The Norris Group’s annual award-winning event, I Survived Real Estate is back! Due to Covid-19, we are virtual. HOWEVER, our 14th annual black-tie gala that benefits Make-A-Wish and St. Jude Children’s Research Hospital will continue. Since 2008, together we’ve raised over $1,000,000 for charity!
Our network will want to pay special attention to The Norris Group Radio Show and Podcast as we will be doing pre-event shows featuring local experts as well as national leaders. There’s a lot at stake in 2021 for real estate investors. Will the real estate market remain scalding hot? Is a crash coming? How will the US handle the disappearance of Covid housing- and employment-related assistance?
I Survived Real Estate was created during a year in crisis and our mission continues to bring thought leaders together for a great cause while preparing our industry for the year ahead.
San Diego Creative Investors Association
Wilson Investment Properties,
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Inland Empire Board of Real Estate
Keller Williams Corona,
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Leivas Tax Wealth Management
Narrator This is The Norris Group’s real estate investor radio show the award-winning show dedicated to thought leaders shaping the real estate industry and local experts revealing their insider tips to succeed in an ever -changing real estate market hosted by author, investor and hard money lender, Bruce notice. On November 5, 2021, The Norris Group proudly presented our 14th annual I Survived Real Estate charity event, industry experts joined Bruce and Aaron Norris to discuss evolving industry trends, real estate bubbles, inflation, and opportunities emerging for real estate professionals, all proceeds from the event benefit Make-a-Wish and St. Jude Children’s Research Hospital. We want to thank our Platinum partners, San Diego Creative Investors Association, Wilson Investment Properties, uDirect IRA Services. See ISurvivedRealEstate.com for event details, information on all our generous sponsors, watch the video uninterrupted and to connect with our speakers.
Bruce Norris Doug, welcome back. The probably the topic of the day is still inflation. And because it would impact where we are in price, if interest rates were to change dramatically up real estate prices would really have a difficult time. So, I guess maybe let’s talk first of all, what, what’s the basic cause of inflation? And do we have it? And is it short lived? Or is it long, long live this time?
Doug Duncan Well, thanks for inviting me back. And not looking at my old forecasts. We have a little algorithm on the Fannie Mae website that expunges Last, last month forecasts you can look, it’s not exactly true. But so I’ve been starting comments on inflation from my Oxford English Dictionary, which sits on my desk, and I looked up the word transitory. And the first definition is not permanent. That, that is an economist giving himself some wiggle room, which, which is not unknown. So, interestingly, in the Feds release, they have planned the tapering and the dollar amounts of tapering for two months. But then they left it open, which tells me they are uncertain about how much of this inflation will last and what its causes are. I think there’s no, there’s no question that you can look at certain categories or sectors of the economy, the auto sector is really the poster child. And you can see the disruption of the supply chain on the supply side. And the demand of households for automobiles and the real spiking of used car prices that took place a few months ago. That’s that’s an example of something where the Fed chair will referred to, which is, first of all, every household, or almost every household has a car. So, they’re familiar with that. And they also know that they have to be replaced from time to time. So, it’s an easy thing for the public to, to gather an understanding of the supply, the supply, disruption causing spikes in price, but that’s one product. So, there’s a lot more products where prices have spiked. Certainly food and energy, which typically got stripped, get stripped out of headline inflation, both are up significantly. And I’m building a house and the, I just met today with the builder and the trusses are five months out. And he said as soon as we start, we get the contract signed, we’ll start ordering appliances because they’re over a year out. So, the so first of all, on the cost side, it’s clear that there are going to be pressures on the cost side that will flow into the rate of inflation. And I in my personal view, that’s a function of the fact that it is both time consuming and expensive to restructure supply chains and supply chains are being restructured all over the globe. So, to me that will last longer than the next 12 months. It might last three or four years could even go longer than that. If you think back to how We got supply chains out of China and Southeast Asia all the way to the United States and made them very efficient. And now we’re disrupting that. So, that’s on the cost side. On the demand side, where, are people able to buy those products, even if they were available? Right now, households have $2 trillion more in their checking accounts than long term trends would suggest they should have. Som there’s a lot of tinder out there for people to light on the demand side of the