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11-22-2008 |
Bruce Norris is joined once again by Inland Empire Economist and Specialist John Husing. Bruce Norris mentions that The Norris Group is now ready to start purchasing properties with the intent to hold them as rentals. Bruce says we?re buying at 28% of what the lender was owed. John takes Moreno Valley as an example of what happened in the last cycle with rentals. The injection of rentals in areas that were traditionally owner occupied caused problems. Rentals are generally not as well cared for as owner occupied properties in the area. Home values go down because of this. In areas dominated by rentals, calls for police soar. Soon turnover increases as renters look for the best deals and there?s soon a rent war. Side effects of too many rentals can cause many issues. John says Moreno Valley was destroyed by HUD in the last cycle because they didn?t even think about the effects to the communities. In the stabilization act, money has been given to cities to help stop this issue. Cities can negotiate prices in bulk and then double escrow the homes at certain prices over to construction firms to bring them back to nice homes. They then sell these homes to qualified first time home buyers. San Bernardino did this in the last cycle. 90% of the people who purchased those homes were still in 10 years later. Bruce mentions that homeownership levels got too high and that more rentals will be a natural conclusion. John thinks it?s more of a pricing question. If prices got down to a level that?s affordable, people will buy. He says California has never built enough homes for its population. John says that demand for homes is accelerating greatly. Unfortunately, the supply of foreclosures is still coming in great quantity which continues to bring down prices. John feels the only real solution is to get the principal down. Bruce says Riverside is one of the possible hot spots once this all turns around. John says the Inland region has more construction dirt available then other counties. Over the next 25 years, Southern California will add 6 million people. Orange County and San Diego are built out or zoned out of being able to build. LA is in a similar situation. Once we get through this downturn, the Inland region has tremendous growth opportunity. Bruce says that people would rather be in California then many other states. For the next couple of years, people from other states will start to recognize the opportunity to move to California and be making the same payment or less and be able to live in a better climate. Bruce thinks we?ll see massive in migration. John says he too thinks people will be looking at California as a place to retire. Bruce talks about how he got to Riverside and the massive growth that?s taken place. John explains the three stage growth process. By the late 70s, Riverside developers started developing in the area. People were putting up houses where people didn?t want to live. But affordability is important. Later, the entrepreneurial developers come out here because there was a market. Retail centers soon follow because of demand. Housing boom tends lead to population serving businesses coming into the area. Industrial developers follow after which creates blue collar jobs. The Inland area was in Stage 3 where we saw increasing upscale houses being built. The Inland Empire saw much younger people move into the area. This influx of young talent with higher education opens up the area for much different jobs and services. The Inland Empire economy will be back on John?s three stage development once we get through this cycle. John says San Fernando and Orange County went through this same three stage growth cycle. Orange County went through stage three in the 70s. John tells the story of South Coast Plaza. Orange County is actually worried because it?s losing its young and educated workers to the Inland Empire. In Riverside, all industries are having a difficult time. Residential construction brought in a large about of jobs. Warehousing and distribution have also been main drivers for jobs. Now that these have both slowed, unemployment has boomed. Bruce asks John if the Feds will crank up infrastructure projects. John says that would be the way to help the economy. The influx of cash to consumers by the government in May didn?t work because they paid off debt or went to Walmart. Bruce asks John about the difference in median incomes from the Orange County and Riverside. John says they are very different. However, if you take the median income and then subtract the cost of housing, it?s about dead even. As the economy approves, we?ll continue to pull more and more people from Orange County for this reason. More on John Husing and his research at johnhusing.com |
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11-15-2008 |
