This week Bruce is joined by Rick Sharga, the Senior Vice President of RealtyTrac. Rick joined RealtyTrac in 2004 as the vice president of marketing. Rick is also a panelist for I Survived Real Estate 2009.
Bruce asks Rick “What services does RealtyTrac offer?” RealtyTrac publishes the largest database of foreclosure and bank owned properties in the country. They also put a lot of related information about those properties in the database including property characteristics, comparable sales, and loan history. It used to take much longer and more expertise to get into the investing business, but RealtyTrac has helped change this.
Rick Sharga congratulates Bruce on producing some of the best educational services in the country.
Realtors use RealtyTrac in a couple ways. Some agents subscribe in order to get up-to-date information on foreclosure activity in their neighborhoods. Others use RealtyTrac to post their properties for sale and to advertise their services to buyers. Appraisers and investors look at property regions to determine property values. You can also use RealtyTrac to check the future inventory of a market place by checking the number of properties in the trustee sale stage. Realtors also use this tool for broker price opinions and to discuss short sale processing.
RealtyTrac’s data goes back to 2005. In 2005, about 530,000 were given foreclosure notices. Over 1.5 million properties have received foreclosure notices through the first half of this year.
Besides the great depression, this is the worst down turn we have ever had. Even professionals who knew this down turn was coming were stunned by how quickly the down turn hit us.
Prices are also falling with the number of foreclosures. In the past, people were taught to honor their contracts, but now one’s financial well being encourages people to walk away from financial responsibility. In many cases, the only option is to execute a deed in lui of foreclosure. The other option is to take the next 15 years to break even on the property you’ve bought.
Bruce asks Rick if he thinks that people consider it more acceptable nowadays to simply walk away from a payment because they do not feel like making the payment. Rick thinks that foreclosures have become so common nowadays that now people are not bothered so much by walking away from their homes. There is discussion in the industry about creating a forgiveness program for people who have gone through foreclosure during this period because the lending programs participated in making this problem worse. Bruce thinks that might make sense because they cannot make houses fast enough to solve the problem. There is discussion about shortening the forgiveness period from 5 to 7 years to 2 or 3 years.
This cycle is unusual because in the past downturns have been caused by an economic occurrence, which then caused unemployment, which then caused foreclosures. This time foreclosures started the problems because home prices were too high and people could not buy a home unless they bought a toxic loan.
Unemployment forces a selling decision that did not exist before. Option ARMs are going to be coming fast for the next 24 months, and they have already experienced a price hit. Option ARMs when they are resetting are always upside down in Riverside. Option ARMs are resetting a little early too because people are making teaser payments.
These home owners have very few options. They have no equity, they cannot afford the higher mortgage payment, and even if they can, they have to decide if that is the best decision for their family’s financial future.
Bruce asks Rick how loan modifications are working out. Rick says that they have done nothing other than give us a lot to talk about. Servicers are only focusing on the length of the loan and the interest rate. The Obama plan does not compel servicers to do principal balance write downs, and it does not moderate their loss. The only way to modify loans effectively is to do a principal write down.
Bruce asks Rick what the ramifications are for giving people principal write downs when they have lied to receive the original loan. Rick is not sure if we will induce more foreclosures by doing this. He thinks we may be overstating the number of people who are in the circumstance. There were not many people putting 50 percent down on their properties in the early part of the decade. People were using ridiculously relaxed financing to obtain properties that they could not afford. Rick thinks that it may be better to do a long term deferral instead of a principal write down. This might keep the home owner at a rate that they could afford, and sometime in the future that amount would be payable. Equity sharing is also one of the options for solving this problem. This involves writing down the principal balance, and requiring sellers to give a percentage of their profit back to the lender. Rick does not think that home owners would be interested in that plan.
States that have non recourse loans in place have a higher percentage of homes that become bank REOs. However, Rick has not seen a comprehensive study on this. There is a lot of discussion right now about increasing the number of loans that have a recourse option.
The House of Representatives passed something recently that will mandate a lender who forecloses on a property to give the former owner a five year lease option on the house. This has not been passed by the Senate yet, but it is coming to them next. Bruce and Rick think that this bill will affect loan programs going forward. Rick says that this is a valiant attempt to help prevent people from ending up on the street but most lenders are not set up to be property managers. People wonder how this will affect their capital structure. How do they treat the loss on that property, how do they treat the asset value, and what does it do to the loan risk profile? It could be a higher risk because more people will default, and it could be a lower risk because lenders will see more revenue.
Bruce asks if moratoriums have worked. Rick says that the only thing that these moratoriums are doing is delaying foreclosures. This could extend the length of the down turn. Moratoriums do not accomplish what they were intended for.
