I Survived Real Estate 2023 | Part 4 #853

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:
Mortgage rates and their impact on homeowners
Demographic profile of the homebuying age in the next decade
Housing market trends and inflation

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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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.

Joey Romero: 1:12

In the interest of time, we're gonna find the full bios for all of our guests on ISurvivedRealEstate.com but I'd like to bring up to the stage Sean O'Toole, founder and CEO of PropertyRadar, John Sebree, the CEO of the California Association of Realtors, and Doug Duncan, Chief economy of Fannie Mae.

Bruce Norris: 1:41

Well, thank you guys. I'm excited to start, I want to ask this question because to me, this is important. The ramifications of having an under 3% mortgage in place. I'd like to, you know, just give that some thought and think about like a positive or even a negative that has caused in the real estate market. I'll start with one. I think it accelerated prices for sure. So talk about that huge equity position, showed up very quickly. So even if you got in and 2019. Two years later, you had a 50% equity. That's not normal. But it also builds in safety too. So they got a mortgage rate that's nothing and they got an equity position that normally takes a year to show up or five years, 10 years to show up. So that's, you know, ramifications of a 3% mortgage. What what are the ramifications do you think happened? Anybody?

Sean O'Toole: 2:48

Yeah, I'll go. We talk a lot about the lock in effect that people have with that.

Bruce Norris: 2:53

Yeah.

Sean O'Toole: 2:54

But I think one thing that I don't see a lot of is that now 43% of homeowners in the United States have no mortgage at all.

Bruce Norris: 3:02

That's right.

Sean O'Toole: 3:03

So those folks can move, they have the ability to, they're not locked in at all. So that's for those folks in the room thinking about who to try to transact with that's a good group to think about. And on the equity piece. Overall, we now have 70% If you take the whole homeownership stock, it's 70% equity.

Bruce Norris: 3:24

Yeah.

Sean O'Toole: 3:24

Not 70% debt. 70% equity.

Bruce Norris: 3:27

Right. Huge, huge safety valve for all kinds of, you had brought something up for the first time that I thought wow, it's like every everybody that owned a home gotta raise too.

Sean O'Toole: 3:38

Yeah.

Bruce Norris: 3:39

A big raise, because your went from whatever you had to two and a half or 3 mortgage, the net that that created was like a car to payment.

Sean O'Toole: 3:49

I think that percentage of folks free and clear and the increase in income essentially because you have this savings and expense, but this increase in your, you know, disposable income that we had during this great refinance boom is I think, why so many people have underestimated the economy.

Bruce Norris: 4:07

Yeah, that's a good point.

Sean O'Toole: 4:08

That's why the restaurants are so busy. And, the rest.

Bruce Norris: 4:11

That extra dough.

John Sebree: 4:12

Well since you live in Florida. I was with the Florida Association of Realtors in 07, 08, 09 and we were Ground Zero, you know. And so I think that's the difference that we see now, when you're showing your charts and the potential for trustee sales. There's so much equity now that we didn't have in 06 and 07 and 08. And so we're not there are buyers read, the second someone can't pay their mortgage, we've got a need for that inventory. So that's why you know, we're not going to see a repeat of 06, 07, 08 Because of that.

Bruce Norris: 4:50

Yeah, you're not going to have that or, you're not going to have that trustee sale turned into an REO.

John Sebree: 4:54

Right.

Bruce Norris: 4:54

That's right. Okay.

Doug Duncan: 4:56

I live in Cape Coral, and I just came here to figure out who is driving prices up.

John Sebree: 5:06

I bucked the trend. I'm moving to California when everyone else is leaving.

Doug Duncan: 5:13

Yeah, I would bet there's nobody in the room here that present that expected to see 3% mortgages in their lifetime.

Bruce Norris: 5:22

Right. Yeah.

Doug Duncan: 5:23

And that 3% mortgage was a function of policy. And the the lock and effect is a distortion of markets driven by policy. So and there's not really a way to reverse that. We did a survey anytime I'm a little bit like you, in the sense that every time I read a headline that doesn't necessarily comport with what logic would suggest. I, you know, I question it, and we have a survey function. So we're reading all the headlines about lock-in. So we actually surveyed 1000 People in the Fannie Mae portfolio who had bought a home in this time period. And we asked them, are you locked in by interest rates or is there some other factor at work? About a quarter of people said, Yes, we're, gonna stay here and because of the rate, but a bigger share, said, well, the rates were important. But we were at a phase of life where we were thinking about making a change, maybe a couple of years from now, because of where our kids are relative to school. And COVID came along, and we needed more space. So it was actually the combination of COVID life change, and that incredible opportunity from an interest rate that shifted what we view as four years of business into two years. So what you're feeling today is the two years of payback from that business have been moved forward in time. And we would agree with you that the a lot of those people, they're the Gen Xers who never get any airtime. So we're trying to give the Gen Xers an airtime, now, they're locked in smooth move, good job. And I'm gonna suggest a bunch of them, like you said, are going to become investors, because they will keep that house because the mortgage payments $1,000 less than the rent in that market.