Bruce Norris is joined this week by Inland Empire Economist Dr. John Husing. Bruce asks John if we?re facing the biggest mess he?s ever seen since he?s been an economist. John says it?s the worst mess he?s seen in his life. John talks about how we got here. In 2004 the real estate market detached from reality. The housing shortage created unbelievable demand creating massive price increases. Investors came into the picture. Prices started increasing even more since they tied up supply. It had nothing to do with real supply and demand issues. The creative financing made it even worse. Bruce brings up that the same financing was available to consumers just as well as it was for investors. The consumer too became the speculator. Bruce asks if the Feds are taking the correct steps to fix the problem. John thinks they haven?t fixed the fundamental problems. John says all homes bought in 2004-2007 are upside down. John says it?s one third of the market. That does not include those that used their home as a piggy bank and refinanced. Bruce asks if foreclosure moratoriums have worked in the past. John thinks it?s just a delay. There are three parts to a loan: the principal, interest rates and the terms. Ultimately it?s about the principal. The mortgage backed securities market is where it?s getting held up. Bruce talks about some for these solutions and how they only apply for those that have the adjustable loans and how that doesn?t fair well for those that didn?t participate in those programs. John thinks we?re only about one third through the houses that are upside down and that doesn?t include people who refinanced. If the price gets down far enough, they could just walk away anyway. Bruce asks if commercial areas are affected by residential. John says the office market was the third tightest office market in the US because many firms were moving here because the size and growth of our economy. There was a subsequent boom in commercial building. We?ve gone from 7% vacancy to 19%. There?s more being finished so it will bring it over 20%. Retail sales have plunged due to unemployment in residential building in the Inland Empire (Riverside, Moreno Valley, San Bernardino, Corona, Perris). We have a 10% decline in sales so now the shopping malls are being affected. General Growth, who owns several shopping malls, might go under. Their stock price has been hit hard. John thinks we?ll see a few more large retail stores go under. Numerous furniture stores are already out of business. The auto industry is getting hit hard but that?s part of an industry issue that?s ongoing. Bruce asks John about the cities in California and if they will be dealing with difficult issues in their budget as real estate taxes take a big hit. John says cities will be affected. The biggest item in the discretionary budget is retail sales. When sales go down, that makes things difficult. Bruce asks about the ramifications of when cities go bankrupt and who ends up holding the bag. John talks about damaged credit and investors not getting paid. The typical investor in bonds includes pension funds. Bonds are typically considered a secure and safe investment. Triple A has really been misleading as many of these investments have not turned out to be safe at all. As real estate supply increases, the supply of homes has dropped significantly. Demand has gone up but the supply is still too strong. The supply is what has to be addressed. As long as the supply still is too high, we won?t see new homes being built as it won?t pencil. Locally, if builders get the land for free, builders still can?t build because the fees and materials are still too expensive. Homes are going for less than replacement values. So many industries are connected to the building industry. 95% of all job losses in the Inland Empire can be traced back to the residential construction industry. The unemployment rate in the inland empire has reached 9.1%. John doesn?t think high unemployment is causing too much out migration. John thinks nationally we are having a difficult time so there are no real safe havens. Bruce asks if California has ever seen 12% unemployment. John says no and the worst for the Inland Empire area was 1993. That was localized because of the space/defense industry job losses. Commercial construction is now not penciling. The projects currently underway will be finished. John doesn?t think another office space will be build until 2013-2014. We have to absorb around 20% vacancy rate. With the US going into recession, world trade has slowed down substantially and directly affects the Inland Empire because of lack of warehousing and distribution space needed. Construction will now stop in the industrial market which is typically very strong. Bruce asks who the typical lender is in the commercial market. Local banks and pension plans are behind some of these projects. Bruce feels they will own a lot of real estate in the coming years. This is happening in Orange County as well because the Financial Industry was hit so hard. Technically many of these buildings are still leased but are now vacant. They don?t show up as vacancy. Therefore the availability rate is a better indicator John says. Bruce asks about apartments. John says the coastal markets have the best chance of doing well. In the Inland Empire it hasn?t shown up as a bright spot. John thinks many people are moving closer to their jobs. Vacancies have actually increased. It?s a market we don?t have good data on. Bruce and John discuss about the oil market. John says lower gas prices are like a tax decrease which helps in the short term. In the long term, projects we were hoping was going to happen are now on hold (alternative energy projects). Bruce talks about the how this is a repeat of the 80s. John talks about an oil set price solution and how it might help. Bruce talks about the new regulations and how REO agents are going to adjust. They?ve laid off staff knowing they will have to hire them back to handle the huge volume coming shortly. John really thinks we need to find out how can we get restructuring on the underlying loan on the mortgage backed securities. See Dr. John Husing on his website at johnhusing.com. |
