Post Pandemic impact in Real Estate with Dr. Robert Kleinhenz -Part 1


How did COVID-19 change the real estate industry, are we going into another recession? Joining us this week is the Principal Economist and Founder of the firm Kleinhenz Economics, Dr. Robert Kleinhenz.

A leading voice on the economy at the national, state, and local level, Dr. Kleinhenz taps over 30 years of experience to present his outlook for the economy and its leading industries, and to offer his perspectives on leading policy issues.

He is known for his extensive knowledge of the economy and economic policy. He speaks to a variety of audiences that include leaders in business, government, the nonprofit sector, and education. A frequent contributor to the media, he has appeared on CNBC, Bloomberg, and NPR, and has been quoted in news outlets including the Wall Street Journal, the Los Angeles Times, the San Francisco Chronicle, the San Jose Mercury-News, and numerous Southern California publications. He is also a member of the National Association for Business Economics, past President and Treasurer of the National Association for Business Economics-Los Angeles Chapter, and past Treasurer of the Real Estate Research Council of Southern California.

Kleinhenz holds a Ph.D. in Economics from the University of Southern California with a specialty in urban and regional economics. He also holds an M.A. in Economics from the University of Southern California and a B.A. in Economics from the University of Michigan.

Episode Notes:


Narrator  This is The Norris Group 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. Today our special guest is Robert Kleinhenz. Robert is a Ph.D. He’s principal economist and founder of the firm Kleinhenz Economics, a leading voice on the economy at the national state and local level. Dr. Kleinhenz taps over 30 years of experience to present his outlook for the economy and its leading industries and to offer his perspectives on leading policy issues. Dr. Kleinhenz is known for his extensive knowledge of the economy and economic policy. He speaks to a variety of audiences that include leaders in business government, the nonprofit sector and education, a frequent contributor to the media. He’s appeared on CNBC, Bloomberg, NPR, and has been quoted in news outlets including the Wall Street Journal, the LA Times, the San Francisco Chronicle, the San Jose Mercury News, and numerous Southern California publications. He’s a member of the National Association for Business Economics, past president and treasurer of the National Association of Business Economics, Los Angeles chapter, and past treasurer of the real estate Research Council of Southern California. Dr. Kleinhenz holds a PhD in economics from the University of Southern California with a specialty in Urban and Regional Economics. He also holds an MA in economics from the University of Southern California, a BA in economics, from the University of Michigan and Robert, we’ve known each other for a long time, and welcome to our radio show.

Robert Kleinhenz  Oh, Bruce, thanks for having me on. It’s been a while since we’ve connected, I’m looking forward to chatting with you.

Bruce Norris  Yeah, you know, it’s interesting, when at the end of 2019. You know, I think, as I was looking forward to 2020, 2019, was sort of a blight year for real estate. It was, and it had the best set of charts ever. It was crazy. And when I looked at the charts, you know, it had the best unemployment number, really great interest rates, affordability for California was high as in relationship to other things. And the market was actually the real estate market was actually kind of slowing down and losing steam. So, generally, prices build momentum, and to 2018, we went up a little bit more than we did in 2019. But neither year was a boom year. So, I got my first question is when we you were looking at the end of 2019 to 2020. What did you, where did you think the real estate market was headed?

Robert Kleinhenz  So, that’s a great question, I think, to put greater context on this, and we’re talking about the market level here. If you take a look back, whether we’re looking nationally, or for the state of California, really in the post Great Recession era, which, during which we had the longest economic expansion on record.

Bruce Norris  Right.

Robert Kleinhenz  The real estate market, that is to say the for sale market really didn’t do a whole lot over that entire time period. If you take a look at, say, home sales year by year for the state of California, they were roughly in line with the long run average dating back over 30 years, despite the strength of the national and the state economy. And despite the fact that, you know, the population of the state of California has been growing, you know, with the exception of this, the, these most recent numbers, but over the last 20 years or so, California’s population has been growing. And yet the housing market in terms of sales really hasn’t gone anywhere. I think that is very striking. And that’s where we were in 2019, I didn’t expect to see a whole lot of change in 2020. There were concerns at the time about the length of the expansion, and that is to say the economic expansion and whether or not that was going to continue, I didn’t see any reason why the expansion would peter out. But I also didn’t see any reason to think that the housing market was going to veer too far from the course that had been following for quite some time. It was responsive to the interest rate declines that occurred in late 2018 through the first part of 2019. And so that gave me hope, maybe that there’d be a little bit of heightened activity in 2020. And then, of course, we had COVID that just change the game all the way around.

