I SURVIVED REAL ESTATE
Industry insiders focus on what’s ahead for 2022-2023
The Norris Group’s annual award-winning event, I Survived Real Estate is back, LIVE! Our 15th annual black-tie gala that benefits Make-A-Wish and St. Jude Children’s Research Hospital will continue at the Nixon Presidential Library. Since 2008, together we’ve raised over $1,000,000 for charity!
Record inflation, high housing demand, steep interest rate increases, national affordability challenges, global supply chain disruption, a pandemic reshuffle, and a dangerous war are just some of the headwinds we face as an industry and a nation. What has forever changed and what will remain constant? Are we headed for a crash, a slowdown, or another record-breaking year despite black swans looming in the background? We’ve assembled some of the brightest minds to help us tackle topics we never thought we’d have to consider and how they might impact real estate.
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 2022 for real estate investors. 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.
Episode Notes:
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 Norris. The Norris Group proudly presents our 15th annual award winning event I Survived Real Estate. Industry experts join Bruce Norris to discuss the 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. See Isurvivedrealestate.com for event details information on all our generous sponsors and to connect with our speakers. We want to thank our Platinum partners, San Diego Creative Investors Association, uDirect IRA Services, White Feather investments, The Collective Genius, MVT Productions, and Realty411.
Bruce Norris I’d like to introduce our panel, all these gentlemen have been with us before and most of them almost every, every year, so it’s been great. From Fannie Mae Mark Palim Deputy Chief Economist, Dr. Mark Palim is the vice president Deputy Chief Economist at Fannie Mae oversees the teams. Responsible for Fannie Mae’s macro economic and housing forecasts and the National Housing Survey. His team has won the Lawrence R Klein award for blue chip forecast accuracy, and on two occasions the NABE Outlook Award. In addition, Mark leads a team of economists who conduct in depth research on issues affecting housing affordability, including the first work at the company on climate change. This research has informed Fannie Mae’s strategy and resulted in publications in peer reviewed journals. Mark welcome. Any, any one of those that you’d like? Next, John Burns. John founded John Burn’s real estate consulting in 2001 to help executives make informed investment decisions. The company’s research subscribers received the most accurate analysis possible to inform their micro investment decisions. And the company’s consulting clients receive specific property and portfolio investment advice designed to maximize profits, John co-authored Big-Shifts Ahead if you haven’t got that book it’s a fun read for nerds like us. I read it in a day with a yellow marker. So, it’s quite fun. Big-Shifts Ahead demographic clarity for businesses. And it’s a book written to help make demographic trends easier to understand. And he really kind of read, did the whole demographic to where you can actually understand it. And it’s interesting, didn’t it there came out to be almost the same number every 10 years and that was a lot easier to understand. John’s has been with as many times and so we welcome him back and Sean O’Toole. Prior to launching PropertyRadar, Sean O’Toole successfully purchased and flipped more than 150 residential commercial foreclosures, leveraging 15 years in the software industry, Sean use technology as a key competitive advantage to build a successful real estate investment track record. Sean has also thrived in the startup environments and as such, became a key contributor axing technology acquired by, no? Nevermind? Okay.
John Burns I just gotta say, Thank you for not citing any of our degrees due after that rip earlier. So I appreciate that.
Bruce Norris Yeah, and I don’t site degrees because I don’t have any, so I just, ignored it. Well, thank you all for being here. I appreciate that. I’m really curious about, first of all, what do you think is going to occur to price? So, go down the line. John, what do you think?
Sean O’Toole Well, it’s funny. I did, uh, I didn’t use your moodometer, but I did a similar kind of math and just to get back to, you know, back to the affordability we had at the end of last year right when rates were at three. Right. It comes out to exactly the first number you…
Bruce Norris
Sean O’Toole 520,000 from 820 in California, which is a 36% decline. So, we came to the same number through very different things. Now, I don’t necessarily think that’s going to happen.
Bruce Norris Right.
Sean O’Toole I don’t think that’s going to happen, actually. But, but that is where we need to get just to be back to where we were at the end of last year and the end of the last year didn’t really feel that affordable.
Bruce Norris No, but you know, it’s also matched with a 3% mortgage rate.
Sean O’Toole Right.
Bruce Norris Yeah, that’s, that’s the big challenge. Okay.
Sean O’Toole So yeah, you know, your, your, your math is, is right. But there’s so many other bits to this right now, around supply and inflation and global economic events. And, and the rest that, I think it’s pretty difficult. I have a couple different thoughts in mind where it can go. We’ll start there.