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11-08-2008 |
Bruce Norris is joined this week by radio host of the Construction Zone Radio Show on KTIE 590am, general building contractor, and industry expert for the State License Board, Matt Le Vesque. Bruce starts by asking Matt about the term general contractor and what type of license is implied. Matt talks about the different A, B, C, and D licenses. A license is a general engineering license which means streets and bridges. B is for general building contractors which means they perform two or more unrelated trades on a particular project. C license allows the contractor to subcontract out parts of a job. Bruce asks if that having a general contractors license describes capability and expertise. Matt says there are many that have a license that shouldn’t try to do other areas of specialty and how that comes into play. Matt says four years of experience in general construction working for someone else or specific education is necessary to become a general contractor. There are three parts to the test to pass: legal, trade and within the trade is a large section on math. General contractors can’t do specialty projects out of their industry not does it always work out well when they try. Matt talks about people who pose as general contractors who are not. Matt describes what happens to those who pose as generals and get caught. Bruce asks what licenses a handyman is required to have. Matt tells him none and expands to talk about the limitations of what a handman can and cannot do and the dollar amount allowed. Overhead does change quite a bit when you get the general contractors license. Matt talks about the bond costs for different specialties. Bruce asks Matt what people should have to be protected. Matt says general contractors should have workers compensation and why it’s necessary. Bruce talks about a certain issue that the Norris Group has recently found about. Matt talks about how people get around the rules or work the loopholes. Bruce asks what happens if people are caught not paying workers comp. Matt talks about Workers Comp fraud laws and what could happen. People can search sclb.ca.gov to find out info on contractors. He says not to be fooled by the except status and explains what to look for. Matt and Bruce discusses general liability and when that kicks in. Matt talks about a third party that gets injured on a job and not an employee or home owner. Bruce asks about the rights of the consumer if the general contractor who do not deliver. Matt talks about how many consumers get shamed, especially with early payments. Some people pay before the work is complete which is a mistake. Don’t let the payment get ahead of the work he warns. Bruce talks about the scenario about contractors who do work and get paid but who fail to pay supply stores like Home Depot and Lowes for the materials. Matt says this is actually a problem for the consumer and how to protect yourself. Matt reminds people to get the lien release and talks about preliminary lien notices. Consumers want to make sure they have the opportunity to write a joint check. Bruce and Matt talk about how this works with subcontractors. Bruce asks Matt the best way to get connected with reputable contractors. Matt likes when people talk to their friends and neighbors and to make sure you do your homework. Bruce asks about a warranty of work from a contractor. Matt says there’s a four year minimum for all work. Most contractors don’t know that or believe it and sometimes write something different in their contracts. They can extend it but can’t make it shorter than four years. Bruce asks about how to be a good customer. Matt says payment is key followed by interesting and/or challenging work. Bruce asks about Matt’s radio show and what they do. The Construction Zone Radio Show has live experts and also has live callers call with their questions. See czronline.org or visit ktie590am.com. |
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11-01-2008 |
Bruce Norris is joined once again by President of REventures, Michael Pines. Michael and Bruce are discussing foreclosure law changes in California bill 1137. Bruce wonders why there are so many loopholes left open for interpretation. Michael says when bills are written so hastily there is not enough time to do the most thorough job. Michael believes 1137 wasn’t done very well. Courts will have to be involved to interpret this law. The courts will be used to set precedence. Some of this could be unconstitutional. These issues will take years to fix. In the short term, we will deal with ramifications. Lenders would have to do some major work to get changes quickly. Lenders might be able to get a preliminary injunction. The new law effects loans originated January 2003 and December 2007. Bruce asks if former owners can get served. If you were a bonafied purchaser you will have protection under the law and protection on title. If you purchased at trustee sale, that could be another issue. The consumer could collect damages but not get the property back. The lender who did not follow the correct process will be more at risk. However, lawyers and clients could be liable if not done correctly. 