Inland Valley Asso. of Realtors Government Affairs Director, Paul Herrera | PART 1 #828

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Paul serves as an advocate for REALTORS® and their clients on local issues, helping to preserve and protect property rights and the value of homeownership. Working with colleagues at the California Association of REALTORS® and the National Association of REALTORS®, Paul helps members make a difference for their clients at the local, state and federal levels.

His unique experience includes an award-winning journalism career with newspapers in Florida and California where he covered real estate, small business, the aviation business and the confluence of government policy, politics and business. His coverage of real estate and growth in Florida earned him top honors from the Florida Press Club in 2002.

In 2004, he won first place for in depth business writing from the California Newspaper Publishers Association. After journalism, Paul served as communications director for the San Bernardino County Economic Development Agency, coordinating everything from press outreach to speeches and video production. In four years with the agency, he oversaw external communications, managed a communications team and helped publicly position a variety of projects and initiatives.

The combination of mass media experience, local expertise, policy and political background and understanding of real estate issues prepared him to lead IVAR’s government affairs and communications efforts through coalition building, strong messaging and technical understanding.

Paul earned his Bachelor’s of Journalism degree from the University of Missouri-Columbia.

 

 

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.

Bruce Norris  Hi, thanks for joining us. My name is Bruce Norris and today our special guest is Paul Herrera. Paul is the Government Affairs Director for realtors and their clients on local issues helping to preserve and protect property rights and the value of homeownership. Working with colleagues at the California Association of Realtors, and the National Association of Realtors, Paul helps members make a difference for their clients at the local, state and federal levels. His unique experience includes an award winning journalism career with newspapers in Florida and California, where he covered real estate small business, the aviation business in the confluence of government policy, politics, and business. Paul serves as communications director for the San Bernardino County of economic development agency. He oversaw external communications, managed communications team and held publicly position a variety of projects and initiatives. The combination of mass media experience local experience, policy and political background and understanding of real estate issues prepared him to lead IVARs, Government Affairs and Communications efforts through coalition building strong messaging, almost said massaging and full understanding. Oh, maybe, maybe that’s partly true, too. Paul welcome back leads, we’ve talked a few times before.

Paul Herrera  Yes, sir. Thank you for having me back as we can forge the conversation.

Bruce Norris  Well, thanks for being an advocate for our industry. And I guess I just want to first talk about you’re in meetings with these people that are trying to make a living all the time, what’s, what’s the mood of the agent with what’s going on this year?

Paul Herrera  You know, it’s interesting, a lot of the people that I communicate with the most have been in the business for quite a while, you know, they’re the more senior brokers and agents who were there through 2008 and 2010. So, for those folks, they, they seem to have a pretty good outlook, in terms of, hey, this is going to weed out a lot of the folks who just dropped in to say hi, in the last couple years, but don’t necessarily have the staying power, and you know, they survive that and they’ll survive this.

Bruce Norris  Okay.

Paul Herrera  For newer agents who haven’t really established boy, you know, you cut down on transaction numbers by 40%. That’s their piece of the pie that just walked away. So, it depends, it’s a, it’s definitely, we’ve grown as an organization quite a bit through membership, because so many people have jumped into real estate over the last few years. You know, I, we expect to see, those numbers shrink, and our membership numbers shrink, you know, there just isn’t enough business to carry, you know, quarter million realtors in the state of California.

Bruce Norris  No, which is really interesting, because I don’t really know how that gets category categorized as unemployed. You know, you have non unemployed, but not making anything. So, is that same with, say, a lender. So, the people that are doing reifies, that business probably is almost non existent, you may still be in the lending business, but there’s a big piece of your business that represented more than 50% of your volume, it’s now gone to almost 0.

Paul Herrera  And you’ve seen significant layoffs and cutbacks and that business. Now, in a year or two, you’re gonna see some people with 7% loans that may have an opportunity to do something with that.

Bruce Norris  Yes, that’s true.

Paul Herrera  With what that volume is, but you know, it’s only a simple goal there. You know, with the agents. You mentioned, unemployment. I mean, the reality is that I haven’t looked at in recent years, but the last time I looked at it is something like 55% of 8 of Realtors had not done a transaction in the last two years.

Bruce Norris  That is true. So, excited at the top or the volume is.

Paul Herrera  Yeah, so they’re making a business, their money do something else. Some of them are retired and maintain a license. Some of them are have another career and also the real estate. Some of them are just referral agents. But there’s a lot of folks who carry a license and you know, it’s pretty inexpensive to be a realtor.

Bruce Norris  You know, 2029, let’s say 2019 2020 and 2021. You’ve probably had people refiying their house multiple times, maybe even more than once a year.

