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
- Why is building equity important, and where are we in terms of it?
- Why is the younger generation more financially conservative yet also want to own a home?
- Which group does David Kittle believe will make up a large percentage of the borrowers in the next 8-12 years?
- What is the site realestate.com, and what group was in mind when Zillow released it?
- From the perspective of the lending world, what are three big impediments, and which could you work with and still have a successful loan portfolio?
- Do the panelists expect the next downturn to be mild or harsh?
- Could there be any new tax law changes implemented soon?
Episode Notes
This week is Part 6 of our weekly rebroadcast of I Survived Real Estate 2017. Bruce said when he wrote his report“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.
Bruce said building equity is important because it is usable for entrepreneurship. Your payment is fixed when people own, and this is spendable income. At one time your monthly payment was $191, and then four years later your car payment was $230 and your house payment was a joke. All of a sudden, you have equity you can tap and go entrepreneurial. This is going to be missing from millions of people, and Bruce doesn’t think it’s a good idea.
Doug Duncan said Fannie Mae’s survey shows that the younger generation is more financially conservative as a result of their observation of the crisis. However, they also ultimately want to own a home because it is a place to raise a family. It is more the attributes of ownership than it is the investment value. However, when you ask the question of what they think of housing as an investment value and look at the age of the person you’re asking, they actually think it’s the highest as an investment value than any other age group. This is partly because the prices had gone way down, so that number is actually migrating now to where they are getting more realistic about where house prices have gone.
David said if we believe MBA’s statistics, 65+% of the borrowers going forward in the next 8-12 years will be Latino and Asian American. David was asked to speak at NAHREP’s convention on a D.C. update, but instead he asked if he could speak on real immigration reform. Obamacare and immigration have both failed, and we need to embrace it and understand it. The older white people are the minority going forward as the homebuyer. Familia is important to the Latino community. The hardest working and most patriotic people who David has ever seen desire to come to America, have a family, and own a home. Homeownership will go up, but we do not have enough inventory nor the programs to finance people because we cannot verify their assets since it comes from grandmother or from under a mattress. They work hard, and we need to embrace that and think about it since it is here and is a sea change that is coming. This is where the next wave of homeownership is coming. We need to wake up to this.
Sara spoke from a shopping perspective and said how they just released realestate.com under the Zillow Group brand. It was basically built with the millennial in mind. They do not put the price of the house forward, but rather the payment of the house. They are helping consumers shop from an affordability perspective versus solely looking at prices. Translation was a big part of that build-out. At a click of the button, you can translate it into any language.
Bruce next went on to discuss the three impediments from the lending world’s perspective. There is down payment, debt ratio, and credit. Bruce asked which of these three you could successfully play with and still have a successful loan portfolio. Bruce asked if you could do a nothing-down loan program, which Sean said you can. You could get rid of all three of them if prices were at the right level. In 2009, you could have made a loan to any homeless person and not lost a penny. What we have to stop doing is making loans when prices get out of whack. We do exactly the opposite.
In 2009, we tightened up credit and you had to have 20% down on your payment. Most loans now are over 90% LTV at a time when we are getting up to a peak. We are doing it backwards. We should have had the highest homeownership rate ever coming out of 2009 and 2010, not the other way around. David was asked in 2009 if he would really make a 100% mortgage. His answer was a VA loan. Why are these the best performing loans in a portfolio? There’s only one reason: residual income. Once you underwrite it like you do with Fannie Mae, Freddie Mac, or FHA, there has to be so much money left over for you to live on. That has been there for decades, and we don’t put that into the other loans we underwrite. Residual income is still there today. 100% loans perform great, and it is not the down payment that matters most. It is whether or not you can make the payment and whether or not you have the historic income reserved and are credit-worthy. There is nothing wrong with low down payment loans if you can afford them because they are all good programs made to the right people.
Bruce asked if we could create a hybrid if we think ownership is important. Could we do, for example, a nothing-down loan program and combine it with one of two things. There used to be something called a simple assumption to where the loan could move to somebody willing to make a payment. You did not have to fully qualify, just make the loan current at the end of escrow and send in $35. There was also not a foreclosure. Allowing it to walk to another buyer allowed for a foreclosure to occur and the opening bid be only the back payments to where the principal is never at risk. You would literally have an opening bid around $5 grand, and somebody could make it current and take it over. Bruce asked what reason there would be that we couldn’t do this.
Sean said part of the problem is that it’s this institutional knowledge and sense that things are the way that they are. There was a recent study from the National Bureau of Economics that made him want to pound his head into a wall because the assumptions were so bad. Sean thinks what is going to happen is we will move past loans and transfers as we know them today. We will see a completely new innovative product where it says you own the home but own it like you do the share of a REIT. If your share goes up in value, you get that value increase. Any day you feel like moving, move. Somebody else will get put in that property, and they will trade shares. It almost sounds like real estate Bitcoin.
