I Survived Real Estate 2017 Part 7 on the Real Estate Radio Show #564

Norris Bruce

Bruce Norris is an active investor, hard money lender, and real estate educator with over 30 years experience. Bruce has been involved in over 2,000 real estate transactions as a buyer, seller, builder and money partner.

Norris Bruce
November 10, 2017
No Comments

File type: MP3 --- File: Download --- Date: 11/10/2017 --- Size: 14.3M
Find show on: iTunes, Google Play, Tunein, SoundCloud, PlayerFM

Array

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

Do the panelists expect the next downturn to be mild or harsh?
Could there be any new tax law changes implemented soon?
What would happen with the desire to own a home if these changes happened?
What will getting rid of the mortgage deduction hurt the most?
What black swan event are the panelists most concerned about for 2018?
What excites them the most about the following year?
What does Bruce himself want to see in the coming year?

Episode Notes

This week is the final part of our weekly rebroadcast of I Survived Real Estate 2017. The segment began with Sean O’Toole saying how he thinks we are going to 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 happening, to which David replied he thinks we will 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. He recently did a report on how the interest deduction is almost a moot point for many owners.

Bruce asked what would happen to the desire to own a home. He wondered if this has any impact at this point or if it is already a moot point. John said we need to separate desire from ability. All the surveys say everybody wants to own a home. The ability normally does not make it any easier. However, for some people it might since they are deducting $24,000 and can save and pay less taxes. He did a white paper on the mortgage interest deduction, and around 80% of it goes to five states. These states include California, New York, Virginia, Massachusetts. For the rest of the country, it’s not that big of an issue except for a real small percentage of families.

Sean said getting rid of the mortgage deduction will hurt RVs, second homes, and boats. Doug said if you are asking whether it will happen, Fannie Mae’s whole forecast this year has been predicated on no health care or tax reform as well as some regulatory reform. There are three rules to forecasting are if you give a number, don’t give a date. If you give a date, don’t give a number. If you get it right, don’t look surprised. Doug mentioned how we need to get back to GDP growth of 3% or more. He thought it was possible but did not see policies being implemented that could be. He said healthcare reform is the key since it was the thing the determined how far they could go towards reform versus relief. If you don’t get healthcare reform, you are not going to get deep tax reform. This is due to the share of the cost of the GDP that goes to healthcare. The Senate is one vote away from failing again. There is still some hope of it happening, but it won’t have any impact on this year. If they get this, then you may see some progress on taxes.

In the Regan Administration, there were the marginal tax rate cuts that were made in 1981 that took effect in 1983. This was intended as an economic stimulus. Fundamental tax reform took place in 1986, and it was possible because the real GDP growth that was after inflation from 1983-1985 were over 4%, 6%, and 4% again those next three years. You could get all the lobbyists around the table saying growth had been so strong that we could actually survive a fundamental tax reform. However, that is not the world today.

Bruce ended by asking every panelist the same question. He asked if there are any black swan events they are concerned about as well as what most excites them in 2018. Doug started by saying if North Korea sends a nuclear missile into Japan, this would be a black swan event. We have no idea what the world reaction to that would be. In terms of things that are exciting, from an economist’s answer Doug said if you get the global central banks all to attempt to return to a normal, monetary policy, then you can actually hold your legislatures to their responsibility to manage fiscal issues responsibly. We are coming close to the point where this is going to happen.

David Kittle agreed with Doug about North Korea, the world environment, and how that affects money trade and gas prices. If gas goes up $.50 because of a hurricane, what happens if you have a war or nuclear event. This would be catastrophic. However, what he is most hopeful for in 2018 is the recruiting class for the University of Kentucky’s basketball team. The coach has the number one class coming in again, and this was where he attended school.

Sean said on the black swan issue, he had mentioned in his presentations an economic black swan. They joked how Janet Yellen’s job was to have a shrink ray and bring everything to bare. To the degree there is so much debt and trouble, if you lose a hold of the thing then it could be bad. We cannot let this happen. John Burns had discussed this prior with John Mauldin. If this comes unraveled, it really comes unraveled. He does not think we really need to worry about this since you cannot really plan for it or do anything about it. He also thinks it’s decades off, but things might be like Japan and Tokyo where things are still going. More and more debt is not economically good, but things feel okay and people are living. He thinks this will continue and we will not see anything like we experienced in 2008.

Sara Bonert talked about when you do a real estate transaction and how many times you have to enter the address of the home. Zillow is really trying to solve for the problem of smoothing that out for the practitioner so they can just put it in one time and make the transition easier. She said there are a lot of things they can do from a data standpoint to make all the platforms talk to each other more effectively and efficiently.

John Burns said he is concerned about the stock market and the impact it would have on the pension funds that are no longer unfunded pension liabilities. People are actually asking for their cash since there is a lot of retirement happening. On a more positive note, they talked about the disruption, big data, and things Zillow is doing. He finds this exhilarating since it is changing their business and asking them to be smarter and quicker. He does not think 5 months is the new normal on the MLS anymore. It is more like 2 ½ since you can sell your home in an afternoon when before it would take you 30 days just to get the open house done. He finds this exciting and is looking forward to more of this and seeing who the winners and losers are next year.

Bruce finished by saying he would like to see every elected official next year to not be a Democrat or Republican, but be an American. David said of all the places he has gotten to go, there has never been a finer gentleman than Bruce, and he makes everyone feel great. Bruce thanked everyone for participating in another great event. He thanked the panel for all the answers and said how fun it is preparing. When he thought he was completely done, he made a printout, and anything written now were changes that came from a hotel room an hour prior. Bruce had so much respect for the people there that he was trying to get the best questions and get the most information.

Join us again next year for I Survived Real Estate 2018. 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.