1137 was really created to make lenders really sit down with the people to try and work things out. It’s a little vague. Bruce asks if there is any training for those people making these phone calls. Bruce says meetings and phone calls by trained people would be very different. Michael says there is currently no precedence and the lenders are scrambling. Some lenders don’t even know 1137 has passed. Lawyers might be telling some lenders this is unconstitutional and should fight it. There will probably be class action lawsuits. Title companies are now requiring a letter from the lender making them liable for not following procedure. The title company will make it clear that they are not liable. They do not want to be responsible for this law. 1137 is talking about owner occupied properties. Bruce is wondering what type of products qualify. There could be conflicts with other laws currently on the books including California foreclosure laws. Under 1137, lenders can get fined up to $1000 a day for a brown lawn. Bruce brings up that the lenders will be out of business very shortly where he buys in Moreno Valley. Bruce brings up a meeting with another city The Norris Group had about this very issue. The City’s perception was that they could only charge at city cost, not at the full $1000. People are already reading this differently. This law will be applied differently in different cities. Michael says this will be a dream bill for lawyers. Some judicial process will be in place so the lenders will be able to fight this. It depends on how much the fines amount to. Under 1137, neighbors could have brown law and this law doesn’t apply. If an investor buys an REO, the law doesn’t apply. However, if investors purchase at trustee sale, 1137 will apply and the investor will be fined if a brown lawn exists. Michael says this is why many are calling this law unconstitutional. Bruce thinks most trustee sale buyers don’t know they have the same liability as the lenders. Bruce talks about having bought a property and how there was a fine and how it caused it to stall the closing since the bank didn’t even know. Some lawyers will use SB 1137 to stall the foreclosure process. Bruce tells Michael about that happening with a property where it got retracted because they had done the foreclosure incorrectly. Judges are requiring lenders bring original paper work. Bruce sees the change in the number of files in the NOD phase since many banks are trying to catch up. It’s a bottleneck since the process has changed. It’s very common for people in foreclosure to get very active late in the process. If they contact a foreclosure consultant, the people may not be eligible for parts of the bill. Michael says there is an exception but the qualifications are unclear. Lenders probably won’t count on that. Michael and Bruce discuss whether lenders are getting motivated to sell notes as they would be taking on the responsibility. Buyers should consider the responsibility coming if they are purchasing debt. SB 1137 has not yet solved much of anything. It could create opportunity for investors as the lenders will get much more motivated. |
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10-25-2008 |
This week Bruce Norris is joined this week by Michael Pines, President of REventures. Michael is a licensed attorney, a licensed broker, and has first hand experience with the RTC in the 1990s. Bruce asks Michael about his involvement with the RTC. He got involved originally with the RTC by working with a client who was dividing land to do manufactured housing. There was a legal dispute and the owner lost the property and the RTC got the property and inherited the litigation. Michael and Bruce discuss the differences and similarities between now and the S&L crisis. Michael feels like he’s reliving the same scenario. It’s been 20 years since deregulation and you think we would have learned. The parallels are remarkable he says. In the mid 90s the stock market did OK and real estate did horrible. Back then, real estate wasn’t as tied to the stock market as it is today. Michael says this time it’s intertwined and it’s impossible to separate. This time foreign counties are also much more involved. When the RTC started it was thought it was going to be a $30-$50 billion dollar problem and then shortly there after it was much more expensive. Bruce thinks the government’s $700 billion is just the down payment. This is going to be a multi-trillion dollar solution. Telling people this would cause tremendous political fallout if they were honest upfront. Bruce talks about the story he read about a Congress woman being asked about where they came up with the $700 billion number and she replied they just needed a large number. Michael says he doesn’t see it as a bailout. Michael says the people who made money said they got it and they are gone. There will be people who went to jail and some people will be forced to give money back. Michael thinks the major players who acted dishonestly will be tracked down and be used as an example. So many people were involved it will be hard to track everyone down. Those that profited will not be profiting from the solution. No one knows quite yet where the money will go. Congress is not full of experts. There’s still much research that needs to be done. Institutions need to be studied and they know these institutions need money. They need the authority to buy some of these institutions. The new bailout said the golden parachutes of the past will now be gone and some will be forced to give back unearned bonuses. Michael doesn’t think they will go down quietly. In the RTC days, the first two years was a mess as the government tried to do it itself. They weren’t equipped. The office for disposing