Bruce Norris Okay. All right.
John Burns How’s that for a hedge?
Bruce Norris Yeah.
John Burns Yeah, I agree, thought this a little bit. So, I was originally in the camp that gee, we’re not going to see a lot of supply. So, maybe prices won’t tank. I’ve never seen prices fall this fast before in my career. So, I’m totally changing my mind. And I think what we need to remember is very few homes transact every year, it only takes two or three in each neighborhood to transact to completely reset the bar. We’re seeing a lot of cash buyers, cash sellers, willing to take a $400,000 profit instead of a $450,000 profit because I’m moving anyway or we’re seeing what you said. Putting the home on the market, we’re actually seeing a surge or rentals, which is kind of the, other, the other thing I thought was, this is less of a California thing, it’s more of a rest of the country thing and a Florida thing is that we have all this money now that did not exist before that knows how to manage rental homes, that they will bring a floor to the market and maybe prices won’t tank. We’re actually seeing a surge in listings of homes for rent. And the big ones there are publicly traded REITs. And there are clients of mine. And I’ve asked them, Well, geez, you borrowed a bunch of money at 4%. What do you care, you can keep buying? And they said no, John, my stock price is down 26%. So, my investors are saying to be a creative, you now need to get a six and a half yield and everything you’re buying instead of a four. So, I need to wait for prices to come down. So, I get a six and a half yield. And I’m like, Okay, here we go. And that’s how it’s playing out. And then you throw in the homebuilders which I laugh you talked about only 8000 homes that’s like a 10 year supply in Orange County now that you’d be you know, you’re we only build eight, pulled 8000 permits and liquid one county in Florida. We’re not building anything here, but the home builders, super well capitalized. NAR 15% debt to market cap ratio. And it’s not even due for years at a fixed rate with a 29% Gross Margin when they usually have 20. So, for them to drop prices, 9% gets them back to their normal profit margin. They’ve already announced they’ve dropped prices nine. So, that’s public information, you can read their earnings call. And so the homebuilders are kind of fighting to the bottom right now because you know what, I got to generate some cash. And I’m gonna keep the trades busy because I don’t want to lose the trades. And this, this is how I get through the cycle. I’m a long way from losing a penny. And they’re driving prices down too. So, so, I’ve rethought this, and it’s not really a forecast this is kind of what I’ve seen over the last three, four months.
Bruce Norris Now. What kind of price decline are you talking about? Could you maybe I’ve missed misunderstood you. I thought you said it was like the most aggressive price decline you’d ever seen.
John Burns So, we’re serving resale agents now. And they’re telling us nationally, prices are down seven from June.
Bruce Norris From June?
John Burns Yeah.
Bruce Norris Okay.
John Burns So, I don’t think I’ve ever seen prices fall 7% in four months before?
Bruce Norris Yeah.
John Burns I’ve seen him fall fall further than that. But it took a lot longer.
Bruce Norris Is it from euphoria number? I mean, I guess…
John Burns It’s, it’s from a silly number that…
Bruce Norris Right.
John Burns I bought this home that was worth 400 grand two, three years ago, then good worth 600 grand. So, if I sell it for 500 grand, that’s great.
Bruce Norris Yeah. Well, you know, just it’s why he kind of gave that example of that house. They went up for sale for five and a quarter and they got a bid of 575. That 50 grand was nonsense because it was, the 525 was 100 more than we thought when we started to build the thing. So, I guess when you when we start saying we lost that 10%, we lost the 10% that should have never existed. So, is that a price hit? Or is that just some…
John Burns Oh, that’s That’s right. And the way we’re spinning this positively because we have to have something positive at this event. So, I always cry here anyway, with the Make-A-Wish thing I was crying more than ever. Is, is the way we were spinning into our clients is we think resale prices and new home prices will go back to sometime in 2020, or near the beginning of COVID.
Bruce Norris Okay.
John Burns It doesn’t seem too bad. But then you put a percentage on that.
Bruce Norris Yeah, that’s bad.
John Burns That’s really bad for somebody who bought a home eight months ago.
Bruce Norris Yeah.
John Burns But for 65% of America their entire home with a mortgage rate under 4%. They’re fine.
Bruce Norris Yeah.
