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.
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 Do you, can any of you or all of you could you see the chance that we could be at the same median price? Not that we went straight across but 10 years from now?
Sean O’Toole I personally think that right now, and I think there’s two scenarios that are wildly different. But I think within 10 years, I think it’s likely we’ll see rates in the ones and 40 year terms.
Bruce Norris Once in 40 year terms. Okay, well, that’s controversial how we get there?
Sean O’Toole Because it’s the only thing that we, it’s the only playbook we have no, we can’t do it if inflation is still high.
Bruce Norris Right.
Sean O’Toole So, that’s a problem. But it’s the only playbook we have that when the economy stumbles. It hasn’t stumbled yet, despite whatever talking points, you’re here, when it stumbles, right, we’re going to cut rates, and we’re going to provide stimulus to the market. It’s the only playbook we have. It’s the only thing we do, we do it over and over and over again, it’s a crisis economy, you know, now, and so the only the big mistake we’re doing, right, is that when things start to get better, we need to put some more ammo back in the, in the gun, right. And so instead of cutting taxes in 2016, we need to raise taxes, right, we needed to start raising rates a long time ago, and the rest and we wouldn’t have gotten to this euphoric position, right. Fiscal policy, by the way, is a lot better in my mind than raising rates. So, what if to slow down the economy? You know, we had a government that worked well together, and we started raising taxes. Now, I know that’s a bad thing. But let me ask you right now, would you rather have higher taxes, helping slow the economy and take the steam out, or 7%, you know, mortgage rates like which is going to do more damage and pull things around and mess with markets more? I think it’s rates, but we don’t have the political will to have good conversations like that. What we do have is, anytime a crisis comes, we throw everything in the book at it. And we got pretty lucky the last few times, right, we ended up with reflation where we brought things kind of back into a good place, right, and we recovered a little faster. And we did better, you know, with the better with that with the pandemic, this last time, though, we did too much. Right, and you do too much and you go from reflation, which brings you back to where you’re supposed to go to inflation. And you know, but that’s, it’s hard to get these things, right, you know, we’re not very good about handing out stimulus and doing these things. So, we just went too far this time. But it’s not just us, right? In inflation, if you look at the G20. We’re about half right, you know, so half of the G20. has higher inflation, and we have our rates are at the low end of the G20. I think there’s only three, three countries in the G20 that have lower rates than we have. So, like, we’re not actually doing very bad.
Bruce Norris What, what happened in the UK, with the bond market? And just curious, and is that have a chance to tip over and get into some contagion of other?
Mark Palim So, so, one of the things that happens is when central banks start to tighten, when you have aggressive increasing interest rates, and we’ve had that around the world, it tends to expose places where people have got leverage, whether it’s real leverage through debt or synthetic leverage through other contracts. And that’s what happened in the UK, right? They, they, they had a little bit of a missed call on what the policy response should be for the new console. of government a couple of weeks ago, they spooked the bond market, bond rates jumped. And then all of a sudden pension funds that had been using. We call them exotic tools, basically using leverage, we’ll call it flat footed. And it was interesting. There was one quote of a trader who said, we’re going to have to close out all these trades for pension plans that day, because they couldn’t meet our margins. So, at 11 o’clock, we called the Bank of England said, by the way, by the end of the day, we’re going to be forced selling way more bonds, because of a margin call. So, that’s why the bank lien jumped in.
Sean O’Toole That’s interesting, you know, the contagion kind of thing is, is scary right now, right? Because to have that, and our only thing that we do is to provide stimulus if we have some sort of contagion problem come in, and then we have to provide stimulus when we already have high inflation. So, that, that’s bad. Well, that’s we don’t need right now would be a bad time to have any kind of financial crisis or any kind of new, you know, black swan need, need inflation to come back down. If inflation comes back down first, and then we have a black swan, then we get rates in the ones.
Bruce Norris Okay. Yeah.
Sean O’Toole That’s why I said there’s two kind of scary possibilities right now, two different possibilities.
Mark Palim Yeah, I think the real difficulty of this current situation is that when you start tightening interest rates, the way it’s happening, now, you can see how much money supply has dropped, you can see how much Fed funds has gone up, you don’t know what’s going to break where and when. That’s just the nature of a tightening part of the cycle. The Fed or the policymakers don’t know, because leverage is hidden during a boom, right? And people taking risks is hidden during the boom, because the rising asset prices kind of make everyone look good. So it goes to this question of is the Fed going to have to keep raising? Well, at some point is this some global financial crisis that comes back into the US or some part of the US system that has stresses and strains that policymakers can accept, and the Fed has to stop tightening, right? And recalled, the official mandate, the Fed is its full employment and price stability, the very first mandate before that is financial stability, right? They, they will step in and change that policy, if they think there’s a danger of some meltdown and a key part of the financial system.
