Registered: 1156877376 Posts: 2,021
Reply with quote #34
Isn't that the truth, Paul? Last year's video was fine, this year's video has these inexplicable breaks, etc. And sometimes it is too loud, sometimes so low you can't decipher it. Not good. (The broker for the sponsor apologized at the end of the video because there were audio problems.)
Also, I can't believe they limited Norris to only 30 minutes---not nearly long enough (compared to past appearances at this forecast). Bruce has said he won't do another report for as long as 10 years because that is how long it will take to work through the current relatively flat cycle. (Since Bruce really loves writing reports, I found that a little hard to believe, but if we stay in the doldrums, maybe there is no opening for him to do another report---just more of same). Foreclosures aren't playing the role they normally play in this market---since lenders have permitted delinquent buyers to remain in place and not proceed to sale. One of the more interesting remarks he made was he disagreed that we lack inventory----although it is not especially high and we don't have many of the normal drivers for inventory. His point is that even with 2 months worth of inventory this has been driving a considerable amount of sales. Even with 2 months inventory if they loosened entry level buyers from their shackles, this market would still hit a lunar trajectory---especially if moveup buyers started to materialize (which, since they can't qualify for the loan for the next purchase, they have NOT materialized). It is true that the Bay area inventory is measured in terms of days---but that is clearly a bubble market. The rest of California isn't quite that insane. According to Bruce, what we lack are qualified buyers---both entry level and moveup buyers. The lenders have shut the door on the entry level crowd and the FICO and other requirements are much higher than in past cycles. It is very hard to get to the finish line in a loan----Norris says he recently did a refinance and it took 3 months, even with hsThe entire lower end of the market has been destabilized and builders can only find it profitable to build in multifamily or maybe the SFR luxury market. Entry level construction just doesn't pencil, maybe will never pencil. The point is that in a normal market the entry level house would start to rise in price and force Fannie Mae, FHA and other lender loan limits to start to rise. (Artificially restricted, for now). The counties that have the most available land haven't seen the necessary price increases that will make building new homes profitable. Also, the stunted growth of new home construction may mean that this type of construction may not come close to recovery since it takes 2 to 3 years to engage in subdivision development. And alot of the labor force used by builders retreated to Mexico during the downturn---and they aren't coming back. (Migration is from Central America, not Mexico, right now). And quite apart from the slowdown in migration, alot of those who previously were engaged in construction were scarfed up by the oil and gas industry. In a normal market, also, the price for existing homes would rocket past the price for new homes (always felt that it was an inexplicable trend, but part of the animal spirits)---though that hasn't happened either. But right now new homes have already exceeded the peak price during the previous downturn. So, likely the only way that existing homes can overtake new homes (which they do in a normal market), is if new home sales prices decline. If the spread between the two figures is dramatic (as it is right now), this is an indication that we aren't close to hitting peak price. In a nutshell we need sales momentum----and the absence of all of these factors have hobbled the market. We may not see the necessary sales momentum to reach our normal peak----better luck next cycle (if there even IS a next cycle in California). It was a shock to hear that even for lots costing $10,000 in the upper desert (Victorville, Hesperia, Palmdale, Lancaster and other areas in the Antelope Valley) are too high priced to pencil out----and as low as $3,000 in other places that aren't upscale enough to pencil out---construction still doesn't make sense. And Norris said he waited over 3 years before he started building in the Inland Empire. It may be that the slow pace of construction here motivated him to go to Florida in early 2015 since it just wasn't happening here. I believe that the Norris Group is still sitting on a ton of lots they bought in anticipation of a wave of high prices in inland markets that haven't materialized---and may not materialize this cycle. Alot of builders remain on the sidelines---the only lots that pencil are those that were bought almost for free (since impact and other development costs have done nothing but increase) And some cities have made it so burdensome and expensive that construction is simply DOA. Plus in past cycles, we had lenders loosen criteria so that unqualified buyers could exercise their animal spirits and buy at the top of the markets. Appraisers used to drink the same Koolaid, now they are ultraconservative---and afraid of losing all their lender clients if they price too aggressively. Under the old rules, the listing agent hired the appraiser and gave subtle hints that he/she better price extra high so he won't kill the deal. No longer. And construction of SFR won't recover in time to significantly boost this cycle. Riverside County is now at 20% of normal SFR type construction. Not only does this market need the extra inventory, but they need the economic boost that construction gives to the economy. And given that prices are rising but entry level houses are vanishing from the marketplace, we are seeing an outmigration to Arizona, Texas, Colorado, Nevada and/or maybe places further inland in California. The book by John Burns makes it clear that Florida and Texas are going to dwarf California in the long run. Bruce has previously mentioned that he spent $13,000 a lot for those lots in Florida and that he was able to exchange one house in California for 2 brand new houses in Florida, which he can keep as rentals. Although the Norris Group is doing some construction in California, it sounds as if the California construction is dwarfed by the Florida construction. (He mentioned doing 6 houses in his VIP Subcriber brunch in late 2016---which is a small fraction of the Florida construction). It's all about unintended consequences. The appraiser ranks have been devastated to such an extent----and aren't being replaced-----because you can't make a living doing it any longer. And once the lender favored appraisers retire---who is going to replace them? The appraisal company system is quite insane----Bruce was mentioning a Whittier appraiser hired to appraise a golf course house in Palm Springs. Really clueless, that. Given that lenders are flexing their muscles on appraisers, it's really they who are setting prices in the marketplace---and relatively flat prices are perfectly fine for their purposes. A really unusual and unprecedented market---not at all what we have been given to expect from California real estate in the past. And Bruce has at times even entertained the heretical thought that maybe California is no longer the Promised Land in real estate terms---he says that Florida and Texas are exploding right now in sales and California won't keep pace. The point is that the lending industry is in control---after they were raped (but not kissed) in 2006/2007, etc---so they may insist upon similar hurdles in the future. All of these factors won't happen this cycle----so by present standards we won't hit our peak price---alot has to change for that to happen----we are stuck in the horse latitudes for the next decade---for me, not good. Right now we are at 32% affordability and not even close to the 17% affordability that usually signals the end of a price rally. A 32% affordability is a very safe market----think about 2002, 1987, 1977, 1978----there should be plenty of room to go up if we get close to hitting the peak. But if we don't advance any further, then there will be no crash since the market will end with some very safe home values. Another way to measure the safeness of the market is the moodometer (sp?)