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Senior Member
Posts: 2,275
Reply with quote  #1 
The entire program was released on Youtube yesterday (not really on the Norris Group Site, they only have the first 30 minutes).

There was a lot of discussion about the low inventory and the estimate was that, from a demographic point of view, the market is falling behind a quarter of a million houses every year.

The 2 economists---John Burns and Doug Duncan, for my money, said the most interesting things.

John Burns made the interesting observation that right now there are more 90% LTV loans in existence than there have ever been---at any time--period.    We have been taught the underwriting is rigorous, and in terms of income, income verification, credit score----things that can be quantified in this way---it has been .   But the only way to expand lending has apparently been to liberalize the LTV----which means that during the next downturn it's going to be hard to sustain a serious price crash unless the lenders agree to accept less than what is owed.   Which means that trustee sale buying may not recover anytime soon.  And even other types of investment is going to get harder and harder.

The funny thing is that most people think of Bruce as an investor---though I tend to think of him as a hard money lender at this point.   And as he mentioned, the advent of foreclosure radar meant that whereas there used to be less than a dozen guys at the courthouse steps----after FC the # was more like a hundred.  And then the hedge funds entered the scene.  Whether this market for individual investors is going to return is a huge, unresolved question at this point---and we will probably only know when the buying market (and lower prices) return.

But just as Bruce (and others) retreat to hard money, keep in mind that the Wall Street firms have access to way cheaper funds than they do----and this market might eventually dry up as well.

Also, although mortgage lenders aren't making the same mistake in this cycle----they are figuring out other mistakes to make.

And the biggest area of buyer fraud---believe it or not----are fraudulent purchases that claim to be owner occupied but are reallly investment type purchases.  Apparently, they are going after this type of fraud in a big way this cycle.

Just being an investor is going to get harder.  Thus, Zillow is partnering with large hedge fund type buyers to make investment offers on their website.  There are alot of companies that are using cheap Wall Street money which the ordinary investor doesn't have access to in order to make offers on practically everything that is available.  (Sean mentioned a list of the companies like offer up, roofstock, etc).  Unfortunately, Wall Street has developed an appetite to engage in real estate investment and the average investor is going to be increasingly squeezed out.

Also, builders are not going to be able to save the day by building more homes and increasing inventory.  Building for this cycle is almost already blown---and they are building mcmansions not entry level homes, in any case.  And the building isn't necessarily occurring in the places where the homes are needed the most.  The factors contributing to the poor building environment include excessive impact fees and overly difficult development standards, insufficient labor force, lots are too pricey (except in very remote areas) and/or there is insufficient time to develop subdivisions in this cycle, nimbyism.  John  Burns is a particular expert on this topic since alot of his clients are builders.

Interestingly, they didn't get to the question about (1) How will the market crash this cycle? and (2) when will it happen---until almost the 2 hour mark?

Doug Duncan stated that:

Given that we are already late in the economic cycle and in light of the housing supply shortage, there will probably be a recession in 2 to 3 years and the severity of the real estate crash will depend on how bad the unemployment will become.  If the UE rate is 7% then the RE crash will be a soft landing, if it hits 10% you may have a serious RE crash.

But he does believe that, in light of the supply shortage, housing may in fact lead us out of the economic downturn.

John Burns didn't give a specific answer, but said that he considers the next economic downturn will not be caused by real estate, but based upon other economic factors. (1) health care is massively overinvested, it constitutes 17% of the economy; (2) the stock market is overvalued and more people have borrowed to buy stock at this time since 1929; (3) He also sees a disruption in the retail sector and the tech sector.   Burns agreed with Duncan that the severity of the real estate downturn should be a factor of the seriousness of the unemployment.

Actually, there wasn't anything too startling about the conclusions reached.

The primary driving factor for retreating from the market at some point seemed to be focused on the late stage and relative weakness of the economy---given the low inventory there wasn't a clear path for prices to retreat anytime soon. 


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Senior Member
Posts: 1,049
Reply with quote  #2 
Thanks for the summary Larry.

From your summary, my guess is a correction in the stock market first, follow by an increase in unemployment, then softness in real estate prices. The lack of inventory will help with the soft landing in real estate. If unemployment gets up to 10% or higher, the real estate correction will be worse, which makes sense. How can people make mortgage payments without a job?


"Be formless, shapeless like water." Bruce Lee

Senior Member
Posts: 2,275
Reply with quote  #3 
Thanks, Minh.

I think of the mechanism this way:

The most recent loans have skyrocketed to 90% LTV.   And the maximum debt to income ratio required by Dodd Frank isn't observed in about 1/3 of the loans.   So even though the interest rates may be low, if someone from the fringe group loses their job then the likelihood of a default is increased---and there isn't much equity left for them to refinance or have other likely options (unless they can find a buyer who wants it for more than its equity and can handle the back payments).

I wouldn't call this a real summary since alot of the detailed observations didn't make it into my summary, this is just what interested me.

But I think the real issue addressed isn't typically what you see in an I Survived Presentation---like when and how the market crashes---though that was addressed to a certain extent by the economists (not so much by Bruce).  I think the real issue concerns whether small investors are going to continue to play their traditional role when (and if) the market crashes----or whether Wall Street and large firms are going to muscle them out of the picture.  So, for example, Zillow is now doing a test model of their instant offer strategy (in which an investor makes an offer directly to homeowners) in 3 markets----Orlando, Las Vegas and Phoenix.    And although I don't really know who makes the investor offer under this scenario, it appears that these organizations are similar to the hedge funds that dominated the market during this last cycle.  And although the representative of Zillow indicated that permitting small investors might be a negotiable issue---I am not sure I would take this assurance at face value.  (This lady is part of their advertising team----she doesn't really run the organization).  Also, my guess is that Wall Street has alot deeper pockets than a ma and pa type investor---seems like a safe assumption.

And Sean O'Toole noted in very strong terms that not only will these funds have lower cost money to invest, they have technolical advances on their side that a private inavestor might find hard to match---such as doing an "open house" by giving potential buyers a code so they can open and view properties.  He mentioned Offerup, Roofstock, etc.  It seems obvious that these kind of companies are going to steal market share from traditional investors---and there may be more coming.  (You probably understand the tech angle better than I).

Put differently, are we going to look upon this cycle as the last one where small investors were permitted to play their traditional role----or is that business model that belongs to yesterday?

One of the interesting (and maybe prescient) things that Sean O'Toole says during the presentation is that Zillow should be concerned about being gobbled up by Wall Street as well----and that  inviting these type of major hedge funds into their space might be a really bad idea, even for them.   (Kind of like IBM letting Bill Gates own the software rights, which it considered as being really not all that valuable.  Whoops!).

I'm sure glad that I participated in this last market----especially since I am fearful about what comes next---afraid I might look back upon this as the last good market for private investors before the 800 lb gorilla descended.  (Too dramatic?)

And even though Bruce Norris is making money doing hard money loans----since the Wall Street funds can get even lower cost funding----that may be the next business that will see a dramatic sea change from Wall Street.

The truth is that the hedge funds' participation set a dangerous precedent----and when Bruce Norris went to Wall Street to pitch getting loans from them----they took it to the next step and just decided to eliminate the middlemen.

I hope I am wrong, but that is what I see as the lurking issue.


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