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  So, what happens to sales volume, do you think with this in place, the interest rates that are higher and everybody having kind of a great rate that they, if they have loans. So, what do you think happens to the sales volume? Just curious.
Sean O’Toole  Go aheada.
Mark Palim  I think that the lock in effect is, is very real that you were talking about unless someone has to sell because of you know, death, divorce, change of job loss of job, they’re going to be very incentivized to not sell and like you said, even rent. So, we have by the first quarter and into the second quarter of next year. We have home sales, existing home sales down 40% from the peak and new home sales down 49%. And like I said, that’s we did that forecast with mortgage rates in the mid sixes.
Bruce Norris  Now. I’m sorry, where was that located? Well, this, is, the statistics that you just mentioned.
Mark Palim  Oh sure, sorry. So, our forecast for existing home sales…
Bruce Norris  Forecast. Okay, not that it’s happened yet
Mark Palim  ….in home sales is that by Q2 of next year, we’ll be down 40% from the peak that we saw…
John Burns  below 4 million sales a year.
Mark Palim  So, so, we go down to 3.8 million…
John Burns  Sales, sales volume.
Mark Palim  Sales volume. And then…
Sean O’Toole  one thing to keep in mind, though, is like 2020, and 2021 are pretty huge anomalies, right, so.
Bruce Norris  Yeah.
Sean O’Toole  Like 2022, we’re going to be down a lot year over year. But compared to 2019. Even though sales volumes are down, the prices were so much higher total commission dollars for those in the room worried about that are going to be 34% higher than 2019, right. So, that’s not a bad year in 2022 from a conditions dollar standpoint. So, you know, intel prices, even if volume come way down until prices come down too, right? Historically, we’re gonna have still not an all bad market to be in this, to be a realtor.
Bruce Norris  What, what percentage of sales is cash? I’m just curious in the existing home market, and then in the new home market?
John Burns  You know, I don’t know the answer to that. But it’s a growing percentage.
Bruce Norris  Yeah.
John Burns  So, it’s more significant, particularly in Florida. I mean, people are moving from the northeast and buying with all cash in Florida. And so the example you gave it, we’re seeing a lot of that, in fact, I’ve been really, I happen to have a sister in law, who is a real estate agent in Orlando, and she’s still busy with all cash buyers, people move in from somewhere else, this mortgage rate thing really doesn’t matter to them. I mean, they’re selling a house for more than they’re buying their current one. And it’s all cash. I don’t know what the percentage is.
Sean O’Toole  $29 trillion dollars in home equity right now. At the bottom of the market, it was six and a half. In 2006 at the last peak, it was 10 trillion. It’s three times as much home equity, as we had at the end of 2006. If you look at the total $41 trillion in home value, right, you know, that’s 70% equity overall, we have a society in US households, you know, that’s typically been around 50%. It’s a lot of cash. And that’s, that’s where, again, that can come down as prices come down, right, that some of that is the you know, is mythical, right, because prices shouldn’t be this high right? So, but either you take some pretty big chunks out of home values, you know, home values down 20%, it’s $8 trillion. That’s still $21 trillion of home equity that’s still double 2006. Like, American consumer that owns houses right now is very wealthy. And this is where I think we, we overestimate maybe how bad the economy is. And that’s become more of a political talking point than a reality that we’re in much better shape than we’ve been at least in the home side, ever.
Bruce Norris  Okay. We hate to see our stuff go down, though. That’s the field.
John Burns  So, if I gave you $1,000 and asked for 100, back, you’d be pissed? That’s kind of…
Bruce Norris  Yeah, no, I totally agree with that, the stuff we’re building, you know, when we sell it, you’re just going, okay, that’s just nuts. So, we’ve, everything we’ve sold this year, it hasn’t, had that moment where you go, we were thinking we were gonna get 600 and quarter for this. And we got 850. So, yeah, if you only got 680, you still would be like, Okay, we started with that profit in mind. And that was a good idea. So, there’s been a lot of bonus chips. That’s for sure. That’s for sure.
Sean O’Toole  Well, we probably won’t see is continuing to see our personal wealth just grow, you know, magically lunate has been the last handful of years. Yeah, even if some of it goes away, though. As society, we’re in pretty good shape.
Bruce Norris  Okay.
Mark Palim  I think the migration story that lurks in some of the comments is interesting. People moving from New York metro area to the Carolinas, and Florida, right? And then given house price differences, yes, you can sell a very nice middle class home, pay off what’s left of your mortgage as you retire and move to Florida and buy something. You’ve also seen people moving out of the Bay Area into the rest of California into other parts of the country. But then the question is what happens to home prices in those high cost areas? Where, where people leaving from if you don’t have the employment growth in those areas, and they are somewhat stock market and interest rate sensitive.
Bruce Norris  How, how is California doing as far as I think migration is leaving consistently? Just curious, is that, is that part of the issue, if you try if you price out a U haul? Let’s say going from San Jose to to Austin, that doesn’t sound very favorable.
Sean O’Toole  You know. No, no, please.
