I Survived Real Estate 2023 | Part 3 #852

I SURVIVED REAL ESTATE 2023

The Norris Group’s annual award-winning event, I Survived Real Estate, held last October 27th at the Nixon Library in Yorba Linda. Our 16th annual black-tie gala benefits Make-A-Wish and St. Jude Children’s Research Hospital. Since 2008, together we’ve raised well over $1,000,000 for charity!

The past two years have been like nothing we have seen in our real estate market history.  There are still so many unanswered questions about how the economy is going to change.  Pricing, The FED and Inflation is a lingering problem for working class America.

In this episode:
Bruce discusses the history of mortgage rates and how they've affected housing prices
Real estate market trends and foreclosures
Bruce discusses the current state of the housing market, highlighting the challenges of predicting future price increases or crashes.

Hope you enjoy!

The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669.  For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.


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Transcript

Narrator: 0:00

This is The Norris Group's real estate investor radio show the award-winning show dedicated to thought leaders shaping the real estate industry and local experts revealing their insider tips to succeed in an ever -changing real estate market hosted by author, investor, and hard money lender, Bruce Norris.The Norris Group proudly presents our 16th annual award winning event I Survived Real Estate. Industry experts join Bruce Norris to discuss the evolving industry trends, real estate bubbles, inflation and opportunities are merging for real estate professionals. All proceeds from the event benefit Make-a-Wish and St. Jude Children's Research Hospital. We want to thank our Platinum Partners. Inland Empire Real Estate Investment Club, San Diego Creative Investors Association, White Feather Investments, Wilson Investment Properties, uDirect Ira Services, MVT Productions, and Realty411 Magazine.