The way to move past this is to stop thinking about the current solutions. The mortgage business has been around for so long that it’s time for it to go away completely. We need to think about homeownership in a completely different way where there is a frictionless marketplace. If you property comes in and you have spent thousands of dollars on title insurance, you would not really need the insurance anymore once it changes hands. For those in title insurance, lending, or real estate, it is going to be something like that which disrupts everything. Sara said Roofstock is trying to do this very thing. Roofstock is another model similar to Open Door, only more fractional. They are known for selling homes with tenants in them.
Bruce asked the panel if they expect the next downturn in real estate to be mild or harsh. Doug Duncan said given the supply problem that exists today, within the next 24-36 months there will be another recession. Because of that supply shortage, housing will likely return to its normal cyclical pattern that will lead us out of the recession. The question is how far unemployment goes. If it goes to 7%, you will see some easing off on price pressure. Rates are certainly not going to go up, but rather go down; so out of the 93% of households still in place, some will want to go down. John Burns thinks we will not cause the next downturn, we will just be impacted by it. They did a deep dive on twenty industry sectors that might cause it, and healthcare could be one. It is 17% of our economy and massively over-levered.
In the stock market, more people are borrowing money to buy stocks today than since 1929. The tech companies are getting interrupted, and the retail industry is getting disrupted. All the issues are in publicly traded companies that went out to the bond market. There are no issues with private companies since the banks have been conservative. They identified the risks out there; and Doug Duncan hit the nail on the head when he said if we go to 6 or 7% unemployment, we will be fine. If we go to 10%, it will be ugly. However, we will be leading us out of it since we need more construction due to the demographics. John Burns forecast is that it will not be that bad.
Bruce said one of the reasons he does not think the next recession will be as severe is you will get an interest rate that is very reasonable. This time, we have not pulled out equity and have had a good price increase, but it has not been our habit to borrow all the money out. It’s still sitting there, and instead of having a variable loan a high percentage of the time, we haven’t gotten that loan. It’s fixed, and it is fixed with a 3 or a 4. You will have some losing their job and others losing their house, but that is not going to be a dominant percentage of what is available for sale in the next downturn. Bruce said they pre-played how they would handle people who cannot make their payment this time, and we will treat them kindly. John said the smartest thing to do for everybody is to forebear their mortgage payment until they can get their job back. Everybody wins in that situation, so hopefully that is what people will do.
David asked about forbearance with the ultimate investor. It’s believed they will lose less this way. David said it’s a good debate here. He was raised to learn that you sign the mortgage, it’s yours, and if you can’t pay for it you lose it. It is not the government’s job to step in and help you out. There is some accountability in there that we did not have. In the meltdown, we picked winners and losers. We let some fail and bailed others out who should not have been. Doug has been in conservatorship for 9 years now. It was going to be temporary, and if we had left them alone and let them fail, they could have come out on their own two years earlier and we would not be in this mess. At some point, you have to let it take its course.
John Burns said if you are going to be running a $1.7 trillion mortgage pool, you may look at it and say you want to foreclose on someone who is not paying. However, it could cost you $400 billion if you do this. However, maybe it would only cost you $100 billion if you held on and helped the person until they get their mortgage back. That is a big difference. People learned if they were the holder of the mortgage, they will get more of their principle back. Doug said one of the things the company SoFi does is they have your mortgage and you lose your job, they help you find a job. They actually have a job location function within the mortgage unit.
Sean said there are a lot of unintended consequences. It started with the idea that you can just walk in and return anything, and it is becoming widespread. Sean said his support person occasionally has to deal with somebody who thinks that because they say they can get whatever they want, it is an interesting thing. Maybe we should be saying no to people doing the wrong things and more yes to the people doing the right things. We are building in this idea that you do not need to follow whatever is right, there’s no consequences, and those in charge should protect you. There are big, long-term unintended consequences of where society goes and devolves because of this. We would be in a very different financial position if we had not let a lot of people sit in their houses and not make their payment. We still have Nevada, which has seen a big increase in price. They have the highest negative equity in the nation and basically made foreclosing illegal. They changed the laws and said they would put you in jail if you robo-sign a loan. Sean asked what person at the end of the day at any bank knows anything about the loan. The computer knows everything about the loan, and there’s no personal bankers anymore. We have gone a little off the reservation.
Bruce ended this segment by asking everyone if they see any tax law changes being implemented and what their impact would be on real estate. Sean said tax relief is actually the one piece he is looking forward to in this administration. Bruce asked if he sees this happen, to which David replied he hopes we get relief and not reform. Sean thinks long-term this will put us in worse shape and help our pocket books short-term. We will not get anything that fundamentally puts us back on track. This debt we have is a permanent thing. When speaking on quantitative uneasing, this will last months until the next recession, then we will go back the other way.
Tune in next week as we conclude our radio broadcast of I Survived Real Estate 2017. 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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