John Burns  I haven’t done it in a while. The last time I looked, it was I think it was $1,000 more to take a truck to California than to take it out. Or the other way around. I guess..
Bruce Norris  Just a $1000?
John Burns  Yeah. There’s basically like, $1,000 to take a truck to Phoenix $100 to take the same truck back.
Bruce Norris  Yeah.
John Burns  Because they’re basically paying somebody would you please take it back to California, so I can reuse soccer to pay me $1,000 to drive to Phoenix. Yeah, we were doing that for a while to track migration, migration data so bad for some reason. It’s, it’s not making sense anymore. So, we stopped tracking.
Bruce Norris  Okay.
John Burns  But California’s population is declining. And I think we need to think of California as more like the Northeast and the Midwest, because that’s what it’s starting to look like.
Bruce Norris  And the demographic book that you wrote, it really is was predicting a lot of growth in Nashville, not just the Florida region, but down there, that’s all pretty come true.
John Burns  Well, it’s, it’s really easy to do a demographic forecast because I know I’m going to be a year older next year. And so I was that’s, that’s all there was run the math. There’s one demographics that I love that nobody was talking about. For decades, all that, you were showing all that growth and all those existing home sales. We were having 4 million people who year per year graduate from school and enter the labor force and 2 million people per year retire. Next year, 4.2 million people turned 20 and 4.2 million people turn 65. So, where is the demographic growth gonna come from unless we open up the borders? It’s not and actually I think that was the Feds big miss, I think are two to 3% GDP growth is unrealistic when you’re not growing the number of people who can work. So, we’re not quite Japan. But we’re, I mean, that’s our that’s our demographics now. And frankly, you don’t need that many houses when you’re not adding more people with jobs. And that was that was some of the big myths on some of the the undersupply numbers where people are coming up with over five to 6 million homes under supplied. They were ignoring what the demographics they were just same well, we used to build this and now we’re building this. So, we have under supplied. We don’t, we don’t need as many homes anymore because we’re just not growing the number of adults.
Sean O’Toole  …have been building as many, so.
Bruce Norris  No.
John Burns  We haven’t been built. Yeah. And we still think we’re under supply but by 1,000,007. But as he said earlier, we’ve priced those people out. So, just that, that under supply is a nice cushion to have it we were over supplied in the last cycle, once prices are, are correct, there is going to be demand there. But we need to get prices and rents to a place where people can afford to form a household.
Mark Palim  Yeah, I think so glad we’ve gotten the household formation because in supply, I think in the discussion of these issues, sometimes people confuse the cycle, which is the number of homes that are available for sale, or rent at a particular point. And currently, we have three months of homes available existing. So, that’s why home prices and in the existing market haven’t dropped as fast as one might think they might. But the second question is, are we as a country short, a certain number of housing units in our stock, not in the flow? That is an estimate that’s very sensitive to what you use as the yardstick for what you think a balanced market is what you think you wish home prices or rents were? So, those are very different exercises, and it’s good to keep the two separate. What do you think? What do you guys think of the odds of having a lot of foreclosures this cycle?
Sean O’Toole  Very low.
Bruce Norris  Very low?
Sean O’Toole  I’d love to say different. And, you know, actually we readjusted…
John Burns  There’s a real vulture for you, right there?
Bruce Norris  You want to…
Sean O’Toole  Say I did well during the foreclosure crisis, right? So, you know, during the downturn, actually reinvested a bit in my foreclosure business expanded into new states and all the rest, you know, I thought we’d see by now, things, you know, I was expecting, we would see some distress through the pandemic, and the rest that was held off in the moratorium…
Bruce Norris  Right.
Sean O’Toole  …start to pop through, right. And I wasn’t no 2008. And, you know, if you’ve listened to me at all, I’ve said, we’re not going to see that, again, regulatory changes, lots of reasons, we’re not going to see that again. But I did see, I think we’d get back to, you know, pre pandemic levels, and then probably see, a pop from all the stuff that just got held up to maybe be double pre pandemic levels, which is still, you know, 100%, and nothing is still nothing, it’s still small. But I thought it’d be enough to be interesting. And we’re still below pre pandemic levels. So, that really hasn’t materialized at all. And I think that comes back to that $29 trillion of equity, right, even the folks that got into some trouble through the pandemic, their home price went up enough…
Bruce Norris  That’s right.
Sean O’Toole  …of options. And so, you know, the degree to which prices have gone up, and even if they come down, right, it rescue those folks. And, and so I think foreclosures are gonna stay low, and I threw some good money after bad expanding my foreclosure business.
Mark Palim  I think another aspect of this, why I agree is that the toolkit that lenders have is very different than what they had in the great financial crisis. So, if you look at the pandemic, the pandemic response, in terms of offering options to borrowers was just much better managed than during the great financial crisis. And in while foreclosure may create a good investment opportunity, it is a very costly outcome for the lender and the borrower. So, if you can keep communicating, and you can somehow rework the loan, that’s better for both the credit holder and the homeowner in general, just like we do in commercial real estate, right, where we, we, you know, extend we do this, we do that. So, I think the suite and the policy toolkit is very different than it was no way.