Bruce Norris: 1:12

So here we are, you know, we're hovering around this very high number 850. And the affordability number this is the chart that I look at one of the comps we have, over the years we created comps to tell us that a cycle is over. This is one of the charts that tells us a boom cycle is over affordability hitting 17% '80'89 '05. Then it went down to 12 in '07 or '06. That was fake, you know, we had we had people lying on loans. And now we're down to that 17 or 16. It basically saying you're done. This, this upcycle was over. But we have some things in place that we've never had before. And we'll talk about that. Here's a percentage of median income. This is the other comp, if you will, what does it take out of your budget to buy the median price home with 20% down? And we're at 70%. Now there's a history of that. Did we have it in crazy times? 2006? And seven? Yes. And we had something similar in 1980 and 89? A very exaggerated here's a good question, though. Do you stay there? Is there any history of staying there's spending 70% of your budget on house? No. See, that's the scary part. So you know, maybe we're getting comfortable saying well, yeah, we'll just stay there for now. Well, when does that happen last? That would be good to ask. Okay, so if it stays there, there's got to be something unusual for it to keep there. Because look at the history of it, you spent a lot of time under 40%. So if you want to know what the price damage is, just take a look at 70% and put it into 40. Is that a huge price hit? It is? That's what should happen mathematically. So a little while we'll talk about why that's probably not going to occur. Here's a history of mortgage rates. It's a really interesting thing. You know, again, when you study charts, and your agenda is to find out the truth, you come up with amazing things. Interest rates went from 1974 to 1980, interest rates doubled from seven and a half to 15. How would you like to have been in that, in that stage? You know what happened to price? They tripled. Think about that. The median price in California went from 34 grand to 105. And interest rates went from seven and a half to 15. So when anybody says well, of course when interest rates, and I've debated a lot of PhDs that this sentence has come out of their mouth. Of course, when interest rates go up, prices go down. Really? You just had to look to charts to come up with a better answer than that. And so and then 2008 and nine, we have an interest rate that's a little less than that, right about six, and prices went down by 50%. So here's a good question for you. If you absolutely know the direction of interest rate, what can you absolutely tell me about the direction of price? Nothing. Isn't that fun? Well, that's good to know. Because then you can go okay, well, what else matters? Because it's more than that. So one of the things about interest rates is that we've had a sequence that happens after affordability. And it didn't matter what the interest rates were, it happened just the same. So whatever it were the interest rates were 13 or 10, or six or five. What happens after you hit this affordability number to other charts? Is is damaging. So what happens first is you explode in an unsold inventory. So inventory goes up now if you're not in 1980 and 81. How's that for a chart of a lot of inventory? You know, we feel bad. Well, we got two and a half months. Oh my gosh, they had 22 months of houses, 30 months of condos, 10% unemployment, 15% mortgage rates. Price hit? Zero. See, that's it's fun when you when you study charts and go, Okay, well, I have to contend with that because that was in fact, what happened. So why didn't you have price damage. And that's what's neat about looking at this and say, Okay, I could have all those bad charts, it must be missing a bad chart, that means more than what's there. So that's maybe what's tonight's a little bit about. So within two years of reaching this low point, and affordability, this is what happened to inventory and the different cycles, four months to 22 months, six to 13, two and a half to nine, you have a big price hit two and a half to nine, and no price hit and four to 22. So maybe the makeup of the inventory is more important than the months. This is a sales, so you hit 17% affordability. And the sales go down. What's going to be interesting, you know, at the end of 2023, the amount of commissions made compared to 2021, will be about 50%. To the realtors will the rule is you can say the realtors are still fully employed. Or you could say that they have a 50% unemployment. That's actually a correct number. So this industry is not doing well. So sales went down, new construction goes down after you hit that 17% affordability, it goes down if it will take a look at the numbers that 2005 to 2007. How could you build a house when you could buy a two year old house for 20 cents on the dollar. So you couldn't build that's part of the cycle. Now this cycle, this is California numbers we decided not to build new houses in California parent, we don't need them anymore. Usually, at the peak, we have 150,000 houses built and this time we peaked at about 60. And usually there's a ramp up, you know you do 90 and 100 120. We never did any of that. So apparently we don't need new houses. Or we'll talk about some of the policies that are in place that make it very difficult for a builder to do that. Unemployment again, affordability hitting 17% tips, all of these charts into negative territory. There's the unemployment. So from 6.9 to 10, 5.1, to nine and a half 5.4 to 12 and a half, and this cycle 3.62. So what's interesting about this cycle, it's not cooperating with history. So you have to go okay, well, why is that? Trustee sales. How's that for nice chart? Percentage wise, it's dangerous everywhere. It's like 888% On the first cycle is 888%, I think on the second cycle, and then it's 1000s of percent in the third cycle. So and this cycle, it's not up, it's down. So there's something weird about this cycle. So anyways, affordability recovers. And so this is what's interesting is as affordability goes back up, every other chart in real estate gets hammered of higher affordability does not help other charts. You're saying I have five minutes? Okay. All right. So this is the median price history or history after 17% affordability. So different reactions in the in the 80s, it goes up. In the 90s it goes down a little in 2007, 8, 9 it crashes. And now we have to make a new decision. What's next for now? Well, there was the trustee sales is going up in percentage. But here's what they were as a percentage of the transactions and all of a sudden it starts to mean something. So this is in 1980. We have all those other charts that are terrible, but the transactions, the number of trustee sales if you look at the right, whereas one in four, if you're an appraiser you don't have to say that that's the dominant number. That's the value of everything. Totally one in four sales. Matter of fact you can probably ignore that. If you go to the 90s it's about 40% and you started to have some price damage as we went to auctions and we bought those those became comps that started to hurt the retail market. But what happened in 2008 it was 7 in 10. It was the market. If you were flipping houses in that year, you could buy a house that was 365 three years ago. Buy it for 65 grand, fix it and have 25 offers in one day for 125 and the appraisal come back at 90 and why was that is because all of the inventory was REO selling for below 100. And the appraiser couldn't ignore it. That's when you have damage is when you have a category of real estate that dictates the comp of every other property. So when you go forward, you have to go okay, are we going to have a pile of trustee sales? Or maybe that's not the only question you have to ask, have we ever seen another chart damage inventory? So Grand Junction, Colorado, in 1984, prices there, I bought all of the fourplexes HUD took back in one buy. They were 200 grand, I bought them for 40. Okay. What happened there, oil shale left, unemployment went through the roof. That's what caused the foreclosures. So there was a domino that tipped over the unemployment. So that's the chart we have to look at this cycle, or is unemployment going to tip over? Is it going to tip over other charts? Okay. All right, five minutes, Joey, okay. All right. So let's get to why that's probably not going to occur. These lines are in billions of dollars. So