equation. And you can see that happening in some categories of businesses are worried about whether they’ll even even be able to deliver toys for Christmas, because people are already buying them ahead of time because they’re afraid that they won’t be available. So, on the demand side, you’re also getting a push, then you so if you’re, that’s, if you’re a Keynesian mindset. If you’re a monetarist mindset, my inflation is always in everywhere a monetary phenomenon, it just acts with variable in long legs. Okay, so the Fed is now tapering, but between the start of the taper and when it ends, they’re going to add 400 billion more in stimulus to their balance sheet. So, you’ve got both theories being exercised. And it says to me, inflation is going to run above what the Fed is happy with for a while. That’s the risk to housing because the Fed may decide it’s time to tighten. And, you know, I’m participating in the in the board meeting with Fannie in a week or so. And one of the things that will show them and it’s this is publicly available data, so you can look at it is with the taper tantrum in 2013. That 100 basis point rise in mortgage rates, the second half of the year led to a significant downdraft in sales in the first half of the next year. And it tempered prices. So, prices slowed. In 2018, the Fed combined forces they both started shrinking the balance sheet, and they were tightening. And that also moderated house prices. But it really took on starts and it slowed started significantly during that year, which of course led the part of the supply problem when the COVID hit and demand took off. So, long winded answer, but some data points for people to look at and watch for how long will inflation run above the Feds expectation and from our, in our forecasts, it’s two to three years for sure. And there but there can be lots of policy changes that can take place. I can also that.
Bruce Norris I’m used to her hearing the Feds first, first tool is interest rate changes. So, you’re talking about tools that haven’t, that’s not common for them to use what they’ve used this time, is that correct?
Doug Duncan That’s, that’s right. It’s they would call it quantitative easing. Somebody asked me for a definition of quantitative easing. I said, that’s when you let out your belt, two loops after Thanksgiving dinner. That’s, I guess that’s a different kind of quantitative easing. But it’s sort of, they’re adding to their balance sheet and making a lot bigger. So, there is some sort of an analogy there. But that is, that’s what, what Sean referred to earlier about the there was a stimulus. At one point, there was some quantitative easing, and it was backed off a little bit then with some more it gets bigger each time Fed’s balance sheet is somewhere now between eight and $9 trillion. Whereas prior to the 2007 to ’09 downturn, it might have been a trillion dollars. So, we’re way out there. They tip in his not that, not this week’s press conference, but in the previous meetings, press conference. Chair Powell was asked, ‘will you start to raise rates while you’re tapering?’ And his answer that was direct, he said, it doesn’t make any sense to us that you would start tightening on monetary policy where while you’re still providing stimulus with a balance sheet, so the answer is no. It’ll be interesting to see if they stay with that. Because there are a couple of central banks around the world that aren’t simultaneously slowing the purchases for the balance sheet and raising rates. So, we’ll see whether the Fed shifts his perspective. And that perspective will be shifted if we see inflation continue to run well above their, their acceptable rate.
Bruce Norris Well, okay, the velocity, the velocity chart.
Doug Duncan Yeah.
Bruce Norris Velocity of money off the cliff. Is what? 1.1?
Doug Duncan Yeah, it’s going nowhere. So, the, that relates to that $2 trillion of cash that’s sitting on household balance sheets, they’re not spending that. So, there’s various questions of why they’re not putting that currency back into, into circulation plus, for example, bank loans are have been diminishing. So, they’re the, the bank route of putting money into circulation is also slowed. So, why would households be holding back? Well, for one thing, Delta, the Delta variant, and question whether another iteration of that will come along. So, the services side of thing which saw a boost in employment in the employment data that came out today, still well below where it was, they may also be holding reserves in a precautionary way waiting to see what happens with taxes, as that will be part of the discussion, as they’re, they attempts at putting more fiscal spending into the, into the mix. Will, will it? And if so, how will it be partnered with taxes, and some households, may well, particularly higher income households, which, which is where more of that cast sits in their checking accounts? We’ll, we’ll be thinking about that.
Bruce Norris The stretch between 74 and 81. So, you had that was my entry into real estate. And so I had borrowed money at something like where I taken over loan at 5%, by the time I became an investor, I refinance at 17 and a half. And so that was the tool of choice to stop the inflation of that, of that cycle. What, what caused that inflation? And is that what, is that in any part? What’s causing our inflation today?