There are probably 10 states that account for approximately 75 percent of the total foreclosures. Most of them are doing moratoriums.
Core Logic says that 9 percent of California borrowers are at least 90 days late. Bruce asks Rick how that affects his outlook for 2010. Rick thinks we have seen the end of the subprime problem. The two big variables are unemployment and how badly Option ARMs will default. RealtyTrac’s forecast is that we may hit a numerical peak this year, because the raw number of option ARM loans was not as large as the raw number of subprime loans, but 2010 will look very similar to 2009. We may see an increase in foreclosure activity. If unemployment extends, and if prices continue to decrease, then 2010 may be worse than 2009.
Bruce asks Rick “What services does RealtyTrac offer?” RealtyTrac publishes the largest database of foreclosure and bank owned properties in the country. They also put a lot of related information about those properties in the database including property characteristics, comparable sales, and loan history. It used to take much longer and more expertise to get into the investing business, but RealtyTrac has helped change this.
Rick Sharga congratulates Bruce on producing some of the best educational services in the country.
Realtors use RealtyTrac in a couple ways. Some agents subscribe in order to get up-to-date information on foreclosure activity in their neighborhoods. Others use RealtyTrac to post their properties for sale and to advertise their services to buyers. Appraisers and investors look at property regions to determine property values. You can also use RealtyTrac to check the future inventory of a market place by checking the number of properties in the trustee sale stage. Realtors also use this tool for broker price opinions and to discuss short sale processing.
RealtyTrac’s data goes back to 2005. In 2005, about 530,000 were given foreclosure notices. Over 1.5 million properties have received foreclosure notices through the first half of this year.
Besides the great depression, this is the worst down turn we have ever had. Even professionals who knew this down turn was coming were stunned by how quickly the down turn hit us.
Prices are also falling with the number of foreclosures. In the past, people were taught to honor their contracts, but now one’s financial well being encourages people to walk away from financial responsibility. In many cases, the only option is to execute a deed in lui of foreclosure. The other option is to take the next 15 years to break even on the property you’ve bought.
Bruce asks Rick if he thinks that people consider it more acceptable nowadays to simply walk away from a payment because they do not feel like making the payment. Rick thinks that foreclosures have become so common nowadays that now people are not bothered so much by walking away from their homes. There is discussion in the industry about creating a forgiveness program for people who have gone through foreclosure during this period because the lending programs participated in making this problem worse. Bruce thinks that might make sense because they cannot make houses fast enough to solve the problem. There is discussion about shortening the forgiveness period from 5 to 7 years to 2 or 3 years.
This cycle is unusual because in the past downturns have been caused by an economic occurrence, which then caused unemployment, which then caused foreclosures. This time foreclosures started the problems because home prices were too high and people could not buy a home unless they bought a toxic loan.
Unemployment forces a selling decision that did not exist before. Option ARMs are going to be coming fast for the next 24 months, and they have already experienced a price hit. Option ARMs when they are resetting are always upside down in Riverside. Option ARMs are resetting a little early too because people are making teaser payments.
These home owners have very few options. They have no equity, they cannot afford the higher mortgage payment, and even if they can, they have to decide if that is the best decision for their family’s financial future.
Bruce asks Rick how loan modifications are working out. Rick says that they have done nothing other than give us a lot to talk about. Servicers are only focusing on the length of the loan and the interest rate. The Obama plan does not compel servicers to do principal balance write downs, and it does not moderate their loss. The only way to modify loans effectively is to do a principal write down.
Bruce asks Rick what the ramifications are for giving people principal write downs when they have lied to receive the original loan. Rick is not sure if we will induce more foreclosures by doing this. He thinks we may be overstating the number of people who are in the circumstance. There were not many people putting 50 percent down on their properties in the early part of the decade. People were using ridiculously relaxed financing to obtain properties that they could not afford. Rick thinks that it may be better to do a long term deferral instead of a principal write down. This might keep the home owner at a rate that they could afford, and sometime in the future that amount would be payable. Equity sharing is also one of the options for solving this problem. This involves writing down the principal balance, and requiring sellers to give a percentage of their profit back to the lender. Rick does not think that home owners would be interested in that plan.
States that have non recourse loans in place have a higher percentage of homes that become bank REOs. However, Rick has not seen a comprehensive study on this. There is a lot of discussion right now about increasing the number of loans that have a recourse option.