if you look to the left in the cycle where interest rates were really cheap, we borrowed over a trillion dollars for lots of quarters in a row. My guess it's not wasn't just one loan per person. What if you had a chance to get four and a half percent for the first time? Holy cow. And then next year was three and a half. And then next year was two and a half? You probably refi three times. Matter of fact, when you did that, I probably think there was a conversation. So we've always wanted an office or a pool, and we can have one now that doesn't even raise the payment. Let's do that. So it's interesting that maybe if you made those decisions, you're not going anywhere this time that you're staying there. This is the amount of excess savings, which is it was all the way up to I think almost two and a half trillion now. It's about 700 billion. But what was normal look at 2020 quarter one. Not much. So we still have more savings now. Huge amount of net worth, adjustable loans, man, they were very small participant in for the last decade. Huge amounts of equity, low LTV for the equity position. We were pretty disciplined in the cycle. We didn't cash out a lot of equity. We refied and refied but we refied to lower interest rates, and probably didn't pull out a lot of money. I think the lender learned a lesson. Maybe we shouldn't foreclose on everybody, now would be a bad idea because it dictated the value of every other piece of real estate in existence when they did that. So I think they've learned their lesson. And it's interesting. If you go on YouTube, can you find the story that says, Oh, my, you know, foreclosures are exploding? Well, we have, you know, we have some data people today, though, talk about that. See, exploding is interesting. It depends if you have an agenda can I get an audience, please? You know, so if you have 10 foreclosures that go to 30? Is that insignificant or is that a 300%? Increase? It's insignificant, because again, it has to be a percentage of the sales to be to be damaging to the real estate market. What's interesting is this is the existing home for sale. It's way down. It's a million units. And at normal times, it's two and a half. Well, why is nothing for sale? So I'm a pretty practical person. So I think about that. Okay, if I had a two and a half percent mortgage, what's the most valuable asset I have? It's the mortgage. I'm not going anywhere. What if I get transferred? Is that house going up for sale? Or am I renting it for a grand cashflow? And I'll come back and live there again someday? See, that's more likely to happen. That's a very rational decision. What's coming up in a decision, let's say, and again, smarter people will be on the panel to think about what's next for interest rates. But just as a practical thing, let's say we get mortgage rates to five and a half. Does that induce the the seller off his you know, inactivity because he has a three and a half percent mortgage, does that induce him to sell or does it induce the buyer to come off the sidelines is trying to say no to eight and now he has a chance at five and a half? See my my guess would be you have a lot more buyers show up than sellers that have to sell. So it's a really weird market because there's no history of staying at the levels that were at. Job openings are still there. Household growth is still there. This is what's interesting. So what has occurred Is that normally, new home sales represent 15% of all sales. And existing inventory is 85. And now builders are 30, 33%. They're not selling more homes, by the way, they're selling as many homes as they used to, because the whole market is down by half remember, but the builder is like got a shocked look on their face going, huh? We're okay. Matter of fact, we're actually a more desired inventory, because there's nothing else for sale in the existing world. So that's the thing that's occurring right now. So the lock in effect is actually really in place. I think this chart says that something like 60, or 83% of mortgages are under 4%. We also started having, before the mortgages got really cheap, we already kept our homes for a lot longer than we used to, when I bought a home in 74, the average hold time was four years. Now it's 13. And now you get people two and a half 3% mortgage rate, I have a feeling they're not going anywhere. Which means you have a lot less homes for sale. This is a guy that has a report that I really like LA Housing towards does all the counties in California, this is the missing listings. You just don't have the listings, people are not going to sell. Okay, so this moodometer reading. Let me just go forward to see okay, I'll go back there and look at the scary until the last one. I want you to look at this, because this is the history going back all the way to 1980. How much time have you spent at 70% of your income being necessary to buy a house. It's euphoria. So I want you to think of the mindset that gets you there. Euphoria is 2021, when you have a house for sale, and you know that within hours, you'll have 12 over bids for all cash. And you're just like, I'm so good at this. That's, what happens. That's how you get to 70%. Now we're at 70%. And that emotion is not there. So if you're selling stuff now, what happens by noon, nothing. You're going to see I'm a seller, so I feel these emotions, you know, you're going, Okay, I'm not going to look, you know, you just you don't want to get motivated. But there is now that balance, where the stuff for sale doesn't have that immediate multiple buyer. It has a buyer, we just sold something yesterday at a price. That's exactly what it was two years ago. But there wasn't 10 people wanted at the same time. So it's stable, but I want you to realize it's never done what it's doing ever. And if you went back to a normal percentage of what we're making and what it cost to buy a house, that's the next chart. Okay, the moodometer instead of saying 70 many years, usually 9 years in a row in each of the other cycles, the last few cycles would be a 40% mood, taking you're going to spend 40% of your income. Well, right now we're at about 860 median price, that would take that down with an 8% interest to 470. So you don't get too cocky, okay. So what's, what's actually likely to occur is you're not going to have any price increases for a very long time. But you probably aren't going to have a price crash either. And it will be really interesting to see if you have interest rates go back down. I can't wait to talk to you know, some of the people that have bigger brains than I do, talking about the interest rates, because, again, you can get online and see all kinds of people going, Oh, it's gonna be down to 4%. No time and then other people read, it's going to be 12. So I'd like to know where it's going to be. But the higher the rate, the less inventory is going to show up. And you have buyers you don't what percentage of buyers right now in Cape Coral, there are 60% of all transactions are cash. That's a big advantage. You know, that's one of the reasons I'm in I'm in Florida, you know why? Because guess who migrates there. They migrate there from New York and New Jersey and Canada where markets are twice as expensive. So they sell something with a million dollar loan on a $2 million house and buy a house, that's free and clear here in Florida 4 million. It's way nicer than what they sold. That's why I'm there. So anyway, all right, Joey, I know it took longer than five sorry about that. If he wasn't retiring and I'd fire him right now.

Narrator: 19:50

See ISurvivedRealEstate.com for event details, information on all our generous sponsors and to connect with our speakers. We'd also like to thank our Gold Sponsors, Chase Leland Photography, Fair Trade Real Estate, Inland Valley Association of Realtors, Keystone CPA, Leivas Tax Wealth Management, NorCal REIA, NSDREI, Pasadena FIBI, PropertyRadar, The Outspoken Investor Tony Alvarez, White House Catering, Windermere Tower Realty, Rick and Leanne Rossiter. ISurvivedRealEstate.com for event details, in For more information on hard money, loans and upcoming events with the Norris group, check out the Norris group.com. For more information on hard money, loans and upcoming events with The Norris Group, check out thenorrisgroup.com. For information on passive investing with trust deeds, visit tngtrustdeeds.com.

Aaron Norris: 20:59

The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669. For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.