of California real estate was located in Dallas. They hired attorney in California but negotiations required people flying out from out of state. These individuals had no clue about the state. The RTC got taken advantage of because of the set up so it began to change. As the RTC went more into the 90s, property values kept going down. RTC started willing to sell quantities of properties in small packages and then eventually packaged them in larger quantities. Eventually they only wanted to sell properties and debt in packages. RTC properties were marketed in different ways ranging from auction to mailers to the bigger players who could purchase in bulk. It changed drastically every year. The arrangements got more and more complex. Bruce asks Michael if the similar groups will be set up to handle this. Michael says past people who were involved are being solicited for jobs who can handle this again. Many are retired. Michael says the better investor deals happened early in the cycle. Bruce asks Michael where the deals will be. Michael thinks this will take years and that the S&L Crisis was tiny compared to what’s coming. Opportunities are already here. He’s hoping there’s no great depression. Investors are a big part of the solution. Michael and Bruce talk about the potential for true bulk deals coming our way. Stay tuned for more with Michael next week. |
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10-18-2008 |
Bruce Norris is joined by economist and President of Euro Pacific Capital, Peter Schiff. Peter is author of “Crash Proof: How to Profit From the Coming Economic Collapse” and “The Little Book of Bull Moves in Bear Markets.” Bruce starts off by asking if the media and nonbelievers are now sending apologies since Peter had taken such heat for his views. Peter says they have not and doesn’t think many people understand the situation at hand. Peter sees what the government is only going to make things worse. Although some are taking this week’s erratic behavior as the start of the next bull market, Peter says bear markets are well known for extreme fluctuations. Bruce asks Peter what has surprised him most in the past 30 days. Peter is surprised that the government has stepped in and pretty much done whatever they want with what remains of our financial market. No one is challenging them. Peter feels the financial system is in trouble and that we’re broke. Lending institutions loaned money to people who should have never had it. Instead of the banks failing, we’re going to fail. Peter says that we should expect major inflation. By 2009, we’ll be seeing much bigger, phony CPI numbers. He doesn’t think the government will fess up to the numbers but the consumer will feel it. Bruce asks about unemployment rate. Peter doesn’t think our wages will increase because we’re not competitive. Home prices will go down but other consumer staples will go up. Bruce asks if Peter was in charge what he would do. Peter says there’s no solution. The US had a party and now we have a giant hang over. There’s no magic bullet. Peter would let the painful recession run its course. Peter would make government smaller and would slash government spending, military spending, and other drains on savings. We need savings. Bruce talks about 70% of US GDP being consumer spending and asks what it will be in the future since we can’t keep that up. Since we’ve been borrowing all that money, Peter thinks people should only be spending what they have. We have to get back to basics. He feels we’re setting up a great depression combined with massive inflation. Foreign investors will lose a lot of money and learn their lesson. No country will want US money and that will worsen inflation. Peter says he’s been surprised the dollar has done so well in the short run. He feels once the selling is over, the dollar is going to take a big hit. Bruce asks about gold, silver, interest rates and oil and where Peter sees them in the coming year. Peter thinks by next year we’ll be over $100 a barrel. Peter says since the government is in control, it will be hard to say where interest rates will be. Bruce asks if Peter sees a gold standard coming back and how that might help. Bruce says that we’ve nationalized Fannie, Freddie, and some of the banks, what’s next? Peter is looking to car manufacturers, states, and utilities. The issue is we can’t bail out everyone. FDIC doesn’t insure value, only quantity. Bruce asks about the people about to retire. Peter thinks people we will be back in the work force and that things are drastically going to change. People will not be able to retire. Peter says his books really addressed how consumers could and can protect assets. Bruce asks about tax changes. Peter sees tax increases for rich under Obama but the increases will further undermine the ability to create employment opportunities. The middle class will get tax cuts but they won’t do anything. The extra money won’t buy anything. Government will increase spending. If you have no income, the tax cuts don’t matter. Bruce plays devil’s advocate and asks what a few more trillion would mean. Nobody would be poor if economic wealth could occur by printing money. Peter strongly believes we need a new solid foundation built on savings and manufacturing. Anyone holding US debt will not get paid. They will get paid but the money will be worth less. Bruce asks about two specific moves the audience can implement. Peter says to buy gold and silver and says move out of US stocks and go to global stocks. He also says there is a lot of value outside of the Unites States. Bruce says the global markets haven’t done so well in the past three months. Peter doesn’t think those will stay down long term and that most of this is emotional reaction. Europac.net is Peter’s website and the number to reach his group is 800-727-7922. |