Bruce Norris: 7:24

Right.

Doug Duncan: 7:25

Now use that to either subsidize the mortgage wherever they go, or else, just take it as income.

Bruce Norris: 7:32

You know, if you did end up becoming unemployed, there's a good chance you'd be able to keep your home because like you say, the rent would be more than your payment. So you seemed like you'd find a way. And the equity, maybe you could access? Is there any appetite to let these loans move forward to another buyer at their current rate?

Doug Duncan: 7:52

There has been a bunch of talk in the press about assumable loans, that the challenge there is whether you have the cash to make the difference in the price work, because they're going to whoever is the seller, you may be able to assume that mortgage, but there's going to be a cash calculation about what the value of the property is. That you'll have to satisfy. And a lot of people may not have that cash.

Bruce Norris: 8:17

You know, it's interesting that, you know, years ago, you didn't need to assume the loan, right? You could do subject to, or it was a simple assumption, I think there was a $35 check you wrote, and you just put your name and place it the other name. Is there any appetite to do it, the reason I'm mentioning as close relatives right now are making as a collective group 50 cents on the dollar of what they made. So you almost have to create a transaction.

John Sebree: 8:45

Well, that's why when we did our budgeting for 2024, we're estimating an 8% decrease in membership 8.3% decrease in California Realtors for next year. But we do have some good, there's some light at the end of the tunnel where we're actually estimating home sales will increase by about 20% next year, which means the realtors who stay in the business will be making more money. So please know there is light at the end of the tunnel from our perspective. But on assumable the National Association of REALTORS just had a workgroup on assumable mortgages, looking at every government mortgage program and others. I don't have the final results yet. They're not out yet. But we can maybe circle back on that because it's definitely a huge interest to us. There are some government agencies that don't do a similar goals like the Small Business Administration, which I think could help a lot of us. But most government programs have some kind of assumable function. We're just trying to get a better handle on giving Congress some direction on how they could maybe help us in that area.

Bruce Norris: 9:52

Okay. So now we have an 8% mortgage rates, right? So I'm sorry, we have about an 8% mortgage rate?

Doug Duncan: 10:05

Yeah, some people are.

Bruce Norris: 10:06

Yeah, something like that. So I was thinking about the negatives of that, first of all, if you're a realtor a lot less business, but there's also, let's say, I didn't get in, you know, I didn't get one of those three or 4% mortgage rates, I was not at the right stage in life, I've never owned a property. And all of a sudden, I'm probably feeling I don't have a shot. That's, you know, that would occur to me. So I guess I'm trying to think about the mood of the of the person that's thinking, I may never have an opportunity to do this. You know, what's, that doing to, it's almost like the haves and have nots, the people that have the two and three and 4% mortgage rates and the people that are renting, but the rent went up like 50%, in two years. I mean, you know, we had rentals and go, Holy cow.

John Sebree: 11:00

Yeah, I mean, one of your charts, you know, you showed, or, actually, you said that, when interest rates come down, maybe to five and a half percent, we'll see this movement, that's what we believe is going to happen. Those of us who've been around a long time, also saw on your chart that the long run average for interest rates is closer to where we are today. It's just the public doesn't know that. It's not what they're feeling. They need to see some some interest rate relief. And so I think they will start to move, but for those of us so you did say, you know, we don't know what's going to happen with prices. But if you look at the last number of years, and prices continued to go up and shocked us all, if I bought today at seven, you know, if it's seven and a half percent next month or in a couple of months, but in mind, my mind, I'm thinking the value is going to continue to increase. So isn't that a good thing? Because wouldn't I rather buy it today and gain that? Equity?

Bruce Norris: 12:03

Why do you think that equity is going to happen?

John Sebree: 12:05

Well, that's that's definitely an that's the uncharted territory. However, we're so under built in the United States, that there is so much demand for the property, and it's there. I think it's defying all you know, it's just what, you know, we can't predict obviously, we don't have a crystal ball. But if we're millions and millions of units under built, that's a position we weren't in 10 years ago, that's not a position we were in 20 years ago. That is the place where we are today. And there's so much demand for this, whether it's the investor, the first time person who's paying more in rent, like you said, who wants to own a home, I just think the demand is going to keep, the demand is huge.

Bruce Norris: 12:51

Okay, let's go back. I'm not being argumentative. I'm just playing devil's advocate.

John Sebree: 12:57

That would be a lot more fun for them if we argued about that.

Bruce Norris: 13:01

Well, what you just said there were millions of behind. So in 2009, when prices were 60% off? Were we millions ahead?