Bruce Norris  Yeah. And why do you think that change happened? Because I got it, you know, gotta be honest when I, when that occurred, and I just thought, first of all, if you had told me we’d be wearing masks for a year and a quarter, I probably would have had a really negative reaction to what was about to occur. That would have been my gut reaction as at the time, I didn’t have any context for time. But you know, the immediate 30, 45 days after was devastating to the stock market and to the outlook. I mean, you’re sitting at home. That’s it.

Robert Kleinhenz  Yeah, well, I gave my last talk prior to the onset of the spring 2020 shutdown on March 11 to March 12 of last year. And so, that was just a few days before, we had already heard that certain parts of the economy, were going to be shutting down in California. And we all by that point in time, the stock market had already reacted to what it anticipated would be a problem. But you’re right, the magnitude of the problem, and the idea that it was going to last several months, not several weeks was something that I don’t think any, well, anybody outside of the public health and medical care fields, may have been aware of. And so I agree with you, I didn’t, I thought, and in that March talk of a year ago, talked about, you know, in a matter of weeks, we’ll see a correction, we’re pushing the pause button on the economy. So, we’re not shutting down completely. This is not a, an event similar to a typical recession. With a typical recession, you’ve got imbalances in the economy that caused problems in a sort of cascading fashion. That wasn’t the case. Initially, with the pandemic, we had to shut down we did so for public health reasons to contain the pandemic. It was over time that, you know, chinks in the armor of the economy and breaks in the supply chains and and the fall off in spending. Those are the kinds of things that have translated into the situation we’re in now. Yet, I mean, I think we need to turn towards a more optimistic side of things here in 2021. And by the end of this second quarter, we’ll fully recover economic output that was lost during that shutdown. And by maybe sometime next year, we’ll fully recover all the jobs that were lost. So, it was a traumatic time, no doubt.

Bruce Norris  Well, why do you think the Coronavirus set off such an amazing year for real estate?

Robert Kleinhenz  Well, again, I mean, I think the the idea of amazing is kind of contextual. We had that cratering of sales early on last year.

Bruce Norris  Correct.

Robert Kleinhenz  When the housing market typically moves from off peak to up to peak season.

Bruce Norris  Right.

Robert Kleinhenz  And so, that didn’t happen. So, then I think what saw, what we saw later in the year was a catch up effort on the part of the housing market in terms of sales activity. And the home price changes that we’re looking at right now are comparisons against a very weak year ago set of numbers. So and then again, when you take a look at the long term picture, let’s say for the state of California, we’ll be looking at elevated sales this year, maybe a few percentage points higher than last year. But we’re not really breaking out of that long run average of you know, somewhere around 412,000, home sales per year, plus or minus a few percentage points. We’re kind of stuck in that mode right now.

Bruce Norris  That’s interesting. You have a much calmer, I don’t know. Being in the real estate market as far as what you’re seeing. If you own something that’s for sale, you’re really happy.

Robert Kleinhenz  Yeah…

Bruce Norris  I mean, ridiculous reaction, the prices are going up the median price, I think the latest number was…

Robert Kleinhenz  …13,000.

Bruce Norris  Yeah, that’s kind of what I was talking about a year, a year over a year. That’s an amazing number.

Robert Kleinhenz  Those, you know, those percentage gains that we are hearing in the news right now are the of the same magnitude that we saw back in the early 2000s, leading up to the mortgage meltdown, the financial crisis, and of course, the great recession. This source well, the circumstances behind them are quite different right now, compared to back then because right now, you know, even though lending standards might be a little bit easier than they were maybe a year ago. And I don’t necessarily have information to back that up. I’m just conjecturing that that’s the case. We’ve got very creditworthy buyers who are out there, right. We know that the original, mortgage originations that the FICO scores accompany those mortgage mortgage originations is somewhere in the neighborhood of 760. So, we’ve got very qualified buyers are out there. We have the benefit we meaning the housing market has the benefit right now of demographics and will for the next several years because of the millennials who are moving or currently in prime Home Buying age for first time home buying…

Bruce Norris  For their…for their generation….yes, per decade, right now they’re catching up.

Robert Kleinhenz  Yeah, and And then interest rates, of course, are low. So, I think, as we’re looking through this year and into next year, the question is going to be when when interest rates really start to lift. And I think, you know, because the Fed tends to be reactive, not proactive in its policymaking. And we saw its experience through the Great Recession, I don’t think that it’s going to move very quickly to, to increase short term rates, nor change its behavior to allow in long run rates, which, of course, are governed by the market to drift up terribly fast. So, I mean, you know, and rising interest rates, of course, are symptomatic, at this point in time in the economy, symptomatic of anticipated growth in the economy, and maybe some hint of inflation, those two together are going to drive interest rates up. But I think the outlook is that maybe the 30 year mortgage rate might go up by half a percentage point or so over the next several months, but that’s about it.

Bruce Norris  Okay, yeah, we’re, I want to I’m gonna circle back around to that subject deflation and inflation because I find that, I find that fascinating. And where we are as a GDP, we’ll talk all about that. I guess I also wanted to just touch, this is my thought about what happened in that March to the end of the year scenario in 2020, there was that initial reaction, I have a friend that was looking to buy a boat. So, I never thought about looking at boat volume chart to tell you what’s going on. But he was going to buy a boat in March. And then this happened. And of course, the real estate business died for 30 to 45 days. So, he stopped the purchase, while the boat dealer basically lost all the sales, he had 70 boats were pending, none of them closed. So, he put that on hold. And then 90 days later, his business started kicking in and kicked in really hard. And he started doing really well again, so, they went to go see about buying the boat again. And he met a very, very happy boat dealer. And the guy had about 800 boats in stock. And he had about 700 of them sold in three months. It was crazy. And I, so I when he told me a story I thinking okay, well, what just happened? I think you had two urgent groups. There were people that said, okay, there’s no way if you have your house listed, there’s no way strangers are going to tour my house. So, you pull your listing. So, inventory went down almost by half. And then you had this other group of virgin buyers that said, I got to get out of wherever I am. And they moved. And so, you had urgent demand, need half the supply, and boom. And it’s interesting. It also coincided with interest rates that started with a two. And I wonder how many people just said, ‘You know what, let’s just refi and stay here, let’s fix the house, add whatever, add an office’ and a lot of that went on. So, that’s kind of, you know, having thought about how different the outcome was than what I had pictured, trying to think about what, what just happened. I think that’s that’s part of it. And, you know, my son Aaron has friends that bought for the first time in the last few months. And these people just had an urgency that they have never had before. And they’re 40. That just strange to me, because I always wanted to own a house. And that was like the priority in my early 20s. So, just a very different reaction.

Robert Kleinhenz  Well, those interest rates were very low. And that certainly helped fuel the demand. And as you point out, the supply has been very lean, and it was extremely lean back then, remember that for a period of time, real estate was not an essential industry in the state of California. So, all of it shut down. And then there was a need to, you know, retool and figure out how to show homes online and overcome the constraints that we had. From a health and safety protocol perspective, and all of those things, you know, the industry figured out a way to deal with and I thought that that was a laudable achievement, like so many other industries that, you know, figured out a way to make things happen. And one point about the boat if I’m sorry, Bruce, but so what we saw last year was even as people stopped going to restaurants and going out to movies and taking vacations so that there was a drop off in the purchases of services nationally as a contributed, contributed to GDP, GDP activity, there was a surge in goods consumption. So, our expenditures on goods increased. And of course, those people who were financially well off and did not really suffer income or wealth loss last year, nobody lost wealth, manner of speaking. They bought, you know, durable goods, cars and boats and things like that because they, you know, the money was burning on our pocket so to speak. Go ahead. I’m sorry.

Bruce Norris  Well, I think too. I think maybe there was just some urgency about getting to the part of life that you wanted to. In other words, you didn’t realize how fragile this stuff was. And now all of a sudden, maybe you’re going to do what you pause, you know, for your whole life, I’m going to buy a boat. Darn it. That’s what I want.

Robert Kleinhenz  Hopefully, no, hopefully, this is a once in a lifetime event. So, that means that none of us have gone through that before. And I think you’re absolutely right, from an economic perspective, I really think that economist and a lot of business people were, quote, “fighting the last war”, anticipating that this was going to be an economic downturns similar in nature to an economic recession. This was not a recession, this was a pandemic disruption.

Bruce Norris  Right.

Robert Kleinhenz  And the imbalance I said a bit ago, the imbalances that typically accompany a recession really weren’t present. And then, of course, the outflow of support that came from the federal packages, relief and stimulus packages created a huge backstop that prevented this, this downturn for being as bad as it probably otherwise would have been.

Bruce Norris  Yeah, absolutely. Let’s talk about California. Now you talked about California’s population growing. 100% of the growth for the last few years, and probably at least in my opinion, going forward is the number of births over deaths. So, when you add the migration numbers coming in, and the migration numbers going out, it’s negative, and it’s been negative for a long time, which means the only population gain in California is babies, net. So, how does that impact demand for real estate? Obviously, it’s doing really well right now. But we’re not having more adults, and we’re not having more family units move here. We’re having them net exit. So, how does that change the, the prospects are the smaller the number so small, it doesn’t matter,

Robert Kleinhenz  For, somewhere in the neighborhood of 20 years, if not for net in migration, really. International migration?

Bruce Norris  Exactly.

Robert Kleinhenz  Yes, California’s population would have declined. So, we, you’re right, we haven’t been making enough babies over the last 20 years. And…

Bruce Norris  That’s where all our gains come from, babies being born over deaths. That’s the only numbers we gain in that…

Robert Kleinhenz  …we haven’t been… Yup. But we, we just haven’t had the natural increase that one would like to see in order to, you know, when I look at that question, I think of it through the lens of our economic vitality, you know, thinking all of this, I don’t want to go too far with this analogy. But think of what’s happened with Japan and its aging workforce. And so, so you’re right, California, has really not been able to sustain population growth. I mean, it’s relied heavily on international migration for a couple of decades. As it relates to housing, I think you know, where we are right now, we have a lot of pent up demand for housing. And we have arguably a shortage of housing relative to the population that we currently have. So, I don’t see in the next few years that the population trends are going to have an adverse effect on the demand for housing in California. But, you know, you asked me that question, maybe five years from now, and I may have a different answer. It’s just it’s hard to pin down how that’s going to affect the housing market here in California over the longer term.

Bruce Norris  You know, one of the things that we’re, we’re not doing, interestingly enough, and this has been trimmed in truth through the whole boom, like you said, this has been a very different recovery for housing, when you look at, say, 2009 to 2020, it’s a long time to have a positive real estate market where it’s ever increasing in price. Volume sales hardly ever changed. 400,000 plus or minus. The price has gradually came back to where they were in 2009. We have not built nearly the number of homes. I mean, usually when you have a peak building job, most single families or condos combined, there’s like 150,000 is the number and we’re still at 50,000. You know, we built apartments, but we didn’t build single family. So, you don’t have a, you don’t have a big stock of those. And that usually happens too, like 2005 was a boom year for building. And it was a very bad year to have a boom year in building because things were about to change. So, we don’t have that overhang either. You know, we don’t have a big inventory problem coming down the pipe.

Robert Kleinhenz  And some areas responded differently, right like the Inland Empire took longer to come back. Many of the coastal areas of California came back earlier. Of course the Bay Area went through the roof, way ahead of so many other parts of the economy driven by the success of its tech sector.

Bruce Norris  Now, what’s interesting about that, and that was one of the things I was going to bring up is my daughter moved to Austin, Texas. And as luck would have it, about a mile away, one of the big firms was moving from San Jose, to Austin, and their house that they bought for 300 is, it went up to 550 in about a year and a half. And then, obviously, something happened to where everybody knows this company is going to be migrating employees there. And now the houses are worth 850. I mean, in, in a nanosecond, it’s the craziest thing I’ve ever seen. So, I guess my bigger picture question. Are there? Is there any concern that California is, and it’s not friendly to business. You know, if you look at one of those maps is like, okay, 49th out of 50. Is there a danger that there’s a sector that will leak out, that’s really been a big driver? Or is the intelligence you know, the brain power of the California person up, they are really going to stay there. Just say, you know what, I love more than that.