The House of Representatives passed something recently that will mandate a lender who forecloses on a property to give the former owner a five year lease option on the house. This has not been passed by the Senate yet, but it is coming to them next. Bruce and Rick think that this bill will affect loan programs going forward. Rick says that this is a valiant attempt to help prevent people from ending up on the street but most lenders are not set up to be property managers. People wonder how this will affect their capital structure. How do they treat the loss on that property, how do they treat the asset value, and what does it do to the loan risk profile? It could be a higher risk because more people will default, and it could be a lower risk because lenders will see more revenue.
Bruce asks if moratoriums have worked. Rick says that the only thing that these moratoriums are doing is delaying foreclosures. This could extend the length of the down turn. Moratoriums do not accomplish what they were intended for.
There are probably 10 states that account for approximately 75 percent of the total foreclosures. Most of them are doing moratoriums.
Core Logic says that 9 percent of California borrowers are at least 90 days late. Bruce asks Rick how that affects his outlook for 2010. Rick thinks we have seen the end of the subprime problem. The two big variables are unemployment and how badly Option ARMs will default. RealtyTrac’s forecast is that we may hit a numerical peak this year, because the raw number of option ARM loans was not as large as the raw number of subprime loans, but 2010 will look very similar to 2009. We may see an increase in foreclosure activity. If unemployment extends, and if prices continue to decrease, then 2010 may be worse than 2009.
This week Bruce is joined by John Young. John Young is the founding partner of Young Homes which is located in Rancho Cucamonga, and he is the Vice President of the California Building Industry Association (CBIA). He has been associated with the real estate business for 30 years.
Bruce begins by asking John to contrast 1990 to what we are currently experiencing. John believes that we are currently in a tougher cycle. In the 80s we had a17 percent interest rates, and yet our current cycle is still more difficult. We are going through a much greater decline in our economy.
Most of the people in the industry are survivors that hope to continue through this down turn, so that they may start building again. Membership in the builders associations is down 50 to 60 percent, budgets are down, and layoffs are occurring. The association consists of public and private builders. John’s company is private and they have had to lay off people who have worked for his company for 10-15 years. John hates doing that because many of these people who have worked for him for many years have talent and they have become like family to him.
The sentiment towards helping builders is positive right now. In the last fifty years, builders were often looked at as the guys who would pave over everything and then take their money and run. Home builders create a lot of jobs and there has been a domino effect occurring in our economy as each industry’s struggles are affecting each other. The car industry has had a huge effect on our economy, but John thinks that the real estate industry is even more influential.
Bruce asks John what the time frame for a building project typically is. In normal economic times, it often takes 3-5 years for builders to finish all the paper work, prepare the land, build the homes, sell them and close the deal. That is a very risky time frame because a building project requires a lot of financial investment and you may not finish at the right time.
Builders have been called the most optimistic people in the world, and when you are dealing with an investment that requires a 3-5 year investment you almost have to be. The mentality you have when you first buy a property changes multiple times through the selling process.
Bruce asks John if many builders were caught off guard when they discovered that there was no demand for the product they were selling near the beginning of the down turn, and when it became obvious that the market was slowing down. John noticed things were slowing down during the third quarter of 2006, but then things perked up temporarily in 07, so that made the builders feel optimistic.
Bruce asks if John has confidence in the people he relies on to tell him when things are about to change for the worse. John does have confidence in their management, but what caught John off guard was the magnitude of the decline.
Bruce is sure that the lenders were all caught off guard as well. Bruce asks John about how they responded to the downturn. Most of the banks are working with the builders to finish projects, but it all comes back to whether or not they had a guarantee. John wishes they would try harder though. Banks are trying to work with the builders.
Sometimes when you have a project that gets appraised for less than the lender originally anticipated, the lender will ask you to participate with more capital (margin call). Today, most companies cannot do that. They either do not have the cash or they need to retain that cash.
Regionally builders are more affected by downturns than national builders. John does think that regional builders have been hurt worse. Some builders will have a better chance to make it through this downturn because they work in multiple areas with different cycles. Larger builders also have better access to capital.
Bruce asks John what the mood is towards financing new projects. John says people are not interested in financing new projects. There are some exceptions, such as when a builder has land that has everything ready for building.
Bruce asks if somebody allowed John to have their shovel-ready lots, would he be able to build it for a profit. John says they are gaining maybe 1 or 2 percent profit on their shovel-ready lots.
Young Homes has built a couple thousand homes in Fontana over the last ten years and now those homes are competing with his new inventory because of the REO and short sale inventory.
Bruce asks if John ever considers getting rid of new home construction so that he can deal with the existing inventory. John says that is a good idea, and he has looked into it. Unfortunately, because of the size of John’s company, they cannot do that. They would have to change their entire business model to do that. However, there are smaller companies who have been able to modify their work force to do that.
