On Friday, September 27, the Norris Group proudly presented its 12th annual award-winning black tie event I Survived Real Estate. An incredible lineup of industry experts joined Bruce and Aaron Norris to discuss perplexing industry trends, head-scratching legislation, massive tech disruption, and opportunities emerging for real estate professionals. All proceeds from 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: the San Diego Creative Real Estate Investors Association, InvestClub, ThinkRealty, Coach Fullerton, Keller Williams Corona, PropertyRadar, the Apartment Owners Association, MVT Productions, and Realty411. Visit isurvivedrealestate.com for event information.
This week’s radio show is Part 5 of our 6-part series that will cover our recent event I Survived Real Estate. Today’s show will cover small and large businesses, fringe customers, underserved markets, interest rates in foreign countries, and whether we could see another recession in the next year.
Episode Highlights
- How do small businesses compete with constantly expanding businesses?
- How does the lending industry look at fringe customers?
- Is there an underserved market where people are not getting yes answers and should be?
- With the way things are going in California, why don’t we have soaring prices?
- Will negative interest rates in countries like Germany continue to decline?
- Could we be seeing a recession in the next year?
- Could a recession cascade into more foreclosures?
Episode Notes
Bruce began this session by asking how somebody that’s not big competes with people that that have almost no end to the size they can grow. He wondered if the nature of more businesses today are to deal with only a few people. Simon Chen said from his perspective, even though his company is the largest in the world they still only represent about 18 percent of transactions across the U.S. There’s still that remaining 82 percent that’s available to the rest of the world. They recently signed a deal with Amazon, and it’s exactly what Bruce described. They’re not trying to get into the home transaction business. Simon believes it’s too sloppy of a business for them to be able to really scale. What they’re trying to do is basically generate a referral platform with their 150 million prime members. Who knows how many regular members want to say, “Hey, you know you’re on our site. We have all this traffic. If you’re interested in buying a house we have a referral program, and a Realogy agent at one of our brands will represent you.” Then there is basically a commission split, but it’s not a commission split because it’s not licensed. There is X amount of dollars that are spent in buying home products and services from Amazon as a welcome to your house gift to those consumers. Once they get Alexa plugged in, they basically own you. They know everything about you.
Simon referred to the panel earlier, and an interesting thought they had was how they have a hard money lender that helps them buy properties for their iBuyer program. For the vast majority of real estate agents that are out there that would like to be able to offer some sort of an iBuyer program but have no means to be able to do it other than maybe financing them themselves, that would actually create a great synergistic relationship between lender and iBuyers. That way, they can buy the properties when the opportunity arises. Usually, around 5 to 6 percent are investor grade. The seller is willing to take the haircut that everyone will be looking for in order to have their margins. That other 95 percent of leads are meaningful to the real estate agent who wants to have a relationship with the seller who needs to sell in some kind of timeframe and is willing to take that convenience fee, or 7-Eleven factor. Otherwise, it generates much much more deal flow for them. The Houston Association of Realtors just did a study on this a couple weeks prior to I Survived Real Estate, and 86 percent of the consumers that they surveyed said that given the prominence of iBuyers in the marketplace now, they want to get an iBuyer price to where they at least know what their backstop is for when and how they might sell their house.
Jim Park said only a small percentage of iBuyers are given an offer. The remaining 90 percent or 85 percent are lead-gen opportunity for that, and that’s gold. That’s why a lot of these folks are able to monetize that business across. They may not make that much money on that one particular deal, but they’re able to capture that lead and that’s what people are doing. You see more real estate companies and small brokers trying to set up that iBuyer operation in key markets where they want to try to grab those sell-side opportunities.
Bruce Norris asked how the lending industry looks at the Fringe customers? He mentioned financing for investors, and they’re talking about that getting to be a bigger business. That’s a repetitive customer. If somebody in this audience owns 50 houses with 50 loans, that’s one stop and a loan. He was also thinking about reverse mortgages and asked if those niches are not big enough to put all the effort into or if it is just solely the owner-occupant? Jim Park thinks there’s obviously still businesses. Reverse mortgages are still a decent size market. There has been some scrutiny over the years around how that’s been executed in a kind of disclosure. With the aging population, he thinks that’s going to be something of which we will need more and more. It’s been through some rough waters in the past. In terms of financing for investors, most of the people on the panel were in that business. Most of his members that are independent mortgage banks, or in some cases community banks that have high net worth clients, will provide some of that funding. It is still outside of what their sweet spot really is.
