I Survived Real Estate 2023 | Part 6 #855

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:
Inflation rates and their impact on the economy
Doug Duncan and Sean O'Toole discuss the current state of the housing market, with Duncan expressing concerns about a potential recession and O'Toole highlighting the impact of new categories such as Airbnb and the build-to-rent model.
Craig Evans mentioning travel industry recovery and the Airbnb stuff picking up again


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.


Video Link

Radio Show

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: 1:13

We started in 2008, which is why we use the term I Survived. Not very many people were doing very well. All right, goodness gracious. I don't want to leave early. So let's see what we got. Okay, I think I'm going to circle back around to something that's, I think, important to all of us. And maybe that's first is talking about inflation. So let's talk about that because there's in my mind, I'm not I'm not an economist. So what are the elements of inflation? I guess, let's cover that. And what seems to be headed in the right direction to have a recession? I guess, maybe, Doug, can you touch on that?

Doug Duncan: 2:14

Well, the the textbook definition of inflation is the rate of change in the general price level. So, there's a little bit of a misperception today about the level of prices versus the change in the level of those prices. So, that has slowed down significantly, at its peak, it was about 9% right now, it's around 4% on a year over year basis. The core, inflation is actually increasing just slightly faster than headline inflation, because food and energy have come down, somewhat. So headline is, a little less than core, core includes housing and that's one of the things that the Fed is watching. There was some expectation, which you've both panels have touched on about the lack of a direct connection between interest rates and prices. Because there was a sense that prices would fall and they did for one quarter, the third quarter of 2022 prices nationally fell. The Fed kind of was queuing off that and expecting the continuation of the decline in rents, which is really the component that is, but house price gets involved because looking at what rent you would have to pay in order to occupy the house that you own that's called owners equivalent rent.

Bruce Norris: 3:48

Right.

Doug Duncan: 3:49

So when house prices start going up again, which are our estimate is when the full year of 2023 is in house prices nationally will have risen 6.7%, which was certainly not the forecasts a year ago.

Bruce Norris: 4:05

Is there a lag in...?

Doug Duncan: 4:06

There is a lag, okay. It's because leases are signed, basically one year, they're renewed, like on an annual basis, so they get renewed over time to adjust for the rise in rents.

Bruce Norris: 4:20

And how big of a factor is what people make because you know, you're hearing like UPS, I don't even know that they want to strike, right. They just settled. And I think there was some another union that was about to do the same thing, so.

Doug Duncan: 4:36

Everyone's back to the let me tell you about the Uber driver that drove Ilana and I to the airport, and he was complaining about inflation. And I said so explain that to me. And what what he meant was that prices had gone up by 9% and had not come down, but his wages had not gone up similarly. That's really what he was talking about.

Bruce Norris: 5:01

So okay, but let's let's map that out. How would that react? One of the charts that I put together that surprised me, because wages doubled in in the 70s. And so there were, I was lucky enough that this one report from Cal Poly Pomona broke down the cost of the same house for 10 years in a row. So it was labor and parts same house for 10 years. So the plumber that it was making five bucks an hour, was making 10 bucks at the end of the decade, but was also interesting is what could he buy percentage wise of what he could afford? 1970 It was 78%. So his wages doubled, he lost 22% of his buying power. So I'm trying to get my arms around, everybody's getting a raise, that's not buying more stuff. Is that still marked as inflationary or is that deflationary?

Doug Duncan: 6:05

Let me answer it in a different way. I'll send you my favorite chart.

Bruce Norris: 6:09

Good.

Doug Duncan: 6:10

I call it the barbed wire chart. I grew up in a dairy farm and putting up barbed wire is no picnic. It's real simple logic. And it's very predictive. If you chart on the vertical axis, the median house price relative to median household income. So what you're saying is, somebody with a certain level of income can roughly afford a certain price. But that's adjusted according to what interest rates are if they have to borrow money. So the higher interest rates are, the less price they can afford relative to their income. And so what you see is that's very predictive in terms of econometrics, the regression equation on that is almost perfect until the bubble when we eased underwriting criteria and let and let people money giving them 30 years to pay back when they didn't have an income, didn't work that well. You can see it go way off the predictive line. Then we saw the bust, it went way below the predictive line. And then for four years from 2015 to 2019. It was exactly back on that line.