Bruce asks John if the current unsold inventory of homes is still excessive. John says that it still is, but it has improved, and they are now almost finished with their inventory. The federal $8,000 dollar tax credit has helped John’s industry immensely but the state buying program has already run out of money. John’s company is currently working to get the federal program extended and the state he’s working on as well.
Bruce asks how the appraisal situation has affected builders. John says that now appraisal companies are managed differently, and the changes are not helping builders. The appraisers are using foreclosures and short sales as comps, which does not give builders fair market value. Too many foreclosures and short sales are being used. They are having to appeal almost every appraisal. So far the appeals have prevailed but it takes lots of effort and times.
See John Young at I Survived Real Estate 2009.
Bruce begins by asking John to contrast 1990 to what we are currently experiencing. John believes that we are currently in a tougher cycle. In the 80s we had a17 percent interest rates, and yet our current cycle is still more difficult. We are going through a much greater decline in our economy.
Most of the people in the industry are survivors that hope to continue through this down turn, so that they may start building again. Membership in the builders associations is down 50 to 60 percent, budgets are down, and layoffs are occurring. The association consists of public and private builders. John’s company is private and they have had to lay off people who have worked for his company for 10-15 years. John hates doing that because many of these people who have worked for him for many years have talent and they have become like family to him.
The sentiment towards helping builders is positive right now. In the last fifty years, builders were often looked at as the guys who would pave over everything and then take their money and run. Home builders create a lot of jobs and there has been a domino effect occurring in our economy as each industry’s struggles are affecting each other. The car industry has had a huge effect on our economy, but John thinks that the real estate industry is even more influential.
Bruce asks John what the time frame for a building project typically is. In normal economic times, it often takes 3-5 years for builders to finish all the paper work, prepare the land, build the homes, sell them and close the deal. That is a very risky time frame because a building project requires a lot of financial investment and you may not finish at the right time.
Builders have been called the most optimistic people in the world, and when you are dealing with an investment that requires a 3-5 year investment you almost have to be. The mentality you have when you first buy a property changes multiple times through the selling process.
Bruce asks John if many builders were caught off guard when they discovered that there was no demand for the product they were selling near the beginning of the down turn, and when it became obvious that the market was slowing down. John noticed things were slowing down during the third quarter of 2006, but then things perked up temporarily in 07, so that made the builders feel optimistic.
Bruce asks if John has confidence in the people he relies on to tell him when things are about to change for the worse. John does have confidence in their management, but what caught John off guard was the magnitude of the decline.
Bruce is sure that the lenders were all caught off guard as well. Bruce asks John about how they responded to the downturn. Most of the banks are working with the builders to finish projects, but it all comes back to whether or not they had a guarantee. John wishes they would try harder though. Banks are trying to work with the builders.
Sometimes when you have a project that gets appraised for less than the lender originally anticipated, the lender will ask you to participate with more capital (margin call). Today, most companies cannot do that. They either do not have the cash or they need to retain that cash.
Regionally builders are more affected by downturns than national builders. John does think that regional builders have been hurt worse. Some builders will have a better chance to make it through this downturn because they work in multiple areas with different cycles. Larger builders also have better access to capital.
Bruce asks John what the mood is towards financing new projects. John says people are not interested in financing new projects. There are some exceptions, such as when a builder has land that has everything ready for building.
Bruce asks if somebody allowed John to have their shovel-ready lots, would he be able to build it for a profit. John says they are gaining maybe 1 or 2 percent profit on their shovel-ready lots.
Young Homes has built a couple thousand homes in Fontana over the last ten years and now those homes are competing with his new inventory because of the REO and short sale inventory.
Bruce asks if John ever considers getting rid of new home construction so that he can deal with the existing inventory. John says that is a good idea, and he has looked into it. Unfortunately, because of the size of John’s company, they cannot do that. They would have to change their entire business model to do that. However, there are smaller companies who have been able to modify their work force to do that.
Bruce asks John if the current unsold inventory of homes is still excessive. John says that it still is, but it has improved, and they are now almost finished with their inventory. The federal $8,000 dollar tax credit has helped John’s industry immensely but the state buying program has already run out of money. John’s company is currently working to get the federal program extended and the state he’s working on as well.
Bruce asks how the appraisal situation has affected builders. John says that now appraisal companies are managed differently, and the changes are not helping builders. The appraisers are using foreclosures and short sales as comps, which does not give builders fair market value. Too many foreclosures and short sales are being used. They are having to appeal almost every appraisal. So far the appeals have prevailed but it takes lots of effort and times.
See John Young at I Survived Real Estate 2009.