Bruce Norris  What, why wasn’t that in the playbook in 2008?
Mark Palim  I think that there was, it was a couple of things that were going on, and was that the source of capital was very different. So, PLS, the private label securities to a much bigger part of the market. And it’s where you had a lot of the initial distress, right? You remember the option ARMS and pick your pay and, you know, to 20, eighths and all the other things. So, the servicing of that was not as standardized. And then we, you know, frankly, the GSEs and FHA and VA, we learned something from the crisis, right. And hopefully, we’ve learned to manage the servicing better.
John Burns  Can I ask you a question on foreclosures? So, the foreclosures I think about are what all, what’s going to happen to all the speculators probably a few of whom are in the room, who are been flipping homes or I had the most amazing stat yesterday from the CEO of BiggerPockets who has 2 million followers and mostly seems like really young people. They’ve never done this before. But they they pull people are at the end of every year at the end of 2020 their clientele said, How many of you are interested in short term rentals? Airbnb is 5%. The end of last year was 35%. And we’ve seen an absolute, we track investor activity, but we can’t tell exactly what they’re doing with it. We saw an explosion in investors in the last 18 months and explosion. So, the question I have is how are those people financed? I don’t know the answer that. But yeah, okay. Private money. I do know that it’s not fair. It’s not Fannie Mae, I hope. Yeah, and I, and some of that private money as clients of mine, one of them is the CEO just lost her job. So, I do know that things are starting to hit the fan in the private lender market. But did, was there so were they lending at 90% loan to adjusted realizable value or 65%?
Bruce Norris  Yeah. Now, it’s more aggressive than 65.
Sean O’Toole  Yeah.
Bruce Norris  But I would say it was not anywhere close to what you said. But I would say 80 was certainly attainable. Yeah. And it’s…
John Burns  With, with fixing flap with 10%. Cost overruns. Maybe they’ve got a 10% cushion there to get out hole?
Bruce Norris  Yeah, that’s not a cushion. Yeah, they’re going to take back some problem.
John Burns  So, maybe maybe your foreclosure business, maybe your clientele will be in the room today. I said the other way around. Okay. I know this is a group that finances differently, so but I’d love to get more color on that. And we do have it buy market. It’s not in California, Charlotte, North Carolina is freaking out of control. Austin, Texas, unbelievably out of control. I think 41% of the volume sales volume in Phoenix last year, was purchased by somebody whose property tax bill was going into a different zip code. Where price is falling too fast right now? Phoenix, Boise. Same, same story in Boise.
Bruce Norris  Okay. What’s the chart that you look at? And okay, that’s, that creates prices? So, is there a chart? That’ll create a price hit? So, is it, is it foreclosures?Unemployment? I’m just curious what what chart you look at? And okay, that’s, that’s going to be negative for price.
Sean O’Toole  I mean, right now, I mean, the most interesting one to watch to me is inventory. Right. So and, and also, you know, percentage of properties with, with price cuts. And you know, both those things are going up, but by historical standards, they’re not, they’re not terrible, right. So, we went from two months of inventory, you know, a year ago or three months now.
Bruce Norris  Yeah.
Sean O’Toole  Kind of nationally, right. So, it’s, it’s not super scary yet. That’s certainly the one to watch. Because we’ll need that to come up higher before, I think we see much, much damage. And when we’re seeing some already, like John said, and it’s easy for some folks, you know, look, if you bought four or five years ago, and you want to move and you got to give up a little bit, you know, to be ahead of the market. You know, one of the things I got rid of my last handful of houses in 2006, and prices were coming down. And I found that it helped a lot for those of you in the room, right? Be ahead of it, don’t follow it, right. So wherever you think that price should be 10k low or whatever, and be ahead of it, you probably sell and you probably get out just fine. If you follow it the whole way down, you’re gonna end up in, you know, trouble, I think we’re gonna be going down for a little while.
Bruce Norris  Yeah, that makes that makes sense. I mean, that’s what I wouldn’t just, you know, that display that I showed, those are big hits, mathematically, being prevented by a lot of unique other things that we haven’t had, like all these low interest rate loans in place. If you have enough higher unemployment. I mean, maybe a lot of those people have to go somewhere.
Sean O’Toole  I mean, the other thing, though, is we have high inflation, yes. But we also have wage inflation going on and everything kind of price coming up. So, even if real estate sits flat, like if you look over the long term, right? Anybody bought in 2006? That looked like a terrible thing. Does it look terrible? Those prices look terrible today? You know, so time kind of heals all wounds too. And, you know, so that’s, I think that’s kind of the more interesting question is like, so we’re gotta see some price declines. The question is how deep and how long, right? And then what brings us back out and creates the next, the next thing, right? So, that’s to where to be looking, now and if you need to be out of your thing, right and you’re not planning you can’t hold for 10 years or five years or whatever, then get out sooner than later. But otherwise, you know, time will heal all wounds and if you can rent it for more than your payment, who cares what the price does.
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.