----which measures what % of your income is taken up by housing if you bought the median house price at the median mortgage rate. During the crash, the percentage was as high as 55 to 60%. Right now we are in the neighborhood of 41 to 42%----which is still a very safe number. If you look at the prevailing payment in 2005 (and other crash years), in Riverside County there is still plenty of upside room between the current payment and the crash year (2005) payment. That is true of Riverside----is that true in San Francisco? Not really, they passed their crash payment threshold a long time ago---what is occurring now is very speculative. Another metric: The California median price in relation to the US median price. If the California price gets too high then the attraction for a retired homeowner to bank their equity and move elsewhere can be overwhelming. This is especially true if they move to Texas and/or Florida where there is no income tax. Right now the ratio is pretty high, almost double---so this is a real concern. We are at a high multiple right now due to interest rates. Future of interest rates is important for the California market since if interest rates spike then this discrepancy will become unsustainable. I'm not much for conspiracy theories. But it's obvious that this kind of market helps lenders----and that lenders have a number of tools to slow things down----stop foreclosing, tamp down inventory by making long term rentals, basically encourage a market that doesn't encourage steep price discounts. And having discovered this approach, I am afraid they will continue to adopt it since it prevents any dramatic price changes, etc. Bruce also makes economic predictions---though I am less confident about these statements. Bruce also thinks we will have a recession in 2 years---or set an all time record for # years without a recession. So the statistics clearly favor it. The problem with predicting an economic downturn is that there are alot more moving parts than in one state's real estate market---although I respect his point of view. If there is a recession then usually the Fed will cut the fed funds rate---by an average of 4%. If they did that in the current market, then a 4% reduction will end up having a negative interest rate. Or, at least Bruce thinks mortgage rates may get down to 2%---which he thinks wouldn't be great for the real estate market, but would be an enormous stimulus to the mortgage markets, especially refinances. Caveat: Christopher Thornburgh, the last speakers, says that the inference that we will have a downturn because we have already had a 7 year expansion is (to use his words) "stupid". So maybe not all economists agree. It is going to see what is said during I Survived Real Estate---assuming Christopher Thornburgh is showing up this year. He did not show up last year and the lineup for 2017 hasn't been announced yet. Almost certainly Bruce will invite John Burns, another economist, because of his recent book. I still would like to hear from Thornburgh, but we will see what happens. If mortgage rates get that low, according to Bruce it would have 2 impacts: (1) It would allow for the growth of spendable income and (2) it would tend to persuade most homeowners to improve their current home and not move at all. But the frequency of real estate transactions would peter out. Though I must say that this prediction of negative interest rates strikes me as rather speculative, compared to his other predictions, although it is a possibility. (Which is why I rather disagree with the title of his report----the 2% prediction is part of the title, which I tend to disagree with. I would rely on Bruce's predictions about real estate than predictions about what will happen with the economy in general.) Where Bruce makes predictions about the macro economy like this, I tend to discount his statements since no one can reliably makes such predictions. Overall, I find Bruce's report sobering because: 1. Construction appears to be dead for this cycle. Most of the counties that have cheap vacant land don't pencil. The minimal appreciation forecast for the next decade isn't going to change the overall picture. Given that construction is at 20% or so of normal levels, it isn't going to add much inventory. New housing is way overpriced right now. 2. A relatively flat market for a decade is, well---not exciting. You can force appreciation but you can only do so if you get a really good deal, which are hard to find in this market. 3. Trustee sales, DOA until further notice. Is anyone still doing this? 4. The best deal Bruce has made in the last several years was out of state in Florida. But it appears that this window of opportunity has closed. (I am surprised it was still available in the first quarter of 2015). 5. Short sales aren't exactly flooding the market and the prices are near retail. 6. Most investors like Bruce are sitting on a pile of rentals, doing 1031 exchanges, and doing some deals, but only that distinct minority that make sense. Mainly, Bruce does trust deeds, although the margins are shrinking. Unless you are a deal hub like Bruce, would be hard to find the same kind of deals. And loans to most rehabbers in this market are going to be risky because the margins just aren't there on most deals. 7. Maybe now is the time to test the magic of the marketplace in commercial? Although that market seems overheated as well. 8. The stock market is on an unprecedented, extended rally, and although there's no way to measure these things, seems very highly priced. The truly disturbing thing is that we seem stuck in a deflationary cycle where yields on all assets just seem to dwindle as values rise. Wherever you turn, you see overvalued assets. What is the preferred exit strategy if SFRs aren't going to appreciate?? The sad thing is that although Bruce makes these predictions, I don't see a really clear value play, aside from refinancing the properties that one keeps. My feeling is that all of these predictions are really nice, but where is the smart money trending towards. Maybe the lesson is just do the few deals that might make sense in this market and go on vacation. Any other ideas? On this video Bruce talks about what happened to trust deeds in 2008. He indicates that the Norris Group cut way back. Of course, we aren't in that kind of bubble territory now, but the problem I see is that once the market does get overheated it's not easy to find a safe haven that is not overheated. (Those who were refused trust deeds in 2008 by Norris in many cases found other trust deeds---where they lost all their money---not good).