This week Bruce is joined by Christopher Thornberg. Christopher is an expert in the study of regional economies, real estate dynamics, and business forecasting. In 2006, he confounded Beacon Economics which is economic research and consulting firm that specializes in real estate markets, local economic development, and public and private policy issues.
Beacon Economics will be doing its first Los Angeles Forecast Conference in the last week of July. There will be a panel of CEOs representing health care and the financial industry who will be talking about the changes occurring in their industry. It will be their first annual event. They are partnering with the LA Chamber of Commerce and Pepperdine to make this event happen. Southern California is the economic center of gravity within this state, and the center of Southern California is Los Angeles.
Bruce asks if a company is looking to relocate would find California to be a leading option. There are some things you have to consider if you come to California. You have to worry about where your employees are going to live. Nowadays homes are much more reasonably price compared to a few years ago. Companies coming to California will be able to rent commercial property for a lower price per month as well. The prices have not come down as much as they should have though, because of the leasing situation, and because there are still some landlords who seem to be in denial about the shape of the economy. Residential and commercial property are two sides of the same coin, and yet they come at different stages of the business cycle. Residential leads the business cycle, and commercial lags it.
The commercial real estate market is about to feel the same hit that the residential market has taken, but it is taking more time to mature. Part of the reason the commercial market is taking longer to go down is because the banks are not pursuing bad debt. The banks have more incentive to be lenient towards people they have lent money to, because if you foreclose on a loan then you actually have to mark that loss down in your books, but if you do not foreclose then the FDIC will allow you to keep that on the books at face value. They call it extend and pretend.
In the residential market there are a lot of properties that have not begun foreclosure, and some people have not made payments for 18 months. There are some banks that are willing to delay the foreclosure process, and some banks just can’t catch up, and there is also a problem with moratoriums that are slowing this situation down. Christopher thinks that if you have a problem then you should be trying to work through it and move forward, but we seem to be fond of dragging this problem out. Some will tell you that you want this problem to be solved over time, because the economy is already so weak, but Christopher says that there is very little evidence that foreclosures significantly hurt the economy. Moratoriums on foreclosure make it a lot longer problem.
On Christopher’s website there is a quote saying, “It’s not what Wall Street troubles me to California, it’s what California troubles me to Wall Street.” When we had a big financial meltdown last year, many reporters called Chris saying “What does this mean for California?” Christopher laughed at this, because Wall Street has presented itself as the leader of all financial things, but that is nonsense. The stock market can change its direction in the afternoon if it gets afraid. California has been in a recession since 3rd or 4th quarter of 2007, yet Wall Street made many bad bets and it did not seem to affect the economy for close to a year. If you did have a true meltdown in the financial system then you would have massive deflation and things would be far worse than they are now. We had a depression expert in the Federal Reserve, and he wasn’t going to let that happen.
Trillion has replaced billion as the cost of solving problems, but Christopher says inflation does not seem to be a likely outcome of the spending we are doing. This is because a large portion of the money we are spending is being done through treasury bonds. That does not have an inflationary effect. What does have an inflation effect is the expansion of the money supply. The Fed, through its program of quantitative easing, has expanded its monetary base by 100 percent over the last year. If that money was to get into the real world then it would have an inflationary effect, but it hasn’t. Most of the money that the Federal Reserve has made has ended up in bank reserves. If the banks started lending that money then we would have an inflation problem, but Christopher thinks that if that ever happened that the Federal Reserve would start to get rid of that excess liquidity.
Bruce asks Christopher what the ramifications will be for 12 to 13 percent in California. Christopher does not think that unemployment is going to be a big problem. Unemployment is a lagging indicator. However, it does increase the amount of stress being put on the financial system. People over their heads in debt and underwater in their home but beyond that he doesn’t see a direct effect on the economy.
Bruce asks if he thinks lower wages will be an issue. Will renegotiation for lower union rates will come up? Christopher thinks it will have a little impact. Hours are already being cut for government and education jobs.
If California is one of the leading states in unemployment then it will affect migration patterns in the short run. The number one reason people move is for job opportunity. The number two reason is relative home prices. This means people will not have as much motivation to move into California for a while, but some people may start moving back into California because of the low home prices.
Builders couldn’t possibly be interested in creating building lots right now, so Bruce is worried that there will be a housing shortage around 2012 or 2013. Christopher thinks that is possible but he does not see us having an issue with single family housing. There are lots of lots ready out there, and as soon as someone sees the opportunity they will build. Christopher does think there will be problems with rental houses. When people start moving back, there will not be enough housing for low income families. Christopher hopes the state will make policy changes to encourage multi family production.
