weeks ago, he had the opportunity to go to a Packers game and tour the stadium. There were two Make A Wish kids on the tour with him. This reminded him what everyone was doing at I Survived Real Estate and how huge it was.
Bruce ended by saying the thing that keeps him up at night is everything that had been said. But overall, he would like for every elected official to not act like a Democrat or Republican, but like an American. That is a pretty simple request because that is what they are supposed to do. Bruce thanked everyone, both at the event and away, who made it possible to look at data for free. This includes historical data to put together a picture. It is so much easier because it is shared. If they kept that, it would be very difficult.
The book John wrote was really important because Bruce is very excited about what they are about to do in Florida. They are working with a large builder and have a chance to be in the path of obvious migration. He would not know this if it were not for people like John saying how it will work. California used to win the domestic migration game, and that is how we got to be the #1 most populous state. Now, we lose it all the time and other places are winning it for really good reasons. This is where a lot of growth is; and he is the most excited to be in the path of that growth with some of his chips. Bruce ended by thanking his son Aaron. He is the brain child of the event, so he received a well-deserved standing ovation.
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.