Doug Duncan It’s a part of it. It’s the demand side of the equation. Of course, the, the monetary aggregates were growing rapidly and velocity was higher at that time, from the monetary perspective. On the, from the Keynesian perspective, that was also strong demand and cost increases. And those rises in rates that Paul Volcker put in place, tamp that down pretty quickly. I, for those in the real estate space, I don’t know if folks have read about or if you’re old enough to remember the builders coming to DC with lumber and supplies, which he couldn’t do today because it can couldn’t get them.
Bruce Norris A picture of a trust.
Doug Duncan So, they were dumping them on the lawn in protest of that increase in the interest rates. I don’t I doubt that we’ll see that. I don’t think the Fed will let it go that far. But it is very difficult to take the actions that Volcker did and Reagan supported in really going after inflation, if it should get loose.
Bruce Norris Is there, is, was that Paul Volcker’s independent decision?
Doug Duncan Well, you know, that the Federal Reserve maintains its independence, but it is also aware, is politically aware. So, I am sure there were conversations between the administration and the Federal Reserve. But there’s no question that Volcker was purely focused on the issue of inflation and was fearless in taking it on. And Reagan was a hard money man, and felt strongly about the value of people’s currency. And that, that was a in my view, a marriage that worked very well. Even though politically it, it, the White House had to swallow pretty hard because it did bring a recession two years into the new administration, which was, which was not necessarily something they were looking for, but it did ultimately solve the problem. And to your point, we’ve seen 40 years of that benefit as nominal rates have come down and households are able to refinance all that way down and improve their their financial position.
Bruce Norris Sean, uhm, okay, I’m going to earn do we have about eight more minutes in this segment?
Aaron Norris Yeah. And just remember, we’re going to lose Jim, so.
Bruce Norris Okay. All right. Well, we’re circle back I’m gonna go backward now to, to Sean and then to Jim. Sean, when I, when I take a look at the idea of inflation or deflation, you’re in the tech world, and the tech world, his job is typically to make things Less expensive with innovation. And so what’s your take on deflation or inflation? I just read a really great book, it’s way over my head, The Cost of Tomorrow. That’s a guy that kind of came from your world and talk about, that’s our job. You know, that’s what we’re going to do is make things less expensive. So, what’s your take on, on the future of inflation or deflation?
Sean O’Toole Yeah, I mean, long term, I definitely think deflation is a bigger problem, right? Like, I mean, just like you said, it’s Tech’s job to make I don’t know if it’s a tech’s job, but it’s what we do, right? Like, how, how all these tech folks get so rich, is they use software so that you can replace, you know, 100 people with five people. And they get the benefit of that, that savings. I mean, the simplest level, right? And and I believe that’s something that’s gonna continue, or maybe accelerate, I actually have more of the mindset that accelerates. So, short term, right? You have not enough workers, you got to pay them more, you know, and they’re asked longer term, you get the robot to flip the burger, which we’re seeing the robot that you place your order with instead of the person, you know. So it’s that kind of thing that happens over time. But it’s not instantaneous, right? So, we, technology kind of took us down just in time path. And I think that started the 70s, early 80s, if I remember correctly, and we got into just in time inventory. So, because shipping and the global supply chain was all working so well, you’d get the parts that you needed just in time to build something.
Bruce Norris Right.
Sean O’Toole Well, with COVID, that broke, right just in time just broke everywhere, you know, and that’s what’s impacting cars and everything else, because we didn’t stockpile things, right, we had the parts came to assemble the thing that then and so now you get something like a chip, for the car key remote, is impacting your ability to sell entire vehicles. One part, right, so that that broke, it’s gonna take a while to fix, right, we’ve all seen the lat port in Long Beach. And plenty of, there’s similar issues within China. And it was a worldwide impact, too, right? The pandemic was unique in that it was, it didn’t just impact one country, it impacted the whole system. And with the global just in time supply chain. I do think I you know, Doug’s pays way more attention to this stuff than I do. But I think, you know, three or four years of higher inflation makes a lot of sense. Long term, though. I don’t buy that there’s a long-term case for inflation at all.
Bruce Norris 3D printed houses. Aaron, where did you say when Texas they’re building a whole track?