Bruce thinks that it might be a solution to give investors financing so that they can hold properties for a reasonable price because then the market would dictate what the rent would be. Christopher thinks we got into this mess because of too much financing but now there is not as much financing as people would like. Christopher wonders if there is a true market failure occurring right now or are people simply suffering from credit withdrawals. There was never too much financing for investors who buy and hold properties and eventually pay them off. The financing problems occurred when speculators and owner occupants got involved. If your goal is to find reasonable rentals, they are all over the place in Moreno Valley and San Bernardino, but the financing is not available for investors to get these homes. What seems like a sure deal to investors does not seem like a sure deal to the banks.
Bruce thinks that the number of bank owned properties is going to dramatically increase in the next year. Bruce asks if Christopher sees more price damage coming to California because of that. Christopher does not think that these bank owned properties are not going to really decrease prices but they will help hold prices down. There is pent up demand for housing. If you go to an auction, you will see people who want to buy foreclosed units. Bruce thinks that this is true in the short run.
Bruce wonders how we can have pent up demand when we have the most generous financing programs in existence. It is surprising to Bruce that there is this much demand when there are so many people who have been artificially allowed to participate before they were ready.
In Riverside and San Bernardino, rent is more expensive than the PITI payment. That has never occurred in California. This is occurring because there are many people who cannot qualify for mortgages because they already have a bad mortgage on their payment. Unemployment and foreclosures are at a record, so Bruce does not understand who is actually going to borrow the money to buy these homes.
Christopher thinks there are more potential buyers who smartly sat on the sidelines and waited for these opportunities to come up. There may be other people who are being co-signed by their parents. If you talk to bankers they will tell you that there are people coming through their doors who have a recent foreclosure, and they will look the other way because they know that these people have made a mistake and there is no point in turning down a potentially good loan. Bruce agrees with Christopher here.
Most of the mortgage market is being dominated by Fannie Mae and Freddie Mac. Unless Fannie and Freddie are willing to back mortgage product and buy them off of banks, there is going to be very little money available.
Current loan modifications in California do not change the principal balance. Christopher does not think these have any chance of working. You cannot expect to have a true recovery by simply modifying the payment. People are not fooled by these modifications. Even though we are modifying their payments, they are still in an incredible amount of debt. It will take many years for them to get rid of the debt they have taken on, and their credit score will heal faster than their equity position. In 2008, 7 out of 10 people who applied for a loan modification ended up in foreclosure eventually.
Bruce asks Christopher what he thinks will indicate that real estate is starting to get healthy. Christopher thinks that sales are important and mortgage delinquencies from the Mortgage Bankers Association. For California, about 9 percent of all mortgages are delinquent. That tells you that we are no where near the end of this problem.
We look forward to Christopher being on our panel for I Survived Real Estate 2009.
Beacon Economics will be doing its first Los Angeles Forecast Conference in the last week of July. There will be a panel of CEOs representing health care and the financial industry who will be talking about the changes occurring in their industry. It will be their first annual event. They are partnering with the LA Chamber of Commerce and Pepperdine to make this event happen. Southern California is the economic center of gravity within this state, and the center of Southern California is Los Angeles.
Bruce asks if a company is looking to relocate would find California to be a leading option. There are some things you have to consider if you come to California. You have to worry about where your employees are going to live. Nowadays homes are much more reasonably price compared to a few years ago. Companies coming to California will be able to rent commercial property for a lower price per month as well. The prices have not come down as much as they should have though, because of the leasing situation, and because there are still some landlords who seem to be in denial about the shape of the economy. Residential and commercial property are two sides of the same coin, and yet they come at different stages of the business cycle. Residential leads the business cycle, and commercial lags it.
The commercial real estate market is about to feel the same hit that the residential market has taken, but it is taking more time to mature. Part of the reason the commercial market is taking longer to go down is because the banks are not pursuing bad debt. The banks have more incentive to be lenient towards people they have lent money to, because if you foreclose on a loan then you actually have to mark that loss down in your books, but if you do not foreclose then the FDIC will allow you to keep that on the books at face value. They call it extend and pretend.
In the residential market there are a lot of properties that have not begun foreclosure, and some people have not made payments for 18 months. There are some banks that are willing to delay the foreclosure process, and some banks just can’t catch up, and there is also a problem with moratoriums that are slowing this situation down. Christopher thinks that if you have a problem then you should be trying to work through it and move forward, but we seem to be fond of dragging this problem out. Some will tell you that you want this problem to be solved over time, because the economy is already so weak, but Christopher says that there is very little evidence that foreclosures significantly hurt the economy. Moratoriums on foreclosure make it a lot longer problem.