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10-11-2008 |
Part nine of ?I Survived Real Estate 2008? is the final portion of the radio segments for the event. The show picks up with a bit of a rerun from last week. All new discussions around minute 14. We pick up where Tommy Williams chimes in and says there are other states that had the same inventory for half the price of the states that got overheated. Overheated states have to come back to ?normal.? Bruce says he agrees but says that?s part of the reason he loves California real estate. California wins so many tie breakers. There?s exciting volatility you don?t get in other states. Bruce talks about Fannie and Freddie and if we?ll see them stay in private ownership. Christopher Thornberg says they are clearly insolvent and he doesn?t know what they will do or how they will react. Typically they overact. Bruce asks the panel if the government writing these big checks will increase inflation and if we?ll see much different interest rates three years from now. Christopher describes the two ways our government pays the bills; issue debt or printing money. Christopher says our government assumes that investors have confidence in the system. If investors see the bottom drop out of the public bond market and the treasuries go crazy then there?s a problem but he says we?re far from that. Christopher says interest rates are now adjusting for the increased risk. Eventually they?ll come down when this crisis passes. Bruce talks about when he became an investor he refinanced his house at 17% interest. Many people were telling him at the time he?d never see single digit interest rates again. Bruce says interest rates can be very high as long as the income to median price ratio makes sense. There could still be a healthy market. Rick talks about market psychology and how nervous buyers and lenders are at the moment. Bruce talks about the velocity of price drops in the market being historical and some are unaware. 35-50% price declines are shocking. Joel discusses a Zillow study where 7 out of 10 people thought their home was still appreciating. Christopher Thornberg calls that homo-illucination and what it stands for. Bruce asks Phil Tirone if lenders are skewing too conservative and not making loans at all. The automated underwriting was such a blessing at the time because it made things ease and now it?s making it worse. Phil describes people putting 50% down and he still can?t get financing because his client?s credit score is low. Christopher says those automated systems were a disaster and that lenders knew how to manipulate the systems. Philip says these systems did help cause the problem. Christopher says once the price gets down low everyone will qualify. Bruce touches on affordability. Bruce describes affordability and what it solves and does not solve. He describes past cycles and what he looks for in a turned around market. Bruce looks for migration coming back as the true indicator as the decline for foreclosures. We?ve gone from 16 months of inventory to under 7 months but sees it as a false indicator. Those that didn?t have to sell left the market. Joel Singer disagrees. He?s assuming 85% of homes are owner occupied. He doesn?t see too many rentals occurring for those pulling out of the market since they don?t have to sell, especially in coastal regions. Inland Empire is where most of the vacancies are occurring. He agrees that people who don?t have to sell don?t and pull out of the market. He said it was like this in the 90s. Affordability tells you about first time buyers but not the trade up market. We still have to consider unemployment rate. Affordability is not perfect but decent indicator of first time buyers. Psychology is important too. Joel says 50% more sales are occurring on top of tight lending so things could be changing. He thinks more investors are going to be needed for a certain period of time. He thinks a few of Bruce?s ideas could be sold but others could not. He does think from a policy point of view that affordability going up is a good thing. The vacancy rate is getting close to the national average but it?s always different here in California. Joel thinks the loan assumptions idea won?t work. 90 day seasoning period for investors should be able to work with some sort of certification that the repairs have been done. Bruce asks Christopher which chart he?s looking at for an end of the downturn. He says when prices stop dropping. Joel says that seasonally prices are sure to fall in the coming months as they typically do. Christopher rephrases his original comment to seasonally adjusted. Joel feels prices in some areas are already improving and multiple bidding is occurring. Joel feels a bottom floor is starting to appear in some areas. The overall economy will be important in deciding the outcome as will the outcome for Fannie and Freddie. Christopher says we have way too many 4,000 square foot houses. He also brings up unemployment so there are still other things to consider before he calls it over. Joel reminds the audience that markets are local and that San Bernardino and South Bay are very different. He says most people will miss the bottom. Bruce beings up the list of properties the Norris Group purchased. Homes The Norris Group purchased for $110k are now being bought for $85k. These properties often also have multiple bids but our offers are stronger. Bruce is worried about twice as many trustees deeds then sales in Riverside County. That ratio is much worse then last time. Joel says statewide though it?s different and there?s still more sales than foreclosures. He?s actually surprised. If you go up to 400,000 foreclosures then there?s a much more serious problem. Philip says there are portfolio lenders that are stepping up with non-owner occupied with low 7%-high 6%, 30% down, with no limit for investors. So there is financing out there. Bruce thanks the panel and the evening ends. See also the video on YouTube or Google video. |