Bruce Norris You know, I don’t pay attention to currencies all that much. But I do have noticed that the dollar against the euro is swapped places and gotten pretty close to the crown the pound. So, what ramifications of that have for those people.
Mark Palim So, then has a real ramification particularly in you know, in the developing world, emerging market, I guess we call it now. But where a lot of countries have to borrow in dollars, right? They can’t borrow known currency. So, you saw SriLanka had a crisis and a change of government. There were also other issues there around quality of governance, and that contributed to that. But you know, you see high food prices because of the war in Ukraine. higher oil prices, oils back down to the mid 80s, but it could spike again. So, there are a number of places where a strong dollar, a strong dollar in your local currency makes oil more expensive, even if we don’t think it is right. So, there’s a number of places where it feeds back into other countries. It adds to the potential for financial fragility, but it also just slows down the overall global economy.
Bruce Norris What about the apartment sector? I’m just curious, you know, my thought long time ago was that boom, because you had all the foreclosures and you couldn’t get to qualify for, for a home loan. And so everybody moved to an apartment. And I remember speaking in front of a pretty good sized audience of the apartment owners association. And one of the it was like, packed it was 400 plus people, and they were lying on the walls. And I thought, I said, well, you guys are either really excited or really scared, and laughed at one guy said, we just want to know if apartments are in bubble territory. And I said, I’m not an apartment guy. But I can ask one question, and you’ll tell me, how many of you would buy your apartment at today’s valuation? And there was like rolling laughter you know. And so I guess, I guess my question is that because of interest rate hikes does that cap rate that they are accustomed to that now make that not sensible?
Mark Palim So, I’m so glad you brought up apartments because in your earlier question about what chart Ken has has, one worry for the chart that will change that has bothered me the most the last month, is that multifamily apartment rents are not going up anymore. And vacancy rates are starting to go up. That shouldn’t be the case right now. Because the own versus rent, it’s because of the rise in interest rates, buying a home has become a lot more expensive, right? Bruce was walking through the examples. So, you should have more households staying in rental in more new households forming renting instead of owning, but you’re not you seeing vacancies go up a little bit in rents, and no longer rising. Data from some vendors suggests that going down, so that tells me that the household sector is either becoming more cautious and or it’s under higher financial stress and the inflation than then people might realize.
John Burns Or, or we’re actually having negative household formation for the first time in my career, which is actually what the data is showing.
Bruce Norris Okay.
John Burns And some of the apartment rates, again, public data, stunning achievement during COVID. So, AvalonBay went from 1.8 50,000 apartments went from 1.8 people per apartment to 1.6 in a one year period, huge household for patient with people decoupling UDR went from 2.1 to 1.8, I mean, all the one bedrooms, everybody’s moving. Real page data and institutional grade apartments 300,000 more occupied apartments every single year from like 2014 through 2020. 700,000, more occupied apartments and 2021. So, there was a huge household formation surge last year, that everybody is saying, yeah, we’re pulling forward demand. Well, guess what we pulled it forward this year. So, I actually think the number of households that are forming right now is actually they’re in decline, with a 40 year high of apartments under construction ready to get finished and now need to get leased up. And now, we are going to have one positive on this panel. If rates, if rents are flat, or falling, rents are 30% of CPI, which means inflation is going to come down. Now, I’m actually going to plug into one plug for the Fed here, that the rent data has a six month lag in it so will not show up in the CPI for six months, and the Wall Street Journal and everybody else who say they’re idiots and behind the curve, they don’t know what’s going on the Fed is not that stupid. The Fed knows what he knows and what I know what everybody else knows, because we talked to them. And in fact, I’ll do a plug for a book if you want to know what’s going on with the Fed. And Warren Buffett plug this book too, read trillion dollar triage by Nick Timiraos it actually believe it or not, even for non geeks like me and Bruce, it’s a page turner on the Fed. It’s really well written of what the Insight Jay Powell and Steve Minuchin had to pull off what they pulled off two years ago. It was just amazing. It’ll give you a lot. It gave me a lot of confidence that these guys are not a bunch of dummies. I will say though, that I think they’re in demand be different than the Volcker era is they are part of the politics now. And the reason in my view, Jay Powell did not raise rates was because he was hoping to get reappointed in February. And then they drag that out to May. And so he really didn’t start saying the word pain and housing reset, which he now says all the time until after he got reappointed, because there’s no way he was going to get reappointed when he said that before, but now he’s been reappointed for his term. And I think he wants to be the Paul Volcker that kills this thing. And that’s, that’s where he’s headed. So, if you want some insight, it’s a really it is a very well written book, on this topic. Trillion dollar triage by Nick, by Nick Timiraos, the guy who covers the Fed for The Wall Street Journal. And I actually, actually Goldman Sachs gave him a nasty nickname called Nikki leaks. I think Jay Powell actually is using Nick to communicate to the market. I mean, that’s how tied in this all is going.