Bruce Norris: 7:25

Okay.

Doug Duncan: 7:25

Then the pandemic hit now it's way above.

Bruce Norris: 7:28

Okay, now, it's way above to the equivalent of 2006.

Doug Duncan: 7:32

Right.

Bruce Norris: 7:33

Correct? Okay.

Doug Duncan: 7:34

So what brings it down is the question.

Bruce Norris: 7:37

Yeah, that is the question. Because in 2007, and eight, you had a crash, the prices went down by 50%. But as we're seeing, we got nothing for sale.

Doug Duncan: 7:48

Correct.

Bruce Norris: 7:49

So that's going to be a pretty stable, ridiculous number. So if you look at that chart, over 50 years, you've only visited that peak of crazy times. And crazy times are seemingly to continue because of the math, there's nothing for sale. So is that going to keep inflation higher than normal? I guess that's what, is that going to be normal?

Doug Duncan: 8:11

It won't keep inflation higher than normal, but prices will stay up there. Remember, inflation is the rate of change in the price level. So we're not talking, we're just talking about prices went way up, and they're not coming back down. So they're likely to flatten at some point, although, well, as Craig, if mortgage rates come down to five and a half, will you see more action?

Craig Evans: 8:34

Get below best.

Doug Duncan: 8:36

Right? So we're gonna get back into the same problem that we have demographics pushing harder than supply, and you'll probably see price appreciation. So that will work its way back into the inflation measure, which is one of the reasons Powell is saying higher for longer.

Bruce Norris: 8:51

Okay. One of the things that happened when interest rates doubled, from 74 to 80. And you got to that number you're talking about in 1980, it was pretty equivalent to 06, not quite as bad and 2022. That number was reached after prior interest rates had doubled. We reached that same percent or higher when interest rates went up in like five months. We got there. So we really didn't even use a bar or interest rate hike. And we were already there. So in a way that was safer, because if you think about there was very few people that got into the market at the completely absurd multiple times their income, they didn't have a chance to do it, you know, there was very few of the people. If they were cash buyers, they didn't do it. And if they were borrowing buyers, there were just so few people that got pegged at that number. So that's probably safer for the market as well. What about components now that we're having to look at so thinking about inflation? The dead level. So we have, so we've got 30, what 4? $35 trillion? How is that financed? And for how long is it fixed? So maybe at some point, it was a deal or you're allowed to borrow 30 year deal money? Or is that like that isn't work in that world? And is that about to adjust to a very crazy number?

Doug Duncan: 10:24

I'm sorry, you're talking about the federal debt?

Bruce Norris: 10:26

Yeah. Federal debt. Yeah. Just if that's gonna go out of whack?

Doug Duncan: 10:30

Well, that's the chart I showed before drinks are served. One decision that you have to make about why interest rates have gone where they are other than the Fed was tightening monetary policy. The last six weeks or so are I think, a separate events. And they're either that fixed income investors who would buy treasuries have decided that growth is going to be sustainably stronger so that the Fed will continue to push on rates, or the size of the debt that has to be financed is so massive, that they're going to require more yield in order to make that investment. You have to make that decision if you're going to forecast today. We're more on the latter side. To me, I think if we're spending the same amount of money on paying interest on that debt as we are spending on the Defense Department, that's a misallocation of resources.

Bruce Norris: 11:41

So what is our negative per year now? Is there gonna go be $2 trillion dollars of debt growth? Okay, I guess we're gonna get to that 40 trillion cover pretty soon, unfortunately. What about war? You're just the uncertainty you watch TV? Just curious. What how does that play into interest rates or inflation? And debt, I guess? Anybody?

Doug Duncan: 12:15

You're all looking down?

Bruce Norris: 12:16

Yeah. Yeah, well?

Craig Evans: 12:19

We had this conversation, we had this conversation, and we were was gonna ask you.