Paul Herrera  Oh, yeah.

Bruce Norris  You have getting better and better. So that also kinases is a very good underlay of protection. Because right now your your demand is down 40 to 50%. But you have a lot of people that are thinking, why would I move? I’ve got a two or 3% loan? Not showing up on the MLS, maybe ever.

Paul Herrera  Yeah, that’s a challenge, now, you know, all this has been very good for the consumer who was already in a house.

Bruce Norris  Right.

Paul Herrera  But nowadays, you know, it’s hard to stare down your 3% loan, and think, Well, you know, we’d like to have one more bedroom. It’d be nice to have an extra, you know, 500 square feet in the house. Why don’t we move you know, somewhere in the neighborhood? No, you know, you’ll make do with, with what you got?

Bruce Norris  Well, you know, a lot of people did that project, though. When the pandemic hit. That is exactly what happened to HomeDepot, they got, you know, remember the wood, there was no wood, drywall, and it went up like crazy. Well, a lot of that was, okay, I want an office at home, I want an extra bedroom, I’ve always wanted one. Almost everything that you put off, it was kind of crazy. If you ever looked at like a boat sail chart. It went crazy.

Paul Herrera  Yeah.

Bruce Norris  Pianos went crazy. So anything that you put off for your life, all of a sudden, it was like game on, we’re gonna get it, we’re finally going to get it.

Paul Herrera  You know, all that money that was being spent in offices and centralized workplaces now had to be spent, you know, creating your workspace at home, especially for those who had the resources to do so. I mean, I’m wondering how contracting is going to shift these next couple years. I mean, they had a book of business, you couldn’t get a contractor. In, in late 2020, I was trying to get a few things done at home and boy, getting somebody to come around was, was difficult. People taps, they tapped their equity, they tapped available cash, probably accelerated by many years, a number of projects at home.

Bruce Norris  Sure.

Paul Herrera  So, does that mean that now, you know, they’ve used up all the slack that was that was existing in, in, in future projects? I don’t know.

Bruce Norris  Well, a lot of it. I think that’s, that’s really an accurate assessment. How many offices do you need in your house? And you know, when you did it, it was okay, I’m going to I’m going to get to work at home, you know, I can be remote. So, you kind of got that done? And then you couple that with a mortgage rate that starts with a two or three?

Paul Herrera  Yeah.

Bruce Norris  You can see the case of that house isn’t showing back up.

Paul Herrera  Yeah, and it depends on what happens with with remote work going forward? You know, how does, how do these attitudes change over the next couple of years? I mean, you’re already seeing a lot of push back into the office. So I, yeah, I’m, I’m really interested to see where this goes. I mean, you had folks that, you know, thought they’d remote work forever, and moved out to another state moved down to I mean, you saw the demand on Yucca Valley and resort communities and Idaho, and Utah and, you know, this point, do they have to sell and come back someplace that at least gets him into the office three or four days a week? You know, that’s, it’s gonna be real interesting for some of those markets.

Bruce Norris  Yeah, the new construction, it’ll be interesting to see the charts coming out, because you’ve gone from feeling like, okay, doesn’t matter what it costs me, because your costs are accelerating, while you’re building because of various parts being hard to get or labor being hard to get. But you always thought I could add it to the price at the end, for sure. It is going to be a bidding war. So um, I don’t even want to put a new house under contract at the beginning of construction, because you’re not on 100 grand or something. Now, that’s a whole different game, the we call it mood, the mooddomiter shift. And we are now in quadrant two, where prices are decelerating. And the mood has shifted in strength to the buyer, instead of the seller. And it’s being a seller in 2021 was mind boggling because of what occurred, you’d get your property beyond the market for four hours, you’d have 11 offers that accelerated it by more than you ever imagined. And you can kind of get spoiled in there. And all of a sudden you realize, oh, that’s not reality. Now we’re, now we’re back to reality in in some ways, it’s probably a healthier thing, to have a mortgage. That’s somewhere, not at 2%. You know, it’s it may be five or six, because the other side of it, somebody’s got savings they’re trying to make interest on so it’s a better balance, but it doesn’t mean it’s gonna be an easy transition, that’s for sure.

Paul Herrera  Yeah, I’m sure you’ve gone through so many examples of what happened in 2020. But we experienced it firsthand. I mean, the home we bought in San Diego, we’re looking to buy a home in January, February of 2020. Just before the pandemic.

Bruce Norris  Right.

Paul Herrera  We found a place that we loved, made an offer, I think list price was 870 made a full price offer at 870. That was the first week of March. Four or five days later, locked down. Everybody go home.

Bruce Norris  Right.

Paul Herrera  You know, the seller only got our offers it okay, you know, we’ll think about it. Let’s see what else comes in. A couple days later, we’ll take it. And so we take a moment to pause and say, Hang on, where’s this headed?

Bruce Norris  Right.

Paul Herrera  Because we’ve seen how bad this could become. You saw the collapse in oil prices, all that was happening as we were sitting there saying the we go through this. And ultimately, we decided, You know what, they’re not really building single family homes in San Diego anymore. And when I try and make money on it in the next couple of years, this is our home for next 20 or 30 years. So, what do I care if it goes down 20% This year, it’s not gonna fall long term. And so we closed and we got a loan at two 2.7. It was it was a weird week in which everything collapsed. And so long reads are actually more like three and a half, three and three quarters. And they collapsed over a course like three days. And we locked in, like 2.7% Before they came back up. So, we got the price and alone and six weeks later, that same house was sold for about an extra $200,000. And then the prices went down further and our neighbors that moved in that time. I mean, those homes went for one point 2,000,001 point 3,000,006 months later, eight months later.

Bruce Norris  Yeah.

Paul Herrera  So I mean, we saw the the insanity of it.

Bruce Norris  Your two groups, that simultaneous the pandemic created two groups of urgencies, there was a group saying, Okay, we’re taking our house off the market 45% of the listings disappeared.

Paul Herrera  Yeah

Bruce Norris  On the other side, you had the demand increase by people saying I have to get out of where I am.

Paul Herrera  Yeah.

Bruce Norris  And so a big group of demand buyers that had to have one got met 45% less inventory to make an offer on and that collided, and the price just went bam, you know, it just crazy.

Paul Herrera  Yeah, the 1100 square foot downtown condo in LA was a lot less attractive when it also became their kids school and their office, right?

Bruce Norris  Right.

Paul Herrera  And it had some value. And so they started looking to where they could find, you know, four bedrooms, five bedrooms, you know, some bathrooms and some space.

Bruce Norris  So, you’re involved in the legislation side? And so how do you think the pandemic impacted what what’s come out the last, say 18 months?

Paul Herrera  Pretty drastically. You know, just before the pandemic, there were a lot of real concerns about what would happen with local budgets. So, for instance, Riverside County, was on a glide path to insolvency, as an example, you know, and counties are, are significantly funded by property taxes, a number of cities were on glide paths towards serious financial problems, largely because of pension obligations that they had, you know, promises they made, like in 2000 to 2003. And now the folks who are retiring, and so they’re trying to figure out how do we make ends meet? What would be the cuts, what would be the tax increases, potentially, pandemic happens, and it solved everybody’s problems. Mostly because the federal government printed an ungodly amount of money, right, pass it down to local governments. Also, people did a bunch of online shopping, sales taxes went up, you saw huge increases in investments after that initial panic in March of 2020. Suddenly, everybody was a stock market genius. And capital gains kicked in, and just money came in from pulling from all directions. And now, all these local governments are in fine shape. No one needs money. It’s solved all the problems.

Bruce Norris  Even long, the long range problems.

Paul Herrera  Even the long range problems because it wasn’t really a long range problem. It was like a 10 year problem of this, of trying to get past this segment of retiring, and obligations, where the costs really went up. After 10 years, it’d be okay. But they couldn’t figure out how they’re going to make ends meet for this for this period of time starting like 20 like right now, actually. So, that really fixed our budgets, you know, the state government collected, what about $130 billion and surpluses over the past three years? Actually more than that big has ended up with close to 100 billion surplus last year. So a lot of those issues got resolved. It also meant that for the first time in a long time, legislatively, we weren’t fighting off tax increase proposals left and right. It was really hard to justify proposing a new tax when you’re sitting at $100 billion surplus. You know, just for context, what $100 billion means it’s just City, California, the entire state budget a decade ago is about $100 billion. Well, so the surplus alone was that last year, and last year, I think the state collected about little over 300 billion in in revenue. So, now we go into a year in which the opposite is true. The state’s facing some deficit about I think they predicted 22 billion was the number that came out of the governor. Still, revenues are two and a half times what they were a decade ago. But you know, expenses have gone up with it, promises have gone up with it. And the state’s going to have to, you know, tighten its belt a little bit. I’m expecting to see some of these tax proposals, at least get floated. And we’ll have to deal with it a little bit more seriously. And whenever the state looks has raised taxes, it’s going to raise taxes and the people who either own property or can afford to buy some.

Bruce Norris  Right? When you’re $100 billion in, in the black, is that in a savings account? Or do you find a way to spend it at the by the end of the year?

Paul Herrera  Both things happen. So, there’s a there’s a pretty healthy rainy rainy day fund. Now. The governor has said he does not want to use it this time. Basically, there’s bigger storms coming and then $22 billion this year. And the governor to his credit vetoed, I want to say about 60 bills that would have raised spending at the end of last last session, looking towards this potential, what was really sizing up as loss of revenue over the next couple of years. For those not familiar, the state of California is largely funded by its higher income earners. And by capital gains. So, regular, you know, working class folks are not the ones paying the bills in California, which means that in really good years, when the stock market’s doing well, and everything’s going up and businesses strong, the state runs large surpluses. But when the when the stock market’s not doing well, and IPOs aren’t hitting the market, it was just the other way. And very, very quickly, even when you know, unemployment, it’s fine. And, you know, middle class, incomes are doing okay, those aren’t the folks that sleep relies on.

Joey Romero  Paul, can you, can you clarify what’s, what’s a California high income earner? Is it somebody just north of a million somebody? 10 million 100 million? What does that look like?

Paul Herrera  So, in California, there’s there’s multiple tiers, California has a very progressive tax structure, progressive referring to higher income earners pay a high proportion taxes. So, if you recall, when a state was trying to make ends meet, voters passed an initiative, raising the top tax rate to see guys at 13.9% on incomes over over half a million? I’m forgetting that, because there was a second surplus tax that was added to that. So, you’re really talking. I mean, once you start making a couple $100,000, your income taxes go significantly northward. Once you start getting into the half million and up range, it goes significantly up above that, you know, get over a million it keeps going higher and higher. So, you’re not talking about people who are wealthy and never thinking about money again, especially if you’re trying to live in the Bay Area, you know, or, or, I mean, even la towards San Diego or the Orange County with a median home price is now a seven figure digit. So digit figure somewhere. But, you know, that’s, that’s a high income earner in California, so.

Joey Romero  So, in large part a lot like a lot of our clientele, you know, we’re targeting, you know, got some two or three properties that, you know, that they’ve, you know, secured and now they’re, you know, being successful as, you know, small real estate investors, but they, they’re qualifying as your high income earner.

Paul Herrera  Yeah. Yeah. If you’re, if you’re able to afford to go out into marketplace and purchase rental property, you’re absolutely paying higher income tax rates and say California.

Bruce Norris  California has been losing people, you know, a fair amount. More than it’s coming in, there’s some, I think the last number I looked at was something like 400,000 but we also decided we weren’t going to build enough homes?

Paul Herrera  Yeah.

Bruce Norris  So, it seems like when I look at the legislation, it seems like there’s been a lot of effort certainly in last couple of years to find some, some place for somebody to live. That doesn’t have to be a new structure, so.

Paul Herrera  Yeah.

Bruce Norris  ADUs a, certainly a big category. And then even, maybe you can help me understand if I have a, what used to be an R-1 lot that has enough space. Can I do something additional on that?

Paul Herrera  Yeah, it’s pretty restricted. You know that when you I think you’re referring to SB 9. The legislation that allows for a lot split under certain circumstances. But essentially with the, with the creation of the adu legislation that we worked on with a couple of years, we had already turned single family lots if they’re large enough and had the setback requirements into up to three unit laws because you could build an adu and you could build a generator you generator up attached, Adu ladder, garage conversion, or office conversion. SB 9 added one more piece of that, which is you could take a single family lot if it met the requirements and they’re not that easy to meet, to be honest with you. And you could split that a lot to two separate single family lots and on each one you could build a home and an ADU. So now you take the lot that was once a single family home, then became a single family home plus an ADU then became three units, two now possibly four units. But people really have to take a look at the fine print on that. And there was some recent coverage about how little SB 9 has done. It really wasn’t meant to be a giant problem solver. It’s meant for owner occupants, you really can’t be an investor that picks up a lot and splits it. It’s designed to work in the lots gonna be big enough to accommodate being split and still maintain setbacks and other local requirements. So even in the most optimistic view, I think the estimate was that maybe two to two and a half percent of single family lots in California might qualify under SB 9. And that’s qualify, you know, there’s plenty people who own these lots who aren’t interested in doing this.

Bruce Norris  Okay. It says really not replacing new home building.

Paul Herrera  No, absolutely not.

Bruce Norris  So, is demand still exceeds supply?

Paul Herrera  Oh, I mean, especially now. But yes. You know, the, the real challenge with homebuilding is that we screwed this up 30 years ago, and we didn’t start messing this up in 2010. If we want to really fix housing affordability in California, what we really need are about 1,000,030 year old apartments, you know, where the construction loans have been paid off, and you know, they start becoming more affordable product. Well, you can’t go back and do that. So, what we’re facing is you can build new, but you can’t build new and lease it out for 1400 bucks a month and, you know, make any profit off of that on any kind of multifamily unit.