On Christopher’s website there is a quote saying, “It’s not what Wall Street troubles me to California, it’s what California troubles me to Wall Street.” When we had a big financial meltdown last year, many reporters called Chris saying “What does this mean for California?” Christopher laughed at this, because Wall Street has presented itself as the leader of all financial things, but that is nonsense. The stock market can change its direction in the afternoon if it gets afraid. California has been in a recession since 3rd or 4th quarter of 2007, yet Wall Street made many bad bets and it did not seem to affect the economy for close to a year. If you did have a true meltdown in the financial system then you would have massive deflation and things would be far worse than they are now. We had a depression expert in the Federal Reserve, and he wasn’t going to let that happen.
Trillion has replaced billion as the cost of solving problems, but Christopher says inflation does not seem to be a likely outcome of the spending we are doing. This is because a large portion of the money we are spending is being done through treasury bonds. That does not have an inflationary effect. What does have an inflation effect is the expansion of the money supply. The Fed, through its program of quantitative easing, has expanded its monetary base by 100 percent over the last year. If that money was to get into the real world then it would have an inflationary effect, but it hasn’t. Most of the money that the Federal Reserve has made has ended up in bank reserves. If the banks started lending that money then we would have an inflation problem, but Christopher thinks that if that ever happened that the Federal Reserve would start to get rid of that excess liquidity.
Bruce asks Christopher what the ramifications will be for 12 to 13 percent in California. Christopher does not think that unemployment is going to be a big problem. Unemployment is a lagging indicator. However, it does increase the amount of stress being put on the financial system. People over their heads in debt and underwater in their home but beyond that he doesn’t see a direct effect on the economy.
Bruce asks if he thinks lower wages will be an issue. Will renegotiation for lower union rates will come up? Christopher thinks it will have a little impact. Hours are already being cut for government and education jobs.
If California is one of the leading states in unemployment then it will affect migration patterns in the short run. The number one reason people move is for job opportunity. The number two reason is relative home prices. This means people will not have as much motivation to move into California for a while, but some people may start moving back into California because of the low home prices.
Builders couldn’t possibly be interested in creating building lots right now, so Bruce is worried that there will be a housing shortage around 2012 or 2013. Christopher thinks that is possible but he does not see us having an issue with single family housing. There are lots of lots ready out there, and as soon as someone sees the opportunity they will build. Christopher does think there will be problems with rental houses. When people start moving back, there will not be enough housing for low income families. Christopher hopes the state will make policy changes to encourage multi family production.
Bruce thinks that it might be a solution to give investors financing so that they can hold properties for a reasonable price because then the market would dictate what the rent would be. Christopher thinks we got into this mess because of too much financing but now there is not as much financing as people would like. Christopher wonders if there is a true market failure occurring right now or are people simply suffering from credit withdrawals. There was never too much financing for investors who buy and hold properties and eventually pay them off. The financing problems occurred when speculators and owner occupants got involved. If your goal is to find reasonable rentals, they are all over the place in Moreno Valley and San Bernardino, but the financing is not available for investors to get these homes. What seems like a sure deal to investors does not seem like a sure deal to the banks.
Bruce thinks that the number of bank owned properties is going to dramatically increase in the next year. Bruce asks if Christopher sees more price damage coming to California because of that. Christopher does not think that these bank owned properties are not going to really decrease prices but they will help hold prices down. There is pent up demand for housing. If you go to an auction, you will see people who want to buy foreclosed units. Bruce thinks that this is true in the short run.
Bruce wonders how we can have pent up demand when we have the most generous financing programs in existence. It is surprising to Bruce that there is this much demand when there are so many people who have been artificially allowed to participate before they were ready.
In Riverside and San Bernardino, rent is more expensive than the PITI payment. That has never occurred in California. This is occurring because there are many people who cannot qualify for mortgages because they already have a bad mortgage on their payment. Unemployment and foreclosures are at a record, so Bruce does not understand who is actually going to borrow the money to buy these homes.
Christopher thinks there are more potential buyers who smartly sat on the sidelines and waited for these opportunities to come up. There may be other people who are being co-signed by their parents. If you talk to bankers they will tell you that there are people coming through their doors who have a recent foreclosure, and they will look the other way because they know that these people have made a mistake and there is no point in turning down a potentially good loan. Bruce agrees with Christopher here.
Most of the mortgage market is being dominated by Fannie Mae and Freddie Mac. Unless Fannie and Freddie are willing to back mortgage product and buy them off of banks, there is going to be very little money available.
Current loan modifications in California do not change the principal balance. Christopher does not think these have any chance of working. You cannot expect to have a true recovery by simply modifying the payment. People are not fooled by these modifications. Even though we are modifying their payments, they are still in an incredible amount of debt. It will take many years for them to get rid of the debt they have taken on, and their credit score will heal faster than their equity position. In 2008, 7 out of 10 people who applied for a loan modification ended up in foreclosure eventually.