Doug Duncan: 12:24

I picked, it was a bad selection of microphones why? Well, there's multiple effects. One of the effects is when defense spending picks up, it directly grows GDP. So one of the reasons GDP is picked up as we spent 118 billion so far on Ukraine, now that we have Gaza, also on the plate and of course, that raises the probabilities. China will be thinking about Taiwan. So you have people who don't like the United States considering whether or not we could support three fronts on war. There's different ways to execute on that. It can be significantly inflationary. So if you look at World War Two, there was an agreement between the Treasury Department and the Fed, that the Treasury would monetize that debt. That's certainly one possibility that could happen in this instance, as well. And that keeps it from being inflationary. So they just continue to expand the balance sheet.

Sean O'Toole: 13:39

And we're at 130% 137% debt to GDP, we're the world's reserve currency, Japan's at almost 300. If they can get to 300 as the world's reserve currency, we should be able to get pretty far assuming we don't have some major misstep. So everybody keeps thinking about this is like a next year event. I think it's, you know, if we stay on this path, then we don't get a good, you know, fiscal policy at some point. If we don't start electing people with brains. We're going to be in trouble. But it's not tomorrow.

Doug Duncan: 14:13

Yeah. That's right.

Bruce Norris: 14:15

Ray Dalio, have you read what he's written as far as that type of thing. Okay. So that's he looked at a 500 year chart of countries, which is crazy, right? I mean, I feel like I've got 50 years of real estate down and needs to be looking at 500 years of world history.

Doug Duncan: 14:35

I wasn't there for the whole thing.

Sean O'Toole: 14:38

Are you sure?

Bruce Norris: 14:41

But one of the things that he's certain of because of history is that whoever it has the reserve currency, loses it. And also he was concerned that when you get into this stage of all of his stages, he's I think this is a stage five, that the chance of war becomes increasing. And I just saw that quote from him, he thought there was chance of a World War at 50%, which is crazy. But, you know, I don't like watching TV right now, either. So I guess...

Doug Duncan: 15:19

The reserve currency is an exorbitant privilege. It makes people around the globe by our, is that fact. And it is one of the three strategic objectives of China to replace the dollar with the yuan. And it's a rational, strategic objective.

Bruce Norris: 15:40

Doesn't that include trust, though?

Doug Duncan: 15:43

It does. It's why the arrangement that the Chinese, the Russians, Brazil, I forget the other country, they talked about trying to create a competitive currency against the dollar. What do you think about the stability of contracts in those countries? One of the things that the United States has is contract law and courts that enforce them. That's a place where private investment takes place.

Bruce Norris: 16:10

So when you look out? And I'm sorry, I keep on directing. I'm not trying to please anybody opinion do what do you think? How long away are we from a recession? And when we get a recession that usually has the Fed doing a much different policy? So I'm just curious, do you think that's six months away? And what would drive that? I hate the time? Do you think that's within a year? Let's put it that way?

Doug Duncan: 16:39

Well, there's three rules to forecasting. Give a number, don't give a date. If you give me a date, don't give a number. And if you get it, right, don't like surprise. Forecast is public and I have a mild recession beginning in the first half of next year.

Bruce Norris: 17:05

Okay, so let's say that that's accurate. So you have a recession. What does that do? What say to the Fed funds rate? And what would that probably do to mortgage rates just approximate.

Doug Duncan: 17:25

I will assume that if the recession curves, the Federal achieve its 2% target. So rates will come down. But I would say when Powell says higher for longer, there's two ways to interpret that. One is that they're going to stay with the fed funds target where it is today for a longer time period, or when a recession occurs. If it's not catastrophic, they will lower rates more slowly than they have lowered them in the past.

Bruce Norris: 17:55

Okay. Okay, because usually, they are pretty aggressive.

Doug Duncan: 17:59

Right.

Bruce Norris: 17:59

Okay. So this...

Sean O'Toole: 18:01

But, you know, recession, there's a pretty big range of right? There are plenty of recessions that most people don't feel at all, we do have the fastest GDP growth of any country in the world right now. Which seems really surprising for you know, everybody's saying all this. You know, there's all this economic trouble.

