COVID-19: Top Headlines With Aaron Norris #696

This week’s radio show and video guest is The Norris Group’s own Aaron Norris.  His role with The Norris Group includes loan officer, office manager, and business development. Aaron has been in the real estate field for over a decade, having worked in the construction and design industry before joining The Norris Group in 2005. He speaks nationally on topics including technology and real estate, artificial intelligence, robotics, shared economy, virtual reality, and intech as well as marketing and PR trends. He has contributed to Forbes, BiggerPockets.com, and ThinkRealty magazine. He has an MBA from UC Irvine and is a credited public relations professional and APR. He also holds his certified specialist in planned giving CPSG designation.  See below for full video and resources.  

Episode Highlights

• How is he viewing how the different states and countries are handling containment and control?
• Where does unemployment stand in the U.S?
• When is California expected to start Phase 3 of the reopening?
• Where do mortgages currently stand?
• Where do things stand right now with foreclosure moratoriums?
• How is building fairing, especially when it comes to permits?
• What is this new term The Norris Group coined “covexodus,” and what does it mean?

Episode Notes

Hey everybody, it’s Aaron Norris with the Norris Group. It is May 22nd. Oh, my goodness. COVID-19 has definitely made producing this radio show very difficult. We always have to sort of record at the very end of the week, which makes it more challenging to get guests. This week I just didn’t get a guest. Just been so crazy. And you know, we’ve been doing the radio show for 13 years. We’ve only ever missed one show, and we are simplifying. We won’t always do videos moving forward. We just produce a lot of content. But I want that radio show always to be tight, data-driven inspiration for real estate investors. And, you know, it was 25 minutes originally because we had a radio show for 10 years, and that was our time slot. And also, you know, after twenty-five minutes, it feels very selfish. I’m asking you to listen, give up a portion of your weekend to hear us talk, and I always to want to make it good. So I guess even though we don’t have an official radio show, we always try to keep it as tight as possible.

Today, I’m actually gonna go through some of the headlines. I didn’t want to be noise either in COVID-19. You know, a lot of it’s the same stories. There’s a lot that’s happening. For VIP subscribers, instead of doing a newsletter this last quarter, we did that investor town hall, and they got to participate live. And we’ve just been really waiting for the data because so much has really changed over the last couple of months. And I’ve really been watching how they control the Coronavirus. I’m hoping that the three different routes, whether it be the antibody, the vaccine, and then the medications that could assist in people recovering more effectively and quicker would assist in opening up the economy, and just watching how the real estate market sort of deals with that. So we’ve got real estate, and then we’ve got the financial markets. There’s just a lot to cover.

So containment and control, that’s still what I’m watching. You know, I think all 50 states as of this week have a plan to roll out. It’s the fourth phase plan that everybody’s talking about. Several parts of California are on phase two right now. The virus is one thing, and the impact on the economy is something that I think is far more scary. At this point, with it going on globaly, we’re all connected. So it’s not just watching what we’re doing in the United States, in California and our local cities. It’s what’s happening globaly. It affects supply chains. It’s crazy. So there’s lots of discussion about recession and depression and the shape that’s going to take from an L to a V to even a W as people worry about a second phase of the Coronavirus coming through in winter.

Unemployment in the U.S. now is thirty nine million, and some states are worse than others. Nevada is very reliant on tourism and the service industry. I think it was something over 25 percent, arond 28 percent. Here in California, we went from 3.9% in February to 5.3% in March. And of course, we really didn’t have the shutdown until mid-March. And I haven’t seen the official number for April just yet. But I know it’s bad and there are particular cities like the city of Los Angeles that are horrendous. But here’s the thing. It’s really not the complete picture. Unfortunately, you have a lot of people that have exhausted their benefits that were already on unemployment since March, and they haven’t gotten anything. So from March to May, you’ve got people out of unemployment benefits that are off that radar. They’re about to come back on as of next week. The pandemic relief effort that they’ve been doing rolls out Phase 3, which starts next week in the state of California. It expands the unemployment benefits for an additional 13 weeks. So the number is going to get worse before it gets better. So I’m sure the headlines in the news media is really going to play that up. But it’s been in the works for a long time.

More than half the mortgages in the first quarter were refinancing. It will be very interesting to watch Q2 since the rates were supposed to have dropped. They’re starting to come down. I’ve heard some good things about how loans have been really busy. All the lenders that I know for people who qualify have been slammed. Refinances as interest rated dip below 3 percent. The Mortgage Bankers Association did a survey on servicers, and they say that 8.16 percent of loans are in some sort of forbearance, and some lenders are, dealing with it more than others. Ginnie Mae loans had eleven point two six percent of their loans in forbearance, while independent mortgage servicers reported a 7.85 percent. So that’s a pretty big difference.