Aaron Norris Austin, and then in Rancho Mirage? I believe it’s mighty, mighty buildings. Cornelius, can you verify, confirm or deny? Yeah, it’s happening in more than one spot. So, entire neighborhoods of the 3D printed houses are coming.
Bruce Norris Wow. You know, it’s funny, Sean, I miss our little trip to the I Survived, Nixon library, because you’re always telling me something I’ve never heard of, you know, you bought, your bought your son, a 3d printer? And I’m going ‘what? What’s that?’ And so now it’s building houses. That’s a little a little hard to get your brain around. So, the bottom line question is, this is what you kind of talked to me about years ago, that that will be done cheaper, and cheaper than home construction is typically done.
Sean O’Toole I think we’re long overdue. You know, if you go back to Schiller’s chart of home prices since the 1800s, right, there’s this big drop around 1910. And that was really do, you know, technology, the Sears Home where you could have a whole home delivered, and you could build it yourself. It really changed the cost of housing and dropped it. And we are, in my opinion, you know, about 100 years, well, not 100 years, but you know, we’re, we’re 20, 30, 40 years overdue for that kind of shift. You know, but I don’t think it’s, despite that the cool stuff happening with 3D printed houses, companies like Plant Prefab, there’s lots of interesting things starting to happen, but I don’t think we’re close yet to a fundamental shift. And I think the primary problem there is regulatory problem. So, um, you know, when we start requiring solar on every house for every plug, you know, a little plug a little outlet, right? They were cost of those were down to like a buck. And then you require that they have built in child safety devices and it goes to 10 bucks, right? That stuff adds up and we keep doing that keep adding more and more cost to homes, and at the same time really stifling innovation, right? So, because there’s so many requirements about what a home can be, has to look like all the rest, it’s very tough for these companies trying to do 3d And trying to do innovative things to get through that regulatory process and get something that can actually build. We’ve joked around locally, I’ve thought about illegally building a house with you know, I live in snow country, right. So, this, this really seems crazy, like with cheap insulation, roof, single pane windows, like, but I could build it, even with the high cost of stuff today, I could build it cheap. And it would still be pretty nice inside. And it would still be much nicer than 50, 60% of the inventory in my town that was built 50, 60 years ago. And that’s illegal. We can’t do that.
Bruce Norris Right.
Sean O’Toole We’ve made affordable housing illegal, and we’ve done it by choice, we’ve curtailed innovation, and we’ve done it by choice. And I think that’s a shame.
Bruce Norris I bought houses that are built without the permission of the city. That’s that was an interesting meeting with the city. Jim, I wanted to get back to you on on the innovation side, because one of the subjects in the 12 days of TMC, it the subject matter is basically how to automate and use less people. So, where does that automation fit into the future of the loan business?
Jim Park What’s happening already, people are using, you know, AI, machine learning to reduce the costs and they got, you’re looking at, you know, you’re looking at files, you know, and it’s reading it, and inputting it into automated grading system and so on. All those things are happening right now, the big challenges you got a lot of people, you know, dating, but they don’t talk to each other. There is not a clear integration. It used to be long time ago was, you know, Fannie Mae, Freddie Mac, which, you know, dictate a lot of those things. Those days are kind of gone, like you got you got a an automated underwriting system, LMA, which is not quite as private 50% market share, I think in terms of a US dictating what system to go. So, it’s, it’s stifling sort of competition, actually, at some level. But I do think there are some really cool products that are being produced right now in the marketplace. And you can see the cost of the origination process, actually, it went up, and some of it because of the regulatory requirements that were put in place, but you’re seeing it go back down a little bit. And and a lot of that has to do with the technology that’s being deployed in the market. You know, obviously, the biggest cost of the origination processes, loan officers. So, that’s, you know, you start to have human beings doing that, I guess so. But I just, I don’t, I don’t, I, I do think I have a lot of hope for technology and what happens there, I do, it does worry me to some extent. But, you know, like, when I go to San Francisco, I can go to a coffee shop that has a machine that makes my coffee for me. But it doesn’t really taste that good. I rather have a human being make my coffee, it tastes a whole heck a lot better. I don’t know some things I some things are up for innovation and change. And some things I just, didn’t know, I’m not sure until that coffee tastes a lot better. I’m not. I’m not going to that machine, so.