Bruce Norris asked if there is an underserved market right now where people are not getting a yes answer right now who should be. Jim Park studied the demographics; and if you look at some of these countries that are dealing with stagflation, it’s not because the country or the housing market is not growing. It’s because our population isn’t growing. We are growing as a country, but that growth is primarily being driven by minority immigrants. The savings pattern, the credit history, and the patterns of saving are so different for this new population. There are a lot of people looking at new ways of calculating creditworthiness. So do you have to have a certain number of trade lines with a certain number of activities, or can you capture it in a different way? At the end of day, you want to make sure you want to lend to people safe and soundly and that you’re going to get that money back. There are some new technologies and ways that people are looking at lending and credit scoring models that are different. There are a lot of these Fintechs that are looking at different ways of lending and capturing creditworthiness. He expected a lot of improvements in that regard. There are some crazy things going on out there, including people looking at your Facebook and deciding your creditworthiness off of Facebook.
Setting that aside, he thinks we are going to see some innovation coming out of that side of the business. Bruce Norris smiled inside because he had been at a meeting with hundreds of people in the audience, and he hadn’t borrowed money in quite some time. He was really kind of dumbfounded after looking at charts and seeing how they had gone way askew from what he thought would ever happen. They actually interviewed a lender, and it was a very short interview. Bruce asked where the stated income number comes from for stated income loans. Without batting an eye in front of hundreds of people, he said they just make it up. Jim reiterated that was the normal course of business, unfortunately. Jim hopes that person is out of business now, although Bruce thinks they may just not have their loan program available anymore.
Bruce follows charts and tries to look at trends. He looks at California, but he asked John if he could give him some feedback on it from a national point of view. With the set of charts that we currently have, we have affordability at 30 percent in California. Normally, we don’t stall until we get to 17. That’s a big spread. We have very full employment, inventory at reasonably low levels, great equity positions, and almost no foreclosures in the marketplace. These charts usually are accompanied by price increases in double digits. We also have an extraordinary volume of sales. We usually have four years of an enormous volume of sales. We haven’t gone up in 10 or so. So This is why he was curious as to why we haven’t had the breakout in sales and prices this cycle, of it if still had yet to come. Doug Duncan said the Boomers are doing what they said they were going to do. They’ve said all along they intend to age in place. He believes that’s exacerbated by their knowledge of what happened in the downturn. In addition, if they still have mortgage debt left, it’s probably at 3 1/2 percent. So why would you give that up? He has commented before on Cape Coral, Florida, which is where he lives and where Bruce is doing some work. The kids call it God’s waiting room. You can tell, being raised by an economist, that there are no feelings whatsoever and that is not a part of that transaction. But, the story 15-20 years ago is when the kids move out, the boomers are going to sell their suburban house and buy a condo downtown because they were raised in the 60s and 70s. They are going to party the night away. However, the evidence from Cape Coral is if you want a good restaurant reservation, wait until about 7:30.
They’ve said they weren’t going to move, and they’re not. So if you adjust for population, the existing home supply on the market is at 30-year lows. There’s nothing to buy. Bruce asked why we don’t have soaring prices if this is the case. We have a shortage of supply; and if that was matched with capable demand, we would be off to the races. Doug said in one of his favorite charts, they track the inflation-adjusted real house price year-over-year change along with current new construction. Those two data points are very tightly correlated for 30 years until the end of the crisis. What has happened is that price piece, which price is signaling to builders to build or people to supply their homes, is causing a huge gap that has emerged between those two. The builders are steadily building, but it’s never been the case that first-time homebuyers bought a significant share of new construction. That was move-up buyers. The other part of that is the Gen Xers, who are the group whose homeownership rate fell nine percentage points in the crisis. That’s huge. They’re the ones that really took the lesson that said if you held onto the house to which you already own the land, which is in an urban area, probably the most expensive part of the house, tear the roof off and put another floor on or push a wall out and add a room. They’re doing the remodel. They’re also not listing that existing-home price. Real house price actually has appreciated very strongly nationally. The average inflation-adjusted appreciation from World War 2 to today is about three-quarters of one percent. For five years, it was over 4 percent in real terms.