The FHFA announced the extension of foreclosure moratoriums for Fannie and Freddie all the way through June 30th. So one of the hard things to follow is you’ve got things happening at the Fed level. You’ve got the state, and then some things are happening at the local markets, which is just insane to watch. I know there’s a bill in process right now that looks at some sort of forbearance that’s attached to not just the state state of emergency, but also a local state of emergency. Stopping foreclosures until that’s lifted. So you can have a very progressive city decide to just have a state of emergency moving forward for the foreseeable future. And until they lift it, no foreclosures can proceed. And I think that’s a really scary mistake. Mind you, the bill that’s being worked on right now is for business purposes too, so it would affect hard money. So for those of us in the flip business, for the rental business, you might have capital really exit the state if there’s no real clarity on the foreclosure rules. You’re really messing with contract law. I suspect the state is going to get sued by somebody. But holy cow. I mean, how are you as a lender going to have a different scenario, not just for every state, but also every county and city. That’s insane.

As far as building goes, building permits fell by almost 21 percent from March to April. And it definitely appears like builders are just taking a wait and see approach on the side. Now, unlike the last market, like in ’06/07, we don’t have entire tracks. They’ve been mostly building to suit. So they’re not sitting on a bunch of inventory that’s standing. They’re just not moving forward with starts right now. They may even be willing to start jumping in if the economy can open up because in some cases, flipper homes, new construction and the iBuyer model is really going to be an advantage as people don’t want to be touring homes that are currently occupied on both sides. The buyer and the seller just might decide, hey, I don’t want people coming inside my house and I don’t know if they’re healthy. And then you might have buyers taking a quick pass, not just because you have personal pictures on the wall and terrible choices of furniture and wallpaper, but just because they’re worried about their health and how many people have come through and if they’re going to get sick by visiting your home. I’ve heard from flippers that their homes are definitely showing and it seems to be a benefit to be vacant. Also, the side benefit right now is that only the people that are really looking right now are in the homes. So that’s going to be something really interesting to watch over the next couple of months as we enter Phase 2 and 3 of opening up. Empty houses. Way to go.

Yes, iBuyers are back. Redfin, Zillow and OpenDoor all announced within the last couple of weeks that they are back on the market. They have smaller staffs. Several of them had up to 30 percent staff cuts. The financing behind them are probably going to keep a close eye on profitability in the next couple of years. Now, with the model of the iBuyers, they’re buying it directly from the sellers that are then moving out. They’re doing slight fixes and they’re basically selling an empty, slightly refurbished home, which is definitely going to work well in their favor right now and moratoriums should not impact them. So I can understand why they’re going to go ahead and step forward. We’ll just have to wait and see and pay close attention to the buy box. iBuyers had really become an important part of flippers in California. They were going after the things that the iBuyers wouldn’t deal with, situations, if you will: hoarder homes, people that had to have a little bit more creativity where iBuyers are really built for scale. They just want down and dirty, really fast transactions. So investors were locking up properties, dejunking them and wholesaling them to these iBuyers. And so I know quite a few investors who are really bummed when they exited. Well, they’re back. So I can’t wait to talk to you that I know we’re personally chasing that model, flipping to them and to see how you feel, and if they’re buying as aggressively and the same stuff. I’ve been following the iboxes by county for the last year and a half. So I’m very interested to watch the next couple of months what they decide to do.

So for the state of California, sales fell twenty-five point six percent in April from March and were down 30 percent from last year, a huge drop. However, the median price was only down 1 percent for the entire state. But again, that is just not the whole story. And I’m really interested in watching – Joey in our office came up with the term the “covexodus” and the concept that not everybody is going to be comfortable with density moving forward. There are a few different things at play. If my boss just gave me the go ahead to work from home moving forward and I’ve had this urban existence, and for health reasons I’m like, you know what, I can work from anywhere and I’m paying really high rent in a high-risk market with a very high population of homelessness. I’m going to move to the outer city limits. Or, “Hey, why not just move to Riverside?”

So I have some personal experience with this. A year ago, I stopped living in downtown Los Angeles part-time. About three years ago, I looked at buying something in downtown L.A., and the cheapest thing I could find was a four hundred square foot condo. It looked like a hotel room, barely fit a king-sized bed. It probably needed a good twenty grand worth of work to bring it back to life. It was very dated, and it was $400 grand. The HOA loan was seven hundred dollars a month for the HOA for the building. So really expensive and just not nice. I just wasn’t into it, so we decided to rent for a couple of years, and the rent ended up being $2300 for a nice apartment building. But it was a one-bedroom, nothing that special. It was just one bedroom, one bathroom. The kitchen had granite, so somewhat fancy. If I could take that $2300, and why we decided to do that was the commute time from Riverside to L.A., if you weren’t waking up at 5:00 in the morning and tackling that drive early, it was taking an hour and a half to two hours each way. You were giving up, at minimum, three to four hours per day. And on really bad days, like a Friday, you could be spending three hours going one way, coming from L.A. to Riverside. The time value of money, it’s crazy how much people are willing to give away of their life.

Now, with COVID-19, you have a lot of employers for the first time forcing to look at remote work to survive. And I’m sure everybody’s looking at that in a different way to look at productivity if people were able to get their work done on time. A lot of surveys are coming back and a lot of employees have been really happy. You have huge companies like Facebook and Twitter saying, You know what, moving forward, we’re not gonna buy fancy or build fancy commercial buildings anymore to house our employees. We’re gonna look at allowing them to work from anywhere.