Bruce Norris Well, you can’t you can’t talk back to him either probably.
Jim Park Yeah. But you know, the other thing that’s happening, it’s, it’s kind of me kind of curious how Doug or Sean thinks about this, but there is so much money being thrown at new innovation technology, and the valuation these companies are getting is sort of mind blowing. Right? And so you can see kind of, you know, this is sort of becomes kind of wealth appreciation that has no foundation to some extent, because there’s a lot of capital being thrown at these companies. Like I was talking to a venture capital guy the other day, and he’s like, Yeah, you know, if someone has an idea, they maybe bring in a couple people who have sort of, you know, built a company, sold it, what have you.’ If you have some idea on piece of paper, you start with a valuation of 15 to 20 million. You don’t have to even prove that it works. Right. And so, like, okay, so this is not like way back when when you have to actually work hard a few years, build something out, make sure it works, you demo it, you get some clients and you don’t have to do that anymore. It’s just I mean, I, you go from zero to 15 million overnight to get money in right and so, I don’t know I do worry about, about that kind of environment and where it could take us, but at the same time you do see it a lot of great companies out there, I see a lot of interesting technology being built for the industry. So, I hope that that works for us all. The one thing that I would say around just kind of a cautionary thing around, you know, we talked about inflation, deflation. And one big issue I do you think is the demographics of this country, because we are as a country are our population growth is slowing considerably. And that has, that’s going to dictate in many ways how the market goes in the future. So, if the if the home, if the if, if population growth, I mean, there’s a lot of different reasons, like you’re getting people who are more educated, more educated people have less kids, you have less immigration going on right now. So, combination of all of these things are reducing the growth, and that’s going to have impact. I don’t care what you do, that’s going to have an impact on the real estate market and the prices in the future.
Bruce Norris Right. All right. Well, thank you.
Aaron Norris I well, before for Jim goes, he’s going to set me up for Cornelius because I have to ask this. So, Jim, I know you’re in California. So, we just passed 30 some bills around housing, how do lenders approach the states like California who passed things like SB9 that all of a sudden, single family home lots are gonna be able to become duplexes or owners are just gonna be able to split the lot? You, they have to get your permission to do that, right.
Jim Park Well, I mean, you know, California has a lot of, a lot of rules, laws being passed. But you also have New York now you the independent mortgage banks are not actually, you know, getting money from, collecting money from people subject to CRA, right. So, we don’t have that. I do think I mean, we everyone likes to gripe about regulation and all that stuff. If you think about the crash, the reason why this program started using why the housing renaissance started, kind of at least as a think tank. Think about all that regulation that came in during that period of time, everyone said, hey, it’s going to stifle the growth of this market, it’s going to kill our business. We’ve had some of the best years ever. People last year made so much money in this business, it is almost ridiculous. And I just think some baseline, some sensible regulation is has been good for growth, and it hasn’t had the opposite impact. You have checked the positive impact. So, yeah, we can’t, we can’t you know, it’s so we’re gonna be very careful when we say regulation, there’s some things are really important to have. And some have gotten maybe overboard, but we have to kind of pick and choose on that a little bit and, and fight the right ones, right. We can’t, we can’t we can’t just say blanket regulation is not a good thing. It has been a good thing for this industry overall.
Aaron Norris Well, you’ll have some new toys to play with next year, with the SB9 and SB 10 coming out, so. Alright, well, Jim, I know we’re gonna lose you here in a second. So, thank you, and it sets me up great to introduce Cornelia. So, Dad cool with me moving on to…
Bruce Norris Absolutely.
Aaron Norris All right. Thanks for being here.
Narrator We’d also like to thank our Gold Sponsors, Inland Empire Board of Real Estate, Keller Williams Corona, Keystone CPA, Inc. Las Brisas Escrow, Leivas Tax Wealth Management, NorCal REIA, NSDREI, Pasadena FIBI, Realt411, and Think Realty Magazine. See ISurvivedRealEstate.com for Event Details information on all our generous sponsors, watch the video uninterrupted and to connect with our speakers. For more information on hard money, loans and upcoming events with The Norris Group, check out thenorrisgroup.com. For information on passive investing with trust deeds, visit tngtrustdeeds.com.
Aaron Norris The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669. For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab