On Friday, September 22, the Norris Group proudly presented its 10th 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. All proceeds from the event benefit Make a Wish and St. Jude Children’s Research Hospital. This event would not be possible without the generous help of the following platinum partners: HousingWire, Coach Fullerton, Coldwell Banker Town and Country, PropertyRadar, the Apartment Owners Association, the San Diego Creative Real Estate Investors Association, InvestClub, Las Brisas Escrow, MVT Productions, Inland Empire Real Estate Investment Club, Realty411, and White House Catering. Visit www.isurvivedrealestate.com for event information and tickets.
Episode Highlights
- What is the craziest thing happening in the mortgage market right now?
- What is a big reason people default on their loans?
- What is the status of homes being built in California right now?
- Who is the driver of home purchases?
- In terms of affordability, where is it at and what can cause problems for it?
- How are we controlling rent right now?
- Where does homeownership stand?
Episode Notes
This week is Part 5 of our weekly rebroadcast of I Survived Real Estate 2017. Before speaking with the panel, Bruce did a little experiment. He asked anybody who owned two rental properties to stand up. It was actually a good amount of people there at the event. Bruce asked if they knew the prices were declining and felt sure they were going to continue to decline, would they be a seller? These were the people he asked to sit down. It was a resounding no.
Bruce opened the panel with David Kittle. He asked him what craziest thing is that he sees in the mortgage market right now. David said the déjà vu he is seeing all over again is that in the full aspect of mortgages, it is not asset verification but rather occupancy fraud. People are saying they are occupying the property and really not. This goes back ten years. They are saying they will occupy the property as the primary residents. A perfect example came from someone David saw that morning: Two people buy a house, put it down as though the grandmother is buying the house and moving to Las Vegas from Hawaii to move into a cheaper place. The highest evidence of fraud is going back to occupancy fraud in a mortgage application, which goes back to 2008.
Bruce said he has seen reports that said upwards of 50% of the homes were being bought by investors who said they were living in the house. The grandmother was called by David’s friend who is paid to investigate by the mortgage insurance companies who are insuring the property. He validated the call and determined there was fraud involved.
Bruce told an embarrassing personal story from when he was 23 years old. He had bought an FHA repo, and this was only his second real estate deal. He wasn’t really a paperwork expert, but he saw a box checked that he was going to live in it. He told the agent he was not going to live in it, but rent it. She told him they checked the wrong box, but sign it and she would correct it. He thought she was telling him the truth and thought it was a big deal. Sixty days later, he hears a knock on his door and his wife is being read her rights by the FBI. It turned out they were actually after the broker who was selling all the FHA repos instead of to owner occupants to investors and telling them all the same thing. Bruce had to go see the FBI twice. Bruce would be cautious with anybody after that who told him it was their policy.
One time on a loan transaction, he was going to get one loan in Texas. It took a long time, but finally the application and loan docs came back and it was completely different from what he originally had. He was told by the person in charge that they simplified it because it was too confusing and that they do this for all their clients. Bruce told them he would pay the taxes on the last sale and to forget it. Bruce asked if there is concern over the mortgage pools we already have for future foreclosure problems. John Burns said that until he heard about the occupancy problem, the most recent mortgages were well documented with real people’s income. Therefore, he does not think we have this problem. The problem he alluded to earlier is that the LTVs are a little high. Maybe the default rate will not be as bad in the next downturn, but the loss rates could be more severe because we would go into it with very low equity.
John said defaults happen when people lose their job. The next downturn would be a recession, and not a lot of people have six months of mortgage payments in the bank. Sean said John’s earlier comment about the government learning certain things. In the 90s, they learned about not taking back banks; and in the last recession, they learned not to take back homes. Sean does not think we are going to see a wave of foreclosures; and without that forced inventory on the market, we will not see a big decline in prices from that.
It is said that in California, builders are building around 80,000 less homes than we need every year. Bruce did not understand this, and John said they are having a hard time making money. They could build 80,000 more homes if they could make money doing it. The land is in the outlying areas, and the permit fees have gotten out of control. We had 7 years of a drought, and they were forced to sandbag all around the homes in case of rain. Now, things like nails get run off into the ocean. There are so many things with which they are getting hit.
John had been in Texas that week, and in San Antonio they are complaining because home prices are $240,000. They are talking about how unaffordable it is, and John mentioned how in Carlsbad the fees alone are $120,000. If we could build homes for $250 and make money, the homebuilders would be making hundreds of thousands of homes in California. However, he does not see this changing any time soon.
Bruce next asked about the issue of low inventory. This is something they hear about all the time, yet they do not have aggressive prices to the point where we would typically have price aggression. When Bruce looks at charts, it seems that they usually have double-digit gains, but we do not really have this. The inventory to Bruce is pretty much matched with demand, but he keeps hearing about low inventory. Bruce asked if there is any case for this and why there might be low inventory. Doug Duncan said home prices are appreciating at about four times the long-term national average.
The millennials are actually now the driver of home purchases, despite what the news articles may say. They are doing what they said as soon as they got a job that was stable, got married, had babies, and moved out of their parents’ basement. Their evaluation of demographics is that in order to just meet the current demographic profile, we should be building 1 million and a half units per year. We are building 1 million and a quarter, so we are still 250,000 units less than what the view of demographics would suggest. This means that if there is that level of demand and not that level of supply, price only has one thing to do: go up.
Another issue Bruce hears all the time is in regards to affordability. Sean said everything they had just talked about was the same issue. John said we are not building enough homes, and in California there are all these different things like SEQUA and Title 24. If you want to build a new house now, you have to put in plugs that have the child protection built into them. All of these things add up, and they are all good ideas. This is where we sit with California homes, and it is effecting the rest of the nation.
Doug Duncan said the same issue that applies to both boomers and millennials is the labor supply. People said millennials want to live in 300 square foot apartments, but this was not true. It was where the jobs grew first, and the only place you could afford was a 300 square foot apartment. Now that jobs have dispersed geographically, there are some places you can afford those entry-level homes. The boomers were rumored ten years ago to like to party, so they would sell the suburban house and move downtown to party the night away. Doug lives in Cape Corral, Florida, which his kids call God’s waiting room. You can tell they are being raised by an economist, and there is no emotion involved. In Cape Corral, if you want a good restaurant and reservation, you have to wait until about 7:30. The boomers have been saying all along that they intend to age in place, and they are doing this. They want to age in place, and they are doing that. They are taking that $6 trillion of equity they have, tapping some of it, and remodeling their house.
If you look at the productivity of labor, its highest is in apartment buildings. Its next highest is in single-family detached dwellings. It is the lowest in remodeling. That is the most labor intensive. The part of the problem with the builders building new homes is they are attracting labor away into the remodeling space. It is a demographic profile, but it is all the same issue.
David Kittle has four millennials, aged 37-23, two boys and two girls. Both the girls own homes and are married, while David does not even know what both the boys are doing. All four of them graduated from college. After four colleges and two weddings, David is broke and doesn’t have the money to invest in real estate. Whitney, his oldest, just remodeled her home and now travels with her husband. Paige, his youngest, lives in Hawaii and owns a home there. What it cost was off the charts, but she does not plan to have any children at this time. They are into themselves, which is the case with most millennials. It is a perfect example of what Doug just said. Bruce said there’s a song called “Gotta Love Millennials.” He said it is hilarious and he listens to it once a week just to put a smile on his face.
Bruce asked what constitutes a bigger affordability problem. Whenever he hears affordability, he hears the word “crisis.” When it is exaggerated, it is bothersome since sometimes there are actions taken. The question is whether we have the biggest affordability problem for the owner or for the renter. We first have to figure out which of these have the biggest issue. Bruce’s concern is some of the solutions might be unpleasant for people who own rentals. Doug Duncan said they are different problems. In the rental space in the apartment-building world, there are some markets now that have excess supply, but they are all A-level quality properties. Nobody is building C-Level, although they could turn into this given time. This is why you see Fannie Mae focusing on credit characteristics. This impedes the ability to save money to buy a house. Builders are not able to build entry-level houses, so you have a circular problem.
John Burns said the payments and property taxes as a percentage of people’s income is not at an all-time high. The rents as a percentage of people’s income is, however. Bruce has a friend who has about 1,000 rentals, and he said the rents are unbelievable. He is managing one property Bruce has in Riverside. The rent was about $1,300, and he rented it for $1,900. John said if he had stood on stage during I Survived Real Estate ten years ago and said there would be 1 million people staying in strangers’ houses that night, he would have been called an idiot. However, this is exactly what is going on with Airbnb. The world has adopted this as an okay thing to do. We are entering into a world where 3 ½ million people per year are retiring, and most need an extra $800 in income. They have their mortgage paid off and have 2-3 empty bedrooms. You also have a lot of people paying $1,500 in rent who would rather pay $800.
John said if he were a single parent and the retiree is going to stay at home with his kid, that is a win-win. Some of the household formation numbers and construction is going to be less than that since some of the demand will be satisfied by the supply. Bruce asked if he sees an opening there for Zillow. He said he tried to talk Airbnb into doing it, and they wanted to go after the apartment people instead. However, he does think it is a big opportunity. Sara said Zillow considers Airbnb a competitor and watch them closely. However, they do not have the same product.
Bruce’s next concern was rent control. Sean said he had just read that 60% of Californians now favor the idea of rent control. John said 80% of Californians don’t even know what it is. Sean said the other day they had Senate Bill 2 make it through the assembly, which adds a $75 recording fee. Most believe we will solve affordability by adding fees to housing. Bruce asked if from the builder world there will be more density that might be possible or allowed. John thinks there is a lot more density coming. When he got into the business, the cities wanted less density. Now they are pushing for even more than the builders wanted to do. They have completely reversed on this, and the disruption of retail is happening. When you throw in right sharing, a lot of these parking lots are going to become unnecessary eventually. You will see some land and good locations get redeveloped into mostly rental housing.
A new term was coined in the suburbs who are saying to “bring some of that urban to my area.” They trademarked the term “surban” for it. John said they are doing a lot of feasibilities on surban development all over the country. If you throw in parking lots not being necessary, this is a great opportunity.
They next went on to talk about homeownership, which is down from the peak. It should not have been there in the first place, but there are a lot of people now who are renters who used to be owners. One quote stated, “Ownership has clearly declined in importance.” Bruce asked if this is in the eyes of the would-be buyer or the policy-makers who don’t really care what percent own anymore. John thinks the policy-makers care, but the consumer doesn’t. He does not remember the last time he ran a focus group where entry-level buyers were saying they were buying for the interest deduction. However, this was the case in the 1980s. John said in the book he did, they drew a lot of parallels between those born in the 1990s and those born in the 1930s. One saw the Great Depression, the other saw the Great Recession.
Warren Buffet’s generation was extremely afraid of debt, and now this generation is afraid of it. If you ask any banker, they will tell you they are not using credit or debit cards. If you are afraid of debt and do not have six months of savings in the bank, a greater percentage are just not going to make that into homeownership, regardless of the fact that you are spewing a lot of your money into rent. You really can’t buy a home and have your payment go down; this is not the math in California. This is why John is very convinced homeownership is going to fall.
Sara does a lot of research on why people buy things on the website. Bruce asked her what her feeling was on why people make the buying decision. She said she was not as sure since she does more advertising. Bruce said when he wrote “The California Crash,” he thought prices would go down by half. However, he did not sell his residence. It went from $1,200,000 to $600 grand. The reason he kept it was because of a phone call he made when he tried to be a renter. He called a guy who had a really cool house and said he was not the typical renter. He told them he would pay a year in advance. Bruce was then asked if he had a pet. The second he asked that question, Bruce knew he could not be a renter. He did not want anyone to have to ask him that again. It was worth $600 grand to say he was so glad they asked the question. This is why he found out that when he owned, he wanted control. He does not think this should not be part of America. It bothers him that we are not thinking about this, and there are some negative ramifications.
Tune in next week as we hear more from the entire panel of experts. The Norris Group would like to thank its gold sponsors for supporting I Survived Real Estate: First Lending Solutions, Guaranteed Rate and Nathan Chabolla, In A Day Development, Inland Valley Association of Realtors, Jennifer Buys Houses, Keller Williams Corona, Keystone CPA, LA South REIA, Michael Ryan, New Western, North San Diego Real Estate Investors, Northern California Real Estate Investors Association, Orange County Investment Club, Pacific Premiere Bank, Pasadena FIBI, Pilot Limousine, RealWealth Network, Rick and LeeAnne Rossiter, the San Jose Real Estate Investors Association, San Francisco Bay Real Estate Networking Summit, Sonoca Properties, South Orange County Real Estate Club, Spinnaker Loans, Think Realty, uDirect IRA Services, Westin South Coast Plaza, Wilson Investment Properties, Inc. See www.isurvivedrealestate.com for event information.
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