There’s also in subsequent articles that have released saying they’re looking at pay scale too. If you don’t have to live in a market like San Francisco in the Bay Area, you don’t have to make three hundred thousand dollars to have a condo. So it’s gonna be really interesting to watch. So the concept of covexodus is that I’m going to move to more rural markets. If I’m able to work anywhere, I can live in Riverside and not have to give up three hours of my life, actually buy a home for what I’m spending in rent and save all that money and spend it in the economy and have a huge lifestyle upgrade. How interesting is that? So I’m just gonna be really fascinated to watch. Now, when I was looking at the data from the California Association of Realtors for April, the Riverside price change month over month from March to April: nothing. San Bernardino actually saw an increase of 2.8 percent. Orange County: their prices were down 2.4 percent. San Francisco was 2.7 percent up. So I think you’re going to possibly have winners and losers in the market. And it could be very micro. You could have people in Los Angeles downtown areas say, Yeah, I’m out, this is crazy. I can’t sustain living here. I’m uncomfortable. I’m going to live on the outskirts if my boss lets me work from anywhere. And who knows, maybe they would even be willing to take less money for a more flexible schedule. It’s going to be very, very interesting to watch.

I’m really watching the political stuff right now. California, I’m really worried from the state perspective. You know, you had the big Tesla uproar, watching them really push back and open anyway and basically say we’re moving to Nevada and Texas unless we get treated really well moving forward. It’s not just that, the extreme controls. It’s them messing with contract laws. So I’ve been e-mailing back and forth this week with a journalist that I’ve known for over a decade that writes on mortgages. And he’s saying that there is a current bill that’s in process that affects all loans, whether it’s non-owner occupied loans, business purpose loans. It’s basically you just can’t foreclose, as I mentioned, that’s tied to the state of emergency that’s going on right now. If they’re able to do that, I just don’t know how things like crowdfunding, hard money lenders. I just don’t know how the finance world will view California and say, you know, that’s just not the rate anymore. California is too risky. There’s no clarity on how I can proceed if somebody doesn’t make payments, and nobody is really talking about it’s got to be COVID-related or you’ve got to show proof. It’s just a blanket. We’re doing it for everybody. Don’t worry about it. Don’t pay. I just don’t think that’s going to do well for the economy and lending and finance overall.

I have got wind that some states, for those of you who are just like this is it, this is the straw that broke the camel’s back, I’m moving to Nevada, there are states that are so upside down in revenue at the county level that states that don’t have income taxes are looking at it for the first time. So that’s something else I want to start following over the next six months as states deal with the states and localities. I know the county of Riverside, for instance, was really buried in an adjustment that the CalPERS system made. And so it was the county, it was the city. Everybody was looking at huge deficits; and the cuts that they were already going to have to make pre-COVID because of the large commitment to the CalPERS retirement program that they were going to have to start backfilling. For a decade, CalPERS was miscalculating and they were running their averages, I think, on an expected 6 or 7 percent return, which they didn’t reach for like on average over the last decade. So it’s like all a sudden they came back and said, yep, we’re gonna have to make up for that. And here’s the real number. So that completely shook a lot of counties and cities that are looking at huge deficits already. And now you basically have shut down the economy. Sales tax, you have unpaid property tax, all that kind of stuff for the last two months. And a lot of that is going to continue for at least the next month. They’re in trouble. They’re looking at huge budget gaps now on top of that problem. And I just don’t know how to get out of it. It’s gonna be crazy. So lots of things to watch.

It’s probably going to have to happen on the backs of some kind of tax increases at the local level, which is not going to be popular, which might have more people leave. Hopefully the federal government will step in at some level. It looks like that’s the way that they’ve decided to solve some of it. You know, it was interesting to watch Pelosi say “we need another one trillion dollars in funds” a month ago and Trump’s like “one trillion? We need two trillion.” And now there’s another three trillion dollar bill in the works where Democrats and Republicans are fighting. We’re clearly going to see at least one more round of aid that starts with a T, and how they decide to position that money. But it does look like cities and governments are going to be part of that. It will be interesting to watch how they end up possibly dealing with the retirement system at the same time. It’s not just the budget gap that was caused by COVID-19. It was already problems with their retirement accounts that they were facing. So I’m gonna be very interested to watch to see how they do this moving forward.

The state of California also released some more housing. California Association Realtors put out a press release on the housing initiatives that just got released and it had to do with CEQA requirements and easing product production. But who wants to build in this environment? And if the finance situation gets really bad because some of the stuff that the legislators are doing, this could be a mess for a year to come. So anyway, just a little bit of a news update of some of the stuff we’ll be following over the next several weeks. Hopefully we will be back to producing a regular radio show next week. We’ve just been trying to make it as current as possible. This whole situation makes that very challenging because everything moves on the day to day. Hope all your investments are going well and you are staying sane and safe. Hang in there, and we’ll see you next week.

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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