Robert Kleinhenz  I think there are a couple of industries that have been mainstays of the California economy for decades. We don’t think about this, but manufacturing has been an important part of the California economy, especially the tech related part, but also the aerospace related part. It is predominantly in Southern California, whereas the tech manufacturing, that is to say computers and related, it has a presence in Southern California, but that’s a has a much greater presence in specifically in Santa Clara County, Silicon Valley. So, certainly tech. And I’m using that in broad sense, tech is a huge contributor to economic growth in the state of California. Depending on how you measure it, it can, it accounts for upwards of 20 to 40%, of economic activity growth over some period of time. So, it’s a huge driver. The, as I say, manufacturing is very important. The entertainment industry and tourism, these are all the heavy hitting industries that are a source of growth, that is to say, it’s through activity in these industries, with the rest of the world out of state, out of country, that brings new income into the state economy and expands the economy. It’s different from healthcare.

Bruce Norris  Okay.

Robert Kleinhenz  Healthcare is largely consumed, you know, by residents, it’s a what we call local population serving industry, as opposed to these other industries that are income producing, an export oriented industries. So, to answer your question, I do think that, you know, there, there will continue to be tech firms that peel off from California and move elsewhere. And, and it will continue to be manufacturing changes in the manufacturing sector, partly due to cost. Okay, so we are a high cost region. And our labor costs, whether you’re looking at a skilled or unskilled worker, our labor costs are relatively higher than they are elsewhere. So, there will be some natural out migration over time. But we are home to this, this concentration of talent, this deep labor pool for each of these industries, whether you’re looking at tech, or you’re looking at the entertainment industry, especially here in Southern California, or you’re looking at, at manufacturing, and aerospace, I mean, people, you know, gave the aerospace industry up for being dead here in Southern California about 30 years ago. And even though it doesn’t employ the same number of people, it is really going gangbusters at the present time. And it’s not employing line workers, you know, production workers in the same manner, but it’s employing a lot of engineers, and highly skilled individuals. So, I’m not entirely convinced that we’re getting a, an even handed perspective on this out migration of firms from California and I also just looked the other day at the number of births of, of California firms, and the number of births of California firms far out distance, any kind of out migration of firms to other parts of the country.

Bruce Norris  I’d love to see that. I mean, I actually, you know, because you do kind of, I don’t, that’s why I love talking to you because I feel like you have a very even approach. You know, not you know, and I don’t like when people have one bent or another, you know, because they, they actually because I think they skew it unintentionally sometimes it’s just said that’s the research they do and you find evidence and you go over, there it is, you know.

Joey Romero  Bruce, can I ask a question?

Bruce Norris  Okay. Yes.,

Joey Romero  So, if migration or migration doesn’t concern you for the economy or real estate in California, does innovation or technology in those sectors concern you at all?

Robert Kleinhenz  Yeah, you know, Joey, that’s a great question. California attracts more venture capital than any part of the world. So, it’s not just any part of the country, but any part of the world. And so, there appears to be, well, let’s put it this way, private money is betting on California as continuing to be the innovation capital, if you will, of the world, I use that term loosely. So, because I mean, you’ve got different areas of, of in different kinds of industries, where different parts of the country and different parts of the world have their edge. Ours happens to be in tech as it relates to computers and things like that. But I mean, I think we continue to be a magnet for that. I think that’s one of the best ways to gauge whether or not California continues to be on the, quote, “bleeding edge” and as far as innovation is concerned, as far as the business exodus is concerned. My research showed, based on some numbers that I picked up last night, a news report said that between 2008 and 2018, 18,000, businesses left the state of California, when I took a look at the net business creation in the state of California over that same time period, we created 220,000 businesses net.

Bruce Norris  Oh, wow.

Robert Kleinhenz  That’s, openings versus birth death, or business births, minus birth business deaths, net new openings of 220,000. So, let’s take those two pieces of information together and recognize that, that innovation continues to be a part of our DNA here in California, as is entrepreneurship. And so I think we should take a look at that and recognize that those are huge positives for the state. Despite all the negatives we hear about.

Bruce Norris  That’s a good point.

Joey Romero  Well, that’s gonna do it for this week’s interview with Robert Kleinhenz. Thank you for tuning in. Be sure to catch Part Two next week. See you then.

Narrator  For more information on hard money, loans and upcoming events with The Norris Group, check out For information on passive investing with trust deeds, visit

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 and click the Hard Money tab.




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