John Burns It’s not some sort of economic crisis disaster is just a disaster for people that are playing a short term game in our industry
Bruce Norris At the end of 2019. I’m just curious what your thought was on, on prices, because there’s CalPoly Pomona has a report. And they have about 2000 homes that they, they appraised every six months, the same house for the last 40 years. And they had 25% of that showing a negative six month period from June of 2019, to December 2019. And that we’re already we’re already taking some prices there. I was just wondering, did you think that that was sort of the end of the cycle, like getting to 2020, that would be a peak?
John Burns I mean, I’ve learned my lesson over the years on how to phrase this. So, the most money as you articulate and most appreciation seems to be when the market gets overheated.
Bruce Norris Right.
John Burns So, yes, I we work, we have a housing cycle risk index, that, frankly, we’ve been raising the red flag on, probably since 2017.
Bruce Norris Right.
John Burns But it’s mathematical is not even my opinion. It’s just like, here’s the math like your moodometer. But I was we were not calling for price declines, because we didn’t see that in the cards. But we were saying like this is the time of the cycle where you, where things can get euphoric. We hope they don’t. And, but we think prices are going to keep going up. And, but risk on. And frankly, that ties perfectly into what the homebuilders have been doing the exact same thing. They borrowed money that’s not due for a very long time at a fixed rate. And then they’ve been buying land under option agreements with with the land seller or with the sophisticated Wall Street guys as land bankers. And they’ve been buying land only putting up 15% of the land price. So, they have the ability to walk from it now. So, that’s exactly what they’ve been playing the game is like, we’re going to make a lot of money, but I’m going to pay somebody else some interest, basically as market insurance on all the land I’m buying. So, most of them are gonna get through this perfectly fine.
Bruce Norris Now, I’m just curious one other question why, why would somebody carrying such long term paper at such low rates?
John Burns Well, you mean, why, why? Who was buying 2% debt and three? I mean, who, who was buying mortgage backed securities when all mortgages were 3% 30-year? Federal government was buying a quarter.
Bruce Norris Okay.
John Burns And which made absolutely no sense to me, I got so sick of screaming like, What the hell are they doing? I stopped. But what I know he was doing is where the housing market is the Feds puppet. The economy was not growing the way they needed it, they wanted it to. Inflation actually was below the two to 3% target. So, he was trying to get the economy growing, and I can use the housing market to do that. And that’s what they were doing. But then when the housing market started going up 20% per year, I mean, I get why they did it in the spring of 2020.
Bruce Norris Right.
John Burns But why they were doing that in 2017 and 2018 and 2019. Actually, they started to taper a little bit and the economy wasn’t growing and so they stopped.
Bruce Norris Okay.
John Burns So, why, you know, the Fed was doing it, but why other people were doing it? I don’t, I don’t know. I didn’t buy any 3% debt. Did you?
Bruce Norris No. So, I didn’t borrow any of it either, unfortunately.
John Burns Part of it was I think people were hoarding cash and just like a little bit of interest on my cash is smart. So, I’m not gonna fault him for that. That’s okay.
Bruce Norris Right. Mark?
Mark Palim Sold a bunch of ideas going through my mind but let me get back to your initial question which is around home price itself. In our, just, just to start with that forecast. Now October forecast, we have peak to drop home prices declining 5%. So, it’s not a huge decline. When we talk about affordability, we have the same sort of view of affordability as you do, which is that affordability now is worse than it was in 2005. And if you think about the components of affordability, we spend a lot of time talking about home prices and interest rates. But the third one is income, right? What’s happening to median incomes? So, in our forecast, we have unemployment, touching 6%. But not going above that. If you think about, in when, we did that forecast, mortgage rates were in the mid 60s, now they’re in the low sevens. So, if you think about, I think the best historical parallels going back to the late 70s, when the Fed was also behind in terms of inflation and having to tighten pretty aggressively. Currently, the bond market thinks the Fed will stop tightening in the spring, which would suggest and maybe stop it for three quarters. So, mortgage rates would be about seven. So, what are the risks to home prices? One is beyond what’s in that forecast, unemployment goes up higher. So, personal income, household incomes drops further, the Fed, inflation is harder to defeat and we can talk about that separately. This is a bunch of reasons why maybe the Fed would have to raise more than a, and people think they will, which means higher mortgage rates, both of those things combined would definitely put more downward pressure on home prices. The other thing I’ll mention is obviously local home prices are very different than national. So, we’re already seeing some markets where home prices are down 10%. In the context of that is, from the start of the pandemic till June, home prices were up 40%. So, you know, corn doesn’t grow the sky. The housing market was the unintended beneficiary of, of very low interest rates and aggressive fiscal and monetary policy in response to the pandemic. And now that’s being pulled back.
