On Friday, October 21, the Norris Group proudly presents its 9th annual award-winning black tie event I Survived Real Estate. An incredible lineup of industry experts will join Bruce Norris to discuss perplexing industry trends, head-scratching legislation and opportunities emerging for real estate professionals. Proceeds for the event benefit Make a Wish and St. Jude Children’s Research Hospital. This event is not possible without the generous help of the following platinum partners: HousingWire, PropertyRadar, the Apartment Owners Association, the San Diego Creative Real Estate Investors Association, InvestClub for Women, MVT Productions, the San Jose Real Estate Investors Association, Inland Empire Real Estate Investment Club, Think Realty, and White House Catering. Visit www.isurvivedrealestate.com for event information and tickets.
Bruce Norris is joined this week by Christopher Thornberg. Christopher is the director of the UC Riverside School of Business Administration Center for economic forecasting and development. He is also the founding partner of Beacon Economics.
Episode Highlights
- Christopher’s upcoming speaking event Inland Empire 2035
- What is the status of employment and GDP, and how are they connected?
- What is the cause of the ten-year T-Bill being at 1 1/2%?
- What is quantitative easing, and how has the Federal Reserve been using it?
- Why is inflation preferable over deflation?
- What is “helicopter money,” and who has implemented it?
- How is California’s economy fairing compared to the rest of the United States?
Episode Notes
Christopher has another conference coming up on September 29 called the UC Riverside Forecast Conference. This one is specifically called the Inland Empire 2035. Besides the standard overall outlook for the local, state, and national economies they will also be talking about what the IE looks like 20 years from now. There will be 1 million new people out there, and that means there are a lot of policy decisions put in place today regarding health, transportation, and education. They will get some experts in from across the region to talk about those plans and what needs to be accomplishes. This is a big place and one of the most rapidly growing, so making that good growth means understanding those important aspects of it.
Bruce talked about how much he likes looking at charts, and he is looking at a 4.7-4.8% unemployment rate for the nation. This used to mean full employment, yet it is matched with a 1% GDP growth for the first half of the year. Bruce asked Christopher what he makes of these two numbers coinciding. He said the GDP number is always a little bit tricky. This is a measure of increases in real gross output, but he likes to tell folks it is not output you should be focusing on but rather demand. Output in the first part of the year was quite weak, but a lot of that had to do with trade, inventories, and issues with the ongoing implosion of the oil exploration market.
When you take a step back and look at core demand, particularly demand from consumers and government, the numbers are much better. Overall growth and demand in the first half of the year was running close to 2%. There is no reason to think demand will go away anytime in the near future. Christopher thinks the 1% is more reflective of external problems, while internally we continue to chug along. He expects this to mean growth will be much better in the second half of the year.
Bruce asked about the ten-year T-bill at 1 ½%. Christopher said this goes back to external issues with which we have been dealing. We live in a world where there are all kind of things happening. We have that crazy instability in the Middle East and issues with commodities and the problem it is creating for economies from Venezuela to Russia. They have issues with Brexit and a slowing Chinese economy. As big, powerful, and relatively inflated as the U.S. is from these global trends, some of this will likely spill into our shores in positive and negative ways. The negative ways is the fact that exports have not been doing well. The dollar has gone up a big, and this puts U.S. exporters in a worse position and makes our economy less desirable. On the other hand, when you think about it from commodity prices, such as low oil and steel prices, these are great for the U.S. economy. Equivalently, you look at people across the globe buying U.S. treasuries because we are a shining star in these turbulent times. People want to put their money here as a safe place, and that safe haven means interest rates are nice and low. These are good things for the U.S. economy, and ultimately they will more than outweigh the negative shocks and move the U.S. economy forward.
You have about 40% of the world’s sovereign debt in negative yield territory. This chases buyers into our sovereign debt, and Bruce wondered what this says about negative interest rates returns across the globe and their economies. Christopher said you have to be really careful because it is true that Europeans and Japan have been playing around with negative interest rates. That is within the banking system. For example, in the European Union it is not so much that a German ten-year bond is in negative territory. It is very low, but it is not in negative territory. They are charging negative interest rates to holdings at the European Central bank. What this tells us is that there are a lot of deflationary pressures.
We live in a world that has two things going on simultaneously. We have the deflationary pressures coming from some of the global turnover. We also have a situation where we are in a relatively low-interest rate world. This is a problem for central banks because they can no longer use traditional policies, which means manipulating the Federal funds rate or the inter-bank lending rate in order to push more money into the economy. They do this to try to play off the deflationary problems.