Bruce Norris: 18:20

Yeah, that's why I'm actually surprised that that. I can't say I'm happy to hear it. But of course, interest rate wise I am. But didn't we just come up with a 4.8? Or nine? Yeah.

Sean O'Toole: 18:32

So I mean, and like, when was the last time we were growing faster than China? Then it's been a long...

Bruce Norris: 18:37

Long time.

Sean O'Toole: 18:38

Yeah. So. Yeah. You know, I think that I don't know how big you know. Is there a depth to your recrecession or anything? Yeah. Especially because...

Doug Duncan: 18:49

...on a quarter of a percent of GDP it's 5%.

Sean O'Toole: 18:54

I don't know that we feel that.

Doug Duncan: 18:56

Well, we're already feeling it in housing, right?

Sean O'Toole: 18:59

Yes.

Bruce Norris: 19:01

Okay. Fair.

Sean O'Toole: 19:02

Like we definitely have a recession in housing, right.

Bruce Norris: 19:04

If your're mortgage, your mortgage, sure. Yeah.

Sean O'Toole: 19:07

Like it feels pretty bad.

Bruce Norris: 19:08

Sure.

Sean O'Toole: 19:09

You got to look at the bigger picture still.

Bruce Norris: 19:11

Well, you know, that's what happened in say 2021 And you brought it forward, right? So everybody got to refi and the refi business you got three from you. So you know, you were doing crazy things and all the buying and selling of houses, but okay. I'd like to always like to look at categories that didn't exist before. Because we've got three that really can affect a market that we didn't have. So in 2006 when prices crashed two years later, it's it kind of created niches that didn't exist before that are kind of substantial. So Airbnb is one of them. So, you got a lot of properties that are in that container, if you will. So if you have unemployed limit or if you have a recession, how solid is that group is that you think that's anybody but it seems like that's going to stay there. The you've got the new build to rent model. And that is that may not be building like crazy right now because the rates, but those houses exist already, and they're not on the market for sale. So whatever the building numbers were like the 1.1 or 2 million, a lot of those never were up for sale. They just were okay, let's hold those things. And if you're in the buy sell business, all of a sudden, you're competing against somebody that wants to hold 10,000 houses, right? As rentals, we didn't have either these categories before. And now we've got all three, and they all came about at the end of a boom cycle that turned into a bargain. So I guess I'm just wondering, do you see any big piles of inventory coming from either of those piles? Will it change the habits of the market?

Sean O'Toole: 21:06

I mean, the build to rents, you know, institutional play to say that they you know, that money is better deployed in housing because of the lack of supply and some of the things that we've talked about than in other markets. So I think that's pretty bullish for housing, and I don't see that trade reversing itself. That's was a long term, trade long term plan. You know, we have some customers that are have been in that space. And, you know, it's a very long term view, I don't see a pile of inventory coming from there. You definitely see short term rental folks that kind of got all in and got way over their skis didn't know what they're doing. And I think some of those that come to market, but that's easily absorbed. So no, I don't I mean, that's the big question. Like, where does the downturn come from, right. So we had the builders was one time right? We had the trustee sales, they've changed that policy, that's not going to happen again.

Bruce Norris: 22:01

Right.

Sean O'Toole: 22:01

So where is that motivated seller that's going to show up and impact prices? I that's what I'm looking for.

Bruce Norris: 22:09

Yeah.

Sean O'Toole: 22:09

And I don't see it.

Craig Evans: 22:10

In that aspect of like the Airbnb in the short term stuff. Just today, I saw three different large you know, large industry titans coming out and talking about the aspect of travel and from the aspect of pre COVID that they all said that on their balance sheets and and what they're saying is they could they would they all said officially that part of their business model. Most of these were airlines hotel, you know, people that travel is back. So again, when you start looking at a short term, Airbnb, you know, I've got a friend that manages some Airbnbs 12, 1300 units in Airbnb. And he says that in the last four months, he's seen his Airbnb stuff picking up dramatically again, because that travel aspect is finally back to where people feel like they're traveling, which is kind of interesting when we're saying our, our buying power feels less right now, you know, because of where things are at. But yet somehow people are still traveling.

Narrator: 23:12

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: 24:22

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.