Bruce Norris Is, I’m just curious, is our, is our society better balanced if in fact, we we sort of get stuck at 7% mortgage rates? And if you actually have savings, you earn interest on it? I’m just curious what your, what anybody’s take is on that, because we’ve lived in a very weird world where savers didn’t get any benefit.
Mark Palim I mean, we were in an interesting point, today that this week, the savings rate information came out, the savings rate dropped again, it’s in the low threes, which is a sign that a lot of households are suffering some distress and higher gas, food prices, etc, etc right? So, savings rates pretty low. If you think of mortgage rates, if you just go back to the, you know, the last 20 years, a 6% mortgage rate is a completely normal mortgage rates, right? It’s just a shock to people now, because got used to a mortgage rate of sub three. In New York, your savings question is entirely a fair one. Central banks around the world push down interest rates and a lot of countries went negative. And that was basically a tax on savers right. It was a hidden tax on savers. And it didn’t give the growth that people would hoped. So, the flip side of that is maybe the economy is not as interest rate sensitive, as macro model suggests. So, just as the Fed and other central banks were disappointed at the amount of growth they got when they cut interest rates, we may find that it’s harder to slow down the economy when you raise rates, and therefore the Fed would have to rate some further.
Bruce Norris With 8% inflation the last time we were there was 70s? What was it? Was the interest rate comparable with the 8% interest or 8% inflation? Or was it a lot higher?
Mark Palim Well, in, from the period from 79 to 88, 81 you know, mortgage rates went from 12% to 18%.
Bruce Norris Well, what was inflation?
Mark Palim And inflation round then was 10%.
Bruce Norris So, why are we at 8%. And the interest rates so low?
John Burns Because rates rates haven’t finished going up.
Bruce Norris Okay, because rates haven’t finished going up?
Mark Palim I get…
John Burns That’s where you’re leading the witness.
Mark Palim I’m glad counsel is here to protect me. I mean, the big difference, of course, is that back then, not just the Volcker days, the Fed back then was completely different than the Fed today. The Fed back then would adjust only short term interest rates and did not intervene at the long end of the curve. In the long end the curve reflected a market consensus about growth inflation. Today the Fed is managing both ends of the curve. So, it’s just we just live in a very different world, from a monetary policy point of view.
Sean O’Toole Used to be a free market economy.
Bruce Norris Yeah. What? What do you think of the policy to take these low interest rate loans that are in place and let them move forward to a new buyer? Like a, like a subject to take over the existing loan, that you might have a very different outcome in price.
Mark Palim Yeah, man, I know in the 70s. FHA loans were assumable. And that was something that, that helped keep homes. But you had to pay a premium often, if they got worked into the price. If you’re buying a house and assumable loan.
Bruce Norris Well, you’re paying a 4% premium not to, right now. Go ahead, John, Im sorry.
John Burns I mean, it’s a great idea. They do it in Australia. A bunch of us propose that in the mid 2000s, actually trade, tried it, consumers didn’t want it because of what he just said. It literally is 50 basis points higher, because it was trading more like a 30 year security because it wasn’t gonna prepay. It’d be like a tenure security, which is what typical mortgages are because somebody you know, refinances after one, somebody holds it for 30. The bond market thinks of it as a tenure security, the bond market would think of as a 30 year security. So, that would drive rates up. It would help real estate agents and more people to transact and things and I don’t understand, like why if I move I take all my credit card debt with me, why can’t I take my mortgage with me? I actually, I actually look at it that way,
Bruce Norris Right.
John Burns As long as you know, subject to an appraisal and maybe a fee and those sorts of things. That would make more sense to me.
Bruce Norris Yeah, either one would be…
John Burns But it would be a higher interest rate because it would be a longer dated security for whoever owns it.
Narrator We’d also like to thank our gold sponsors, Chase Leland Photography, Inland Valley Association of Realtors, Keystone CPA, Inc, LA South REIA, Leivas Tax Wealth Management, NorCal REIA, NSDREI, Pasadena FIBI, Tony Alvarez, White House Catering, Wilson Investments, Windermere Tower Realty. See Isurvivedrealestate.com for event details, information on all our generous supporters 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.