Bruce asks Christopher what he thinks will indicate that real estate is starting to get healthy. Christopher thinks that sales are important and mortgage delinquencies from the Mortgage Bankers Association. For California, about 9 percent of all mortgages are delinquent. That tells you that we are no where near the end of this problem.
We look forward to Christopher being on our panel for I Survived Real Estate 2009.
Thank you Dalmae Properties and Mike Chouinard for your Gold Sponsorship!
About Delmae Properties
Delmae Properties is a California -based real estate investment company that is constantly searching for properties that offer unique opportunities. Delmae takes underperforming or undervalued assets and restores them to their best use and highest potential value. Delmae’s principle focus is distressed single-family properties but also invests in multi-family, condominium conversions, raw land development, and commercial properties.
Delmae strives to create multiple “win” situations on each transaction. We provide a “win” for the end user of the property because they have a location that has been completely renovated that they can occupy comfortably. We provide a “win” for the previous owner of the property because they no longer have the burden of managing a property that is not performing. We provide a “win” for our investors by providing excellent returns on their capital.
The Norris Group would like to especially thank Elite Auctions, now two-time supporter of I Survived Real Estate. The Norris Group successfully auctioned its office building in 2007 and have used Elite several times since. We appreciate their friendship and service. You can hear Randy and Mike Grigg on our radio show. You can visit their business at www.SellWithAuction.com
About Elite Auction
Elite Auctions was formed out of a need to sell residential real estate more efficiently. The owners of the company are investors who buy and sell property, primarily single family homes. They have since expanded and also sell commercial property, land, farms, and ranches using their proven competitive bidding strategy. Obtaining the highest price in the shortest period of time has always been their priority. In traditional sales, where property is listed with the hope of attracting a buyer using the MLS and a sign in the front yard, the owners found that in most markets it takes much more to get the job done quickly. “Many times we had vacant houses that were fixed up. It was critical that our carrying costs (interest on acquisition costs, labor and materials for fix up costs, insurance and property tax expenses) be reduced by selling and closing as soon as possible after the rehab was completed. Before we assisted others in selling their property, our own real estate was used as “guinea pigs.” After two years of selling our property using the auction method and after tweaking and adjusting our marketing program, we felt comfortable selling for others. Our goal was to sell real estate quicker and more efficiently without sacrificing the net amount our clients receive at closing (compared to the traditional list and sell method). Several of our clients are Realtors who make their living selling real estate. Due to the fact they come to us to not only sell their own properties but also properties for their clients, we must be doing something right. Many people think when a property is offered for public auction, the resulting price will be much lower than if it was offered at a listed price. More than likely if the property is listed at exactly the right price the marketplace is willing to pay, and the market is properly reached, the property will most likely sell quickly. The problem is most properties are not listed at exactly the price the market is willing to pay… therefore most properties don’t sell or end up selling at a lot less than their potential. Appraisals and comparable sales are just guesses of a property’s true value. Unlike a bar of gold or a share of stock, where price is set daily by supply and demand, any piece of real estate has its own unique value. Its price has little to do with value, people make value. Real estate is worth whatever people will pay. The auction method, together with our state of the art marketing program, where much more than the MLS and a sign are used to attract buyers, allows the price to match what the property is really worth. By creating both urgency and emotional competition using the auction method, we’ve found our clients avoid selling too cheap or sabotaging a sale by listing at a price that’s too high. Hopefully this gives you some insight into how our service is designed. Thank you for your interest in our company. Please feel free to contact us if you want more information or would like to sell your property quickly at the highest price the market will bear.
Thank you Nick Manfredi and the Inland Empires Investor Forum. About Inland Empire Investors Forum
The Investor’s Forum provides a monthly meeting location for real estate investment instructors and strategists to teach. We liken our meetings to a wine tasting event. With variety comes insight and awareness of ones own preferences. There’s lot’s of ways to do this business so we expect attendees to bring their thinking caps and judge for themselves. (Go to the “monthly meetings” tab for more info regarding attending). We buy houses and apartments with private funds. We buy from owners as well as banks and other investors. Occasionally, sellers prefer to sell with terms and we can meet that need as well. We purchase through Forum Real Estate Investments Inc., an independent real estate investment corporation. Monthly meetings provide a “forum” by which local investors both learn, share contacts & opportunities, and network with one another. For more information visit www.ieinvestorusforum.com
| Website: | http://www.thenorrisgroup.com |
| Phone: | 951-780-5856 |
| Fax: | 951-780-9827 |
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