Sean O’Toole thinks one of the issues is that affordability, percentage-wise, went really low in 2006. That’s been measured exactly the same way throughout this whole period. However, lending has not been exactly the same throughout that whole period. When you can get a pay option ARM in 2005 to afford a house, affordability can go lower. He thinks the 30 percent affordability, by the way they measure it, is not very affordable. It may be the equivalent of 11 back in 2017. That is how the market is reacting, like we are done. Sean said we have a lack of supply, but we really are probably pushing up against what people can really afford. Earlier they were talking about the number of mortgages with greater than 43 percent debt to income ratios and the number with higher than 90 percent loan to values. They are seeing a lot of like 104 and 103 percent loans. Together with that, he heard from a couple of people on the panel that there’s not a lot of risk in that because the underwriting is much better. If you go back and look at the foreclosures of 2008, some of those folks were fine on an underwriting. It wasn’t an employment issue, it wasn’t anything else. It was that they overpaid for their house and wanted out. From that standpoint, if house prices were to fall 40 percent, all that paper you think is so great is absolute crap.
Bruce next went on to talk about the next recession and the ramifications on our industry pricewise. Bruce asked if is there any consensus like that and if they thought we were going to have a recession in the next twelve months. Jim Park did not think so, but Simon Chen thought we were already seeing the early signs of it. It’s not going to be anything like 2007/2008, but he thinks one could happen in the next twelve months. Mark Lesswing believes there has to be a small correction, while Sean said we don’t have a market economy. With our current administration, we would throw anything at not having a recession.
John Burns built an index to predict recessions, and normally within the two years, there’s a twenty-seven percent chance. According to the data, it’s at seventy-five right now. He would say yes to a recession, but he will throw the kitchen sink at it if it’s coming. Doug said he doesn’t have the same numbers as John, but the risks are rising and we’re never able to predict exactly when they happen. But the 12-18 month time period seems legitimate. Bruce said if we have a recession, we want to prevent it from getting worse. The first thing the Fed does is lower interest rates by typically 4 to 5 percent. Right now we don’t have that, although we can go negative. It’s in a report Bruce read, and it’s not a big deal. Doug said it must be true if it was written in a report. If you look at sovereign debt around the globe and take the U.S. debt out of the picture, 50 percent of sovereign debt is paying negative yields. That’s $17 trillion. Sean said it’s like you paying them to have your money.
Bruce sent most of the people on the panel an e-mail because they were messing around with the idea of negative interest rates. He said if, hypothetically, you owe a trillion dollars and you’d be able to get a 50-year loan at minus 2 percent, you would never have to make a payment. It would resolve itself in 50 years just by taking your interest credit. That would be good. There are several countries that are not at the end of their negative cycle. They’re at the beginning of their negative cycle. Places like Germany are going negative, and Bruce wondered if it is going to get more negative. Doug said there’s no question that their economies have slowed. In fact, the Germans were, depending on how you define it, in a recession for a little bit. They’re heavily dependent on trade and on manufacturing, and both of those things have been slowing because of the trade debates that are underway. If you want to see Germany shudder, all you have to do is use the words “car tariffs.” There’ no question that around the globe things are slowing, which is part of the reason that the rates are where they are. Bruce asked if the Fed can only lower so far before it starts doing injecting money. Doug said one of the things that Paul did say in an answer to a question was that it put the damper on the idea of negative rates. The evidence that central banks around the world have seen it that it hasn’t really helped growth. They would ease, however, and expand the balance sheet. They would offer whatever liquidity services they could in the industry, but then the rest would have to be done by the fiscal policy. Tax cuts probably would come through too.
Bruce said they’re basically controlling the short end. You had negative rates that got into pretty negative territory. Bruce asked what would happen to our 10-year if something like that was to occur somewhere else. Would we have that invert to quite a low number? Doug Duncan said unlike those global institutions who do not have regulatory requirements to hold sovereign debt from their nation, we do as our banks have to hold Treasuries as part of their capitalization or asset classes for liquidity and safety issues. Some of the institutions hold those securities or that debt, even though it’s going to generate a negative yield over the course of life because of regulatory requirements. Part of the reason rates in the U.S. are low is because capital flows to the U.S. and it is a positive return. It would be positive, even if it was less negative than where it was originating. Doug said that’s where expanding the balance sheet, or increasing the size of that balance sheet, will come in to attempt to hold those rates up.
Bruce asked about the recession and if it will cascade into lots of foreclosures this time, therefore having a negative impact on prices. Sean said no. The whole regulatory framework changed in 2009. The regulators, pre-2009, required the banks to get rid of bad assets as fast as possible at any price. As soon as they change that, the course of the foreclosure crisis changed. In previous ones, we let the savings and loans fail, and hopefully they learned their lesson. He thinks we learned something each time. We’ll make a new mistake next time, but it won’t be the same one.
John Burns agreed with Sean, but with a different twist on it. He thinks if there’s a recession and people stop paying their mortgages, the servicing companies are required to foreclose on them. He thinks we are going to see the foreclosure process get started, and the lesson learned this cycle, unlike last cycle, was there’s gonna be a huge amount of money raised to do non-performing loans. You can sell the pool to non-performing loans. Now you have all these rental companies who will be asking for a thousand homes with somebody in them that they can restructure as a tenant. They had conversations in ’09 with Doug, Fannie, Freddie, and FHA about FHA becoming the landlord in this situation. They just couldn’t do it. He thinks they are going to find a solution next time. The other thing is that they really do hit the market. He has asked American Homes, Invitation Homes, and others how soon they are going to start gobbling them up. Their answer is as soon as the yields make sense. The odds of a 40% price decline or even a 20% are pretty low in his view, and he thinks those guys would see a lot of new money come in and compete with them.
Doug Duncan said the other thing that is out there is, given the shortage of supply relative to the level of demand, if the recession is mild and unemployment runs to 7 1/2 percent, you still have 92 1/2 percent of households working. Interest rates come down because the Fed eases. The demand curve backs off because of unemployment. But for those that are still employed, that means price appreciation is slower or maybe at zero and interest rates are great. It’s a pretty good time to buy a house, especially if there’s a foreclosure that they’re aware of.
Bruce said from the lending side, he has witnessed an unbelievable effort to not foreclose on houses in the last years. Jim said it was like drinking out of a fire hydrant for these institutions. They had never seen that kind of volume coming through of delinquent notes and foreclosures. At one point he had an asset management firm that operated out of all 50 states, and one of his clients was Bank of America. They had one point two million delinquent notes, and he thought the contract was going to last forever. Lo and behold, they started selling off their notes left and right, and literally over about a six month period it went from 1.2 to less than half that. He thinks there’s a huge appetite to buy, but he is not sure whether people will be able to buy 30 cents on the dollar or 40 cents on the dollar like they used to last time around. That certainly isn’t going to happen, and there’s a situation right now with the average down payment with Fannie Mae. He asked Doug what the LTV is on their typical book of business right now. Jim jokingly said you could just make something up and nobody would know, to which Doug said eighty-four percent of statistics are made up anyway.
Jim said the downpayment cushion is quite substantial, even for FHA right now. So, it would require a pretty big hit in terms of price depreciation for the big flow of foreclosures and all that to happen. From a lending institution point of view, a lot of the community banks that hold the notes would get hit as well as people that are selling into the market. A lot of independent mortgage banks, unless they’ve done something wrong in terms that were originating that loan, they probably don’t have any repurchase risk related to it. It depends on who you are, and he thinks we will not see what we experienced in ’08, ’09, and ’10.
Bruce Norris doesn’t think we’ll deal with anything like that quantity, but he was thinking that the consumer had been taught that they were going to get a hug, a recast, and a 2 percent mortgage, and they’re going to put it on the back end or they’re going to forgive it and stay for four years without a payment. That’s what they just experienced. Jim said they experienced that, but you also had about 5 million people who actually lost their home. That was the first round, and that’s when they said they better not do that. Jim thinks the pain of those five million people is still alive and well. Obviously they’re people who got the pass. They didn’t have to pay a mortgage for three years or whatever it was, and you certainly had those situations. But he thinks the general perception in the market is people got hit pretty hard. A lot of people literally lost their home and really lost their trajectory in their life. People are just recovering from all of that now, and he doesn’t know if it will be viewed as this kind of positive experience that somehow they’ll get saved through the process.
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.
The Norris Group would like to thank its gold sponsors for supporting I Survived Real Estate: Coldwell Banker Town and Country, In A Day Development, Inland Valley Association of Realtors, Keystone CPA, Las Brisas Escrow, LA South REIA, Michael Ryan and Associates, NorcalREIA, NSDREI, Orange County Investment Club, Pacific Premier Bank, Pasadena FIBI, Shenbaum Group, SJREI, Spinnaker Loans, South Orange County Real Estate Investment Club, uDirect IRA Services, White House Catering, Wilson Investment Properties. See isurvivedrealestate.com for event information.
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