Bruce Norris  Right.

Paul Herrera  You know, if you saw the reports out of Los Angeles and other governments tried to build, just adapt housing, to take in homeless individuals. And they were looking at, you know, an efficiency costing 600 $700,000 to build with no profit margin attached to it, right? You know, California is a tough regulatory state. There’s a lot of issues with with trying to get more things off the ground. You know, people imagine that the reason rents are high is because landlords are greedy. I know. It costs money to build here, and there’s a lack of supply.

Bruce Norris  Well, that’s interesting, you know, since you probably have a lot of people now that that aren’t going to buy a new house at 6% mortgage because they can’t get qualified. They still will be in California wanting to rent.

Paul Herrera  Yeah.

Bruce Norris  It’ll be interesting to see if the rents are supported, because I know, rents went up an awful lot. You know, they went up 50% In two years, basically. So, now that that that urgency. I think the rent ran after the prices ran in a way that seems like it would happen, the price ran up so much that you had now an expectation that housing there was an expectation of the renter, actually, that rents were going to be raised every year and that’s, you know, part of their expectation was I’m still gonna stay and you can raise the rent. I wonder if the mood is shifting on that. So, you know, a year from now With the rentals that I have I just emailed my property manager that question. So, how firm do you think the on the renewals? How firm do you think that rental rates will be? And so, yeah, he gave that some thought. And he said, there could be some softening there.

Paul Herrera  I would expect to see some there is more. There’s more supply that started getting greenlit, last couple years, we were able to work on getting some of the restrictions, especially at local governments softened, so it was easier to get things permitted and on underway. So, as that leads to new supply, you would imagine, and also if, you know, if people aren’t flocking to California, and they’ve been flocking out of California, you know, all that should soften some of, some of the demand. But it’s a little more complicated than that. You know, one of the things that high housing costs, creating California is overcrowded housing. So, when I when I talk to lawmakers who are trying to keep rental costs down by imposing government restrictions, rent controls, and you know, and and other restrictions. One things I point out is that you have, you have in many cases, younger people, younger professionals who are crowding into housing, because that’s where they can afford it. Now, let’s say you made it so that, you know, the four roommates sharing a two bedroom place could afford it with just two of them. Where are the other two gonna go?

Bruce Norris  Right? That’s another house that has to be occupied.

Paul Herrera  Yeah, they don’t have anywhere to go. You know, like, if you could artificially just push everybody’s rent to raise rent in half. You just have a bunch of homeless people because you don’t have, it’s not like there’s a bunch of empty units sitting out there unoccupied, because, you know, the the owner, you know, is demanding they get this high price. No, they’re filled up.

Bruce Norris  What was interesting, is, you know, my son Aaron passed away, and one of the things I did is I drove, I drove around just to see the houses that he had lived in.

Paul Herrera  Yeah.

Bruce Norris  You know, it was common. cars on the park with cars were parked on the grass every time 100% of the houses had, like two or three times as many cars as I would have expected, you know, it has, it had a two car garage. No, that’s not enough. We have two cars outside the garage and two cars on the, on the yard. And I was just thinking holy cow density is not safe, in my opinion. Now as a property buyer, that’s one thing that’s a red flag. When you see a you have an area fourplexes that were famous in San Bernardino. Were 4000 square foot fourplexes. And they lit it literally started getting torn down because it was such a dangerous area. You just have too many people in too tight a spot. Well, we’re doing that in some really prime single family areas. Like I used to live on Spruce Street. Well, that was where all the professor’s live for the college’s you go down that street now there’s cars everywhere.

Paul Herrera  Yeah.

Bruce Norris  Holy cow.

Paul Herrera  Yeah, you see that? I mean, Dallas, San Diego, you’ll see some of the older neighborhoods around the ballpark. And there’s not a parking space anywhere you go into I mean, this has been true no way for a long time actually. They’ll single family neighborhoods around downtown area. I mean, they’re packed. And you get a couple of impacts. And one of them is that if you’re looking to invest in an area and the reality is that that’s what you’re facing. You know, if you have overcrowded housing, you also put a lot of wear and tear on that housing very quickly. You know, it’s, it’s a, it’s a real, real challenge, you know, the only way out of it is going to be the investment into more housing. And that’s not something that fixes the problem for college students that are getting jobs and starting to go to work.

Bruce Norris  Yeah, you don’t solve that quickly.

Narrator  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.

 

 

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