To deal with this, they have to use secondary methods of pumping liquidity into the overall economy. The second line of defenses is what they have been calling quantitative easing, which the Federal Reserve has used with quite some success. Quantitative easing works by buying bonds from banks, and in theory banks are supposed to take the liquidity and push it into the economy through more loan volume. The problem they are having in Europe is they keep buying the bonds, but banks are not putting the money into the economy into loans. Rather, the banks are sticking it in excess reserves. The idea of negative interest rates it to encourage the banks to take that money and deed lend it to people in order to get it out into the economy. It is a natural reaction to that problem.
This may not be working, and Christopher does not doubt that at some point in time they will not say negative interests are getting them what they need. Perhaps the next step and idea is to put more direct cash imbues into the economy. Back in the day, Ben Bernanke was called “Helicopter Ben” because he said the third stage if you cannot get QE to work is to start flying helicopters around and throwing out $100 dollar bills. Obviously you won’t do this; but in Europe, for example, the European Central Bank can simply send a 300 euro check to every single person who lives in the European Union. This will be a way of getting money into the economy to try and fight off deflation.
Bruce asked why inflation is preferable over deflation. Christopher said in a deflationary era you have a big problem with negative interest rates. If a bank is going to charge you for leaving money in the bank, your actual best investment is to take your money out of the bank and leave it in hard cash under your mattress. This is really destabilizing to a monetary system, which relies on the money multiplier that the banks fulfill in terms of creating liquidity. It can create a lot of problems within the system, so a little bit of inflation fights that off while most economists agree 2-3% is a nice comfortable range. The problem in Europe is they are running at about ½ a percent, and in the United States we are not much more than that at 1-1 ½%. You have to get the money into the system and keep things moving forward.
Bruce asked if Japan has implemented helicopter money. Christopher said not yet since they are still in the midst of quantitative easing. It is primarily a deflationary problem in Japan, like in many other places. Japan has other issues, and one of the things about Japan that has been a disappointment is that they have been very good at applying monetary stimulus. However, we have to remember that monetary stimulus is at best a short-run solution. Ultimately, the problems occurring in Japan will occur through deregulation. On that front, Japan has been much less successful.
Bruce said they also have demographic issues. Bruce asked about what they have experienced over the last 20 years and if we will have a similar but milder path. However, Christopher does not think so. Japan’s population has peaked and is already starting to decline. The number of working-age folks is already in full decline. The United States does not have that issue since the workforce is still growing, albeit at a slower pace. However, we are still growing our economy. Japan would do themselves a huge favor if they would allow themselves immigration. However, they are unwilling to allow that.
He does find it intriguing here in the United States what is shown toward immigrants, especially by various groups. On the other hand, he would point out that immigration has been an enormous benefit to the United States economy from both a short-term and long-term standpoint. We have to keep in mind that if we want to keep our economy stable in the long run, we will need new workers to step in and fill the holes that will be vacated when the movers begin to move out of their homes.
Bruce asked if he sees California’s economy doing better than the United States, which Christopher said absolutely. Right now, California continues to be in the top 10 from an overall growth rate over the course of the last couple years. Equivalently, we are adding more jobs than anybody else. We are a big economy, but to put that in context from an absolute perspective we have added more jobs than Texas and Florida put together over the last year. These are impressive numbers when you think about it. This is showing the economy doing great, although not all parts of the California economy are doing well. Some sectors do continue to suffer, as we see with high energy costs and problematic environmental regulations. Beside a few exceptions, the vast majority of the California economy is doing very well right now.
Bruce asked what is holding back single-family construction. The California Association of Realtors talks about how they are $100,000 short of where they should be. Bruce asked Christopher if he agrees that we are building far fewer homes than we have demand. Christopher said yes, but we have to be very careful because there are two major issues going on in housing. There is the California-centric issues, and then there are the global issues. Globally and across the United States, we continue to see the single-family purchase market underperform. New home sales are running at $600,000 when they could and should be close to $1 million.
The reason for this problem has been a combination of things. There has been an excess supply of single-family left over from the big bubble as well as we have seen a very slow recovery. Most problematic has been the fact that these new rules, which try to push the liability of any type of mortgage problem from the borrower onto the lender, has pushed a tremendous amount of people out of the potential buy pool as the case may be. Fifteen years ago the median credit score for somebody getting a new mortgage loan was at $700, now it is about $750. It does not sound like a big shift, but this would exclude 15-20% of the U.S. population, and this is the number of people not getting back into single-family the way they should.
The situation is getting better because people’s incomes are rising, their credit is getting cleaned up, and people’s equity in their homes is rebuilt. This is what is pushing new home sales up some, and he expects it to begin to change in the future. However, unless they change these mortgage rules it will continue to be a slow, underwhelming recovery. This is not just a problem here, but also Ohio and Alabaman. In California, we just have a housing shortage which is driven by the ferocity of nimbyism seen within the California economy. This is something that is not changing at all.
Christopher couldn’t really explain nimbyism, just think about the number of sequel lawsuits constantly being filed and being fighting tooth and nail against any kind of new development. This state needs housing, whether it is single-family, multifamily, for sale, or for rent. Lack of housing is the single largest problem we have in California, and this is driven by our own bad ideas when it comes to allowing housing development. No one seems to want to respond to this except for creating programs to subsidize affordable housing. We do not have an affordable housing crisis, but instead we have a housing crisis.
The difference is very simple. Affordable housing advocates for the most part want to tax the creation of regular housing to subsidize the creation of affordable housing. However, this just makes the non-affordable housing market that much less affordable and that much more under-supplied. In a sense you cannot do this. You have to take a step back and look at the root causes, including nimbyism, SEQUA, and Prop 13. There are several problems, and nobody wants to fix them.
Bruce asked about when we are discussing affordable housing units and if we are talking about entire inventories in one location or a builder making a tract of houses and needing a certain percentage be a different price range. In this case people would need certain circumstances to access the inventory. Christopher said this is one thing you have to have a top-down conversation about. One of the problems is you have some cities who absolutely refuse to do their fair share of homebuilding. There are certain cities on the outside that likely will not do this. Somehow or other the state has to tell local jurisdictions that you have to densify and build more units. However, they are very low to be able to do this.
Bruce next went on to discuss the election. Bruce asked what effect it would have on the economy if Clinton wins. Christopher doesn’t think much will change because it is pretty clear there is going to be a partial reduction in the Republican majority. They may even lose their majority in the Senate. However, they will almost assuredly maintain their majority in the Congress. With that in mind, not much will change because you still have this radical group of tea partyers in the Congress who simply will not deal in any substantial way with a Democratic president. Whether it is Obama or Hillary ends up being largely irrelevant.
Bruce next asked Christopher his thoughts on fiscal debt levels. He said he does not think this is relevant either, no matter who the president is. The president does not create the budget, Congress does. Christopher always laughs when the presidents have to stand up and present their economic plan. The vast majority of economic plans have to do with taxing and spending, which is not what they do anyway. The president can create a laundry list of what they would like and veto certain elements, but for the most part Congress handles the budget. What ends up happening is it becomes a game where Trump comes up with a plan designed to nullify the Republican base, and Clinton comes up with a spending plan designed to nullify the Democratic base. Both parties understand these plans are not worth the paper they are written on.
The second part of it is the fiscal debt is not relevant. We have a net debt, which means you net out 40% of the debt held by the Federal government itself. Ours is about 60% of GDP, and the interest rate burden was lower under the Reagan administration. We do have more debt, but interest rates are so much lower that it does not matter. Bruce asked if this would be a good formula if you were going to increase debt. He asked if this is a blueprint going forward where we could have $30 trillion of debt, just a lower interest rate. Christopher said this is fine and we could do this, but it is not the funded liabilities that are the issue right now but rather the unfunded liabilities.
For all the differences between Clinton and Trump, you are looking at the ultimate outsider versus the ultimate insider. There is a huge list showing how different these two people are. Yet, if you take a step back you will notice one massive similarity is neither one is talking about the substantial changes to social security, Medicare, and Medicaid necessary to make these things actually sustainable in the long run. We are fifteen years out from the boomers getting deep in their retirement when the support ratio will go from 3 ½ to 2 or 1. We have to do this now, and nobody in this campaign is even discussing it. It is a sad and sorry situation.
Thank you for joining us this week for the real estate radio show with Christopher Thornberg. The Norris Group would like to thanks its gold sponsors for supporting I Survived Real Estate: Auction.com, Coachella Valley Real Estate Investors Association, Coldwell Banker Town and Country, Elite Auctions, In a Day Development, Inland Valley Association of Realtors, Jennifer Buys Houses, Keller Williams Corona, Keystone CPA, Las Brisas Escrow, L.A. Green Designs, LA South REIA, New Western, North San Diego Real Estate Investors, Northern California Real Estate Investors Association, Orange County Investment Club, Orange County Building Industry Association, Pacific Premiere Bank, Pasadena FIBI, Pilot Limousine, Real Wealth Network, Realty411 Magazine, Realty Executives Inland Empire, Rick and Leanne Rossiter, Sonoca Corporation, South Orange County Real Estate Club, Spinnaker Loans, uDirect IRA Services, Westin South Coast Plaza, Wholesale Capital Corporation, and Wilson Investment Properties Inc. See www.isurvivedrealestate.com for sponsor links and event information.
For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 500 podcasts in our free investor radio archive.