John Sebree: 13:14

I think we were, so I don't, we'll ask Cornelius that when he's up here. Because he'll probably know is the builder. But I think we were building of course, I was in Florida, I remember, at the time and builders stopped building.

Bruce Norris: 13:30

Well, and in 08, yes. But they built like crazy, in 05 and 06.

John Sebree: 13:34

They had built and built and built, but then they just stopped. So when you sell your inventory, you lay off all your people you're not building, then we end up over this 20 year period where suddenly we just haven't built. And so we don't have the inventory to meet the demand. And so that's why I mean, again, we don't have a crystal ball. We can't say that prices are going to continue to increase the way they have. But I don't see them going down. Because, again, there's so much demand, whether it's the cash buyer that can buy if they have the opposite if someone else doesn't want it, you know? Yeah, I just don't see prices falling.

Doug Duncan: 14:18

May I pick up on that a little bit. If you look at just a pure demographic profile of the country, the the millennial age group is about three to four years away from peak first time home buying age, okay, and then there's a little bit of a slide and then the next generation has actually a peak at the beginning of the next group, which is about the same in terms of number of people as the peak of the millennials. So I would say for a decade demographics are pretty strong. And then that will start to slide if we don't reform immigration, because the domestic birth rate is not replacement. So eventually we'll start to see a tail up. But you mentioned in your charts, which by the way, I'm stealing all of them.

Bruce Norris: 15:10

Half of them are Fannie Mae's anyway, I think.

Doug Duncan: 15:14

Well, I think it was Mark Twain that said theft is your sincerest form of flattery. You mentioned the share of new homes. total home sales.

Bruce Norris: 15:29

Yeah.

Doug Duncan: 15:30

Which is abnormally high. Also the share of first time buyers, as a percentage of new homebuyers is also at a very high level relative to history. So there's a lesson there about the distortions from normal patterns in housing. So the lock in effect plus the fact that the boomers are doing what they said they were going to do all along, which is aging in place. And they're also pretty healthy. So that's, and they learned during the pandemic, that if you have an iPad and an a connection to your doctor's office, you can get home health care, which will keep them in their house longer. So now you have the lockin Gen Xers and the boomers staying in place, then the question is where does the supply come from, for those first time buyers who typically buy existing homes and then put in sweat equity and move up? So there was a little lesson in how markets work about, what two months ago was the first time or maybe maybe even three now, when some mortgage rates passed 7%. Within a couple of days of that the secondary market, the mortgage backed securities markets sort of stopped. So then within a week, you started seeing lenders offering to one interest rate buy downs and builders offering to do 2% buy downs permanent on on your mortgage rate. So why did that happen? Because first of all, mortgage backed securities investors did not believe that a mortgage backed security backed by 7% mortgages would still be there a year after the Fed, finished their inflation fight and brought rates back down. So they weren't going to invest in that. So the builders recognize that the problem of the first time buyer is not granite countertops, unfinished basements, it's a basic house they can afford from a payment size and down payment. So the buydown of interest rates recommend the builders recognize the problem of the first time buyer who has become a bigger share of their business that put the rates down to where a mortgage backed security investor would purchase an MBS backed by those loans at 5%, but not at 7%.

Bruce Norris: 17:56

See, what's what's interesting about what you just said, so it seems like a lot of the first time buyers would like new homes, but when you're building them that product has the smallest margin.

Doug Duncan: 18:06

Yep.

Bruce Norris: 18:07

So you know, you're not putting any fluff in there doesn't have a pool than any of that. So your margins tight. So when you start buying down rates, that's not cheap.

Doug Duncan: 18:16

Yeah.

Bruce Norris: 18:16

That could take that could take your margin. So I guess if you're a builder, you know, when to get quick up here, I'm going to ask him, but when you look at your target audience, you know, we've building spec houses, and we intentionally built to the cash buyers standard, if you will, what do they want? You know, they want the pool and they want to look at water behind her house and all that. That's the house that just over 725 that never sold for more than 725, even two years ago, so that market is still healthy. And a cash buyer is more likely in that you know, so that's when the builders make good decisions that they go after the first time buyer and an 8% mortgage rate. And they want to buy a down you know, we looked at that. I think the buy down for a 700 grand house was approaching 50 grand.

Doug Duncan: 19:08

Yeah, yeah, it's a lot of margin.

Sean O'Toole: 19:11

On a temporary buy down on a specialist to one know your to your job to do the questions. On the temporary buy downs like the two one and that kind of thing. How's that different than a Pay-option ARM? And the problem we got ourselves into with those and...

Doug Duncan: 19:27

It's a relevant question. No question. The troublemaker depends on well, it depends on what's required to qualify for the loan. So any of the adjustables or things that have adjustable components now have to be underwritten to the interest rate to which they can reset. Okay, so the law was actually so...

Sean O'Toole: 19:51

That is happening on this...