Sean O’Toole So, Nick was one of my favorites during the foreclosure crisis, too. He’s been around a while he’s, he’s really good.
John Burns He’s a wonderful person.
Sean O’Toole You know, on the housing side, like, I think one thing that people didn’t take into account in this boom and housing was the kind of household formation that COVID for straights. He had families living together, you know, but if you Got a daughter as a nurse living with their parents, she can’t come home. So, that family had to split. And I think we had a lot of housing formation and we had high divorce rates and other things through COVID, right. And suddenly you get to be home together every day. Maybe that’s not so good. And so, so we had…
John Burns Sorry to hear that Sean.
Sean O’Toole So, we had a lot of, why went to the office every day. But so in any case, you know, I think we’re seeing the reverse of that now, right? Where Okay, now like, hey, the economy’s may be slowing down a little bit things or whatever, we’re going back to nesting and done with that kind of peer…
John Burns You’ve done a ton of research on this. It’s also related with people calling people back to the office. So, part of that move was I’m gonna go somewhere is more affordable, or go back home. Now I gotta go back to New York or back to wherever I’m getting forced to come back to work, so.
Sean O’Toole Yeah, so I think that’s, that’s definitely a big, big factor over the next a little bit of time anyways.
Bruce Norris What, I’m just curious, one last question, until the last one, land prices, what’s going on with that?
John Burns We just finished our land survey, they’re down 7%, nationally, 5% in A locations and 9% in the C and D locations. According to 75 land brokers, there’s just not really good data, we had to do a survey on that, which is hardly a correction at all.
Bruce Norris No, no. There’s a really interesting chart, maybe? Well, in Florida, there’s an area where Florida’s land can go up by a multiple of 20 times. So, building lot that’s five can turn into 20. And I was speaking at an, at an not an apartment, but it was like an industrial is a combination of speakers that were there and there was an industrial guy, and he’s talking about land prices. And so I raised my hand and I said, I’m just curious, what was that land? So, he said it was worth 140 bucks a foot, it was in Barstow or something. And I said, What was that worth 10 years ago? He said, ‘Well three years ago is were 70’, ‘Take me back 10’. There was a pause. He said seven, it had gone up 20 times. So, does land, does land revert more easily than any other inventory forest to another price?
John Burns More significantly, but not more easily. Usually, land prices are very sticky on the way down, because there’s not a lot of urgency by the land seller to sell, usually, I mean, there’s not a lot of debt on land. Usually. There’s not a lot it’s not you know, a lot of times it’s not a private equity guy who needs to finish out his funds. And all that is somebody with very patient capital.
Bruce Norris Okay. They also may not want to hear, we did a mailer one time. This one, this one story, a guy call up and he bragged on his piece of land for a while. And this was 2000. And let’s say nine. And there was a pause and I said, you know, I can’t place any value on your lot. There was a pause. He said, Yeah, I know.
John Burns That there’s a funny story related to that that appraiser friend of mine said that apparently is true, but he got to pay a higher to do a huge parcel of land in Texas. And he came back and said the highest and best use of this land is to hold the earth together.
Bruce Norris I’ve, I’ve owned five of those lots in the Quail Valley that’s doing just that. All right. We’re about out of time. I usually ended with I think this question but one thing you’d like to see happen for either our country let’s say or for our industry. Mark when you want to go?
Mark Palim So, I guess for this group what I would love to see is that policymakers no longer view multifamily landlords as good providing a home for people who need it. And single family landlords somehow bad because they keeping the home out of the hands of a first time homebuyer when in fact as you guys know for new customers you’re providing a home to a family who who wants that, who wants the yard, wants a certain school district, other amenities so I don’t know how to change that mindset but I think that’s a challenge for this industry after we get past the next recession.
John Burns How about the world all become a little bit more like Aaron Norris? Thank you.
Sean O’Toole Okay, that’s impossible to follow. I would love to see us collectively as a society have more real conversations about things that are more important.
Bruce Norris I want to thank you guys for helping me get through a pretty tough night with a smile on my face. Very cool I think we’ve had this event for almost 15 years, and I think I’ve said the same thing for 15 years. And it’s still the top of my list. I wish every elected official would stop acting like a Republican or a Democrat and act like an American. All right. Well, thank you very, very much for coming out. And we had a ball tonight. Joey, thanks so much for your hard work Holy Cow. I know where Joey’s heart was and Joey, Joey’s thinking when Aaron looks down. I want him to be proud of this tonight. All right, thank you.
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.