Doug Duncan: 19:54

It's part of the reason you don't see as many as much of a pickup in adjustable rate loans as you might have thought you given the pace at which rates rose.

Bruce Norris: 20:02

Yeah, when you buy the rate down up front though that's a different thing. It's not even connected to the transaction actually, because you do that in advance. So if you buy, let's say I'm gonna buy$2 million of mortgages from eight to six, you'd write a check for 150 grand, and then you get to use that for the next transactions. But you can also pay costs if you want for that transaction. So you know, you might pay a point or something that's allowable for the buyer, but you've already bought the right for the fixed now you might be able to raise your price, right? So you could compensate and say, Okay, we're not gonna get 725 If we're not going to net 725 If we're paying 50 grand for but we may we get 750 and eat 50 grand, you know, and now we're, you want to be the only game in town, I guess, if you're a seller, you go, Okay, how do I set myself apart and say, okay, whoa, look at that. That's why I would buy that one as opposed to this one. So, okay. Joey, we got a couple of minutes. One? Two? He's hard on me, man, I didn't want to, okay. All right. transitory, transitory. I love that word. You know, when we were trying to see if we were going to have inflation, the, you know, the smartest people in the world are going to transitory. And now it's certainly turned other than that. So what were they looking at that they thought was going to happen that didn't happen?

Doug Duncan: 21:41

Yeah, when the Fed first used the word transitory I, in speaking to audiences, I said, I reached for my Oxford English Dictionary, which was next to my computer, which I assume you have yours. And when I looked up the first definition, it says, not permanent. Yeah, which life is transitory. So what they were looking at was the ships lined up outside of Long Beach Port. So they were looking at the bottlenecks that the virus had caused in the chain of the construction of goods, goods and services. That certainly was part of that certainly was transitory in that it, the businesses had to adjust to understand, first of all, what the implications of the virus were, and then adjust for the safety of their workforce. And that was a global issue. It wasn't just a US related issue. So the you'll notice that there is no line of ships outside of Long Beach now. So only part of the issue was transitory part of it was we're restructuring supply chains. And that's expensive and time consuming. And so you, we're still seeing that effect. But we also had this massive transfer of money to household budgets, essentially, the it was all deficit funded, which was now why we're paying as much interest on the federal debt as we're paying through the Defense Department. So that's still working its way through the system. If think about the what happened with consumers, they got a transfer of cash from the federal government directly into their deposit account. And they use a significant portion of that to pay down credit cards, big, big declining credit and debt, and they saved the rest. So that's two ways that they now have spending power. You liked your chart that showed they did not cash out in refi, lowered payments. So now they have more disposable income from that perspective. You mentioned, we sent them home to work from home. So they got an immediate pay raise from the fact that they no longer had the commuting cost. So you start to add all that up, tremendous boost on the demand side while supply was stuck. And you got 9% inflation out of that. It's not all out of the system yet. But it's coming out. And we think that there's going to be a downturn starting probably in the first half of next year.

Bruce Norris: 24:27

I've run out of seconds on this. We'll to that on the next phase. But yeah, I'm really interested to see when you think a recession is going to occur, and then also, the reaction of the interest rates. One of the things that's really interesting is the spread between the mortgage rate and the 10 year is a lot bigger than normal. Why is that right now?

Doug Duncan: 24:52

Who's gonna replace the Fed? The feds the single biggest mortgage mortgage backed security holder in the world they own 21% all MBS all the banks and depositors together on 29.

Bruce Norris: 25:04

Okay.

Doug Duncan: 25:04

But the Fed is no longer buying and they're letting the portfolio run off. So one of the questions and in the market is who replaces them, because they were not a returns buyer. They were a policy buyer.

Bruce Norris: 25:16

Right.

Doug Duncan: 25:17

And they intended to remove the volatility. Now they're letting volatility back into the market. So the spread is widened.

Bruce Norris: 25:26

You think that'll correct?

Doug Duncan: 25:28

Or the time it will once the market figures out? Who's going to be the new buyer and the new buyer?

Bruce Norris: 25:33

You think the Fed will step back in?

Doug Duncan: 25:35

I did not under Powe'lls administration. He never liked that in the beginning so and they have a stated policy decision of eliminating the portfolio.

Bruce Norris: 25:47

Eliminating all of that?

Doug Duncan: 25:50

The MBS portfolio right, going back purely to Treasury.

Bruce Norris: 25:53

So you're saying that represents 23% of all existing mortgages, and they want to bring that to zero?

Doug Duncan: 25:59

Correct. But they're not going to sell. They're just letting it amortize. So it will take a while. Average coupons around 4%.

Bruce Norris: 26:08

Okay. All right. I guess we'll take a break.

Joey Romero: 26:13

Let's take a desert break for 20 minutes, and then we'll come back for two more panels.

Narrator: 26:25

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: 27:35

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.