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10-10-2008 |
After Repaired value Investor must estimate what the property will be valued at after all repairs are completed keeping in mind price declines. 70% FRV 70% FVR = (FRV * .70) This formula is specific for investors using hard money and assumes 5 months holding time, 10% sales costs, 10% holding costs, which would leave the investor approximately 10% profit. This formula has proven to be accurate if the FVR and repair costs are correctly projected and if the investor exits the property within the five month period. Estimated Repairs What the investor calculates it will take in materials and labor to correctly repair the property. Escrow/Title Fees Escrow and Title fees are flat fees and do not change in price. 65% of Future Repaired Value (FRV * .65) The Norris Group will take its appraisal, the investor appraisal, and use this formula to find the number we are willing to lend on a property. Point Costs A point is one percent. The Norris Group charges a 3.5% origination fee for brokering the loan. Fees (Need help here ? please define) Hole for Repairs (Need help here ? please define) Down Payment Required Down payment averages 10-15% of purchase price plus repairs plus costs and is required on all loans. Net to Escrow (Need help here ? please define) Upfront Appraisal The Norris Group charges $375 for its own appraisal of the property. Monthly Payment The Norris Group hard money requires the investor to make monthly payments. TNG feels there is no better way to remind investors there is a debt to be paid. Vacant Property Fire Insurance All hard money loans are required to have proof of vacant fire insurance. If the client does not have a source, The Norris Group will provide the contact. Cash Reserves In the current market, The Norris Group will be looking for an investor to have about 20% of the properties future repaired value in cash reserves (cash, credit line, CDs, etc). This is used to ensure the loan balance will be paid and that the investor is in a healthy market position. Part eight of ?I Survived Real Estate 2008? picks up with Rick Sharga of RealtyTrac talking about a discussion he had with a man who handled the REO assets at a credit union. The man was wondering if RealtyTrac could supply him a list of who owned the firsts on a list properties. Rick was surprised since he thought that would have been information that was gathered. The man said they did not have the information as little information was gathered on the first mortgage and little was taken on the homebuyer. Rick says this downturn is different from others in that other downturns were preceded by an economic downturn. RealtyTrac feels this kicked in first quarter of 2006. Unemployment was historically low as were interest rates. Rick sees we saw capitalism at its worst. We saw Realtors and mortgage brokers getting greedy along with Wall Street. Tools were being used in ways they never should have been used. The wheels this time all came off at once. Bruce says there are a lot of new people in business. The greatest bull run got more and more people in and they rationalized that it would continue. Bruce talks about the discussions people make in a boom market and why it?s unwinding. Bruce also mentions a bet with a friend he made where he thought oil prices would be at $50 before they hit $150. This was when the price was $142. Bruce asks Richard Lambros how the building industry looks at this market and the possibility of building. Richard talks about the builder journey through the last few years. This is a housing crisis combined with a credit crisis. Richard brings up how most people don?t like the solutions being presented but feels the solutions may be less painful then letting it correct on its own. He says builders are really in a position of waiting and the core issues are still an issue. California homes are very expensive to create and the government doesn?t seem to realize that. Bruce asks Richard if when building resumes if the size of the homes will decline. Richard says the average went from 2,200 to 2,500 square feet and builders were looking at demand. Bruce says he thinks this is an unusual event and this might never been happen again in our lifetime. Prices might skew so low that it will eventually attract mass migration. Once our home prices dip below those of neighboring states, we win the climate and coast battle and win migration. Once we get the migration, building will really be up and running again. Tommy chimes in and says there are other states that had the same inventory for half the price of the states that got overheated. Overheated states have to come back to ?normal.? Bruce says he agrees but says that?s part of the reason he loves California real estate. California wins so many tie breakers. There?s exciting volatility you don?t get in other states. Bruce talks about Fannie and Freddie and if we?ll see them stay in private ownership. Christopher Thornberg says they are clearly insolvent and he doesn?t know what they will do or how they will react. Typically they overact. Bruce asks the panel if the government writing these big checks will increase inflation and if we?ll see much different interest rates three years from now. Christopher describes the two ways our government pays the bills; issue debt or printing money. Christopher says our government assumes that investors have confidence in the system. If investors see the bottom drop out of the public bond market and the treasuries go crazy then there?s a problem but he says we?re far from that. Christopher says interest rates are now adjusting for the increased risk. Eventually they?ll come down when this crisis passes. Bruce talks about when he became an investor he refinanced his house at 17% interest. Many people were telling him at the time he?d never see single digit interest rates again. Bruce says interest rates can be very high as long as the income to median price ratio makes sense. There could still be a healthy market. Rick talks about market psychology and how nervous buyers and lenders are at the moment. Bruce talks about the velocity of price drops in the market being historical and some are unaware. 35-50% price declines are shocking. Joel discusses a Zillow study where 7 out of 10 people thought their home was still appreciating. Christopher Thornberg calls that homo-illucination and what it stands for. Bruce asks Phil Tirone if lenders are skewing too conservative and not making loans at all. The automated underwriting was such a blessing at the time because it made things ease and now it?s making it worse. Phil describes people putting 50% down and he still can?t get financing because his client?s credit score is low. Christopher says those automated systems were a disaster and that lenders knew how to manipulate the systems. Philip says these systems did help cause the problem. Christopher says once the price gets down low everyone will qualify. Bruce touches on affordability. Bruce describes affordability and what it solves and does not solve. He describes past cycles and what he looks for in a turned around market. More in the last and final show. See also the video on YouTube or Google video. |
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10-04-2008 |
Part seven of ?I Survived Real Estate 2008? picks up with the panel interview from the last session where Bruce talks about how Wall Street keeps calling to find out when bottom is so they can profit even though they are part of the reason we?re in this current situation. Rick talks about large pools of money purchasing these loans at deep discounts and then fixing the principles of the people in the homes. Bruce then responds by talking about HR3221 about how HUD can buy first trust deeds at a discount and how the new structure would allow them to alter the loan of the person in the property. Bruce worries about the ramifications of this program. It is limited in who can apply since it applies to adjustable mortgages only. The people who really get burned are those next door who qualified for a fixed loan and are making the payments. They did everything correctly but they don?t apply for the principle reduction. With California being a non recourse state, Bruce worries the dominos that might fall. Bruce then asks Philip Tirone if bailing from mortgages is becoming more acceptable. Philip says clients don?t care about the moral issue of walking away; they are more concerned about the credit ramification. Philip talks about the raised loan limits and how everyone thought it would make a difference. They think things are going to help but when you get into the legislation, it doesn?t. Bruce agrees with Christopher in that the median price has to become more reasonable. Christopher thinks another 6 months and everyone will qualify. Tommy Williams brings up the very important point of moral hazard in letting something like a bailouts occur. Not holding consumers accountable sets up a larger problem for the future. Bruce asks Christopher about Merrill Lynch taking .22 cents on the dollar for a $30 billion package of CDOs . He says they actually got 5% in cash and carried back a note and guaranteed the pile. Bruce asks whose money was actually lost. Christopher says it was the consumer investing in their company. Christopher says this buyout is another instrument and accounting mechanism. The financial system, Christopher says, is an absolute mess. All banks are having a difficult time. We?re having an issue with cash because of it. Bruce asks Christopher about how FDIC can handle writing these sort of checks and if the government will just keep writing checks. Christopher says that they?ll have to be bailed out as well. Bruce asks if stagflation will be a problem. Christopher says he doesn?t think it will be an issue. Bruce asks Rick Sharga about the difference between a bank owning a loan and the individual owner. Rick explains how the process works. Banks can accept the losses but the private investors can?t as easily take the hit. These loans are not as flexible as the securitized loans. Bruce talks about HR3221 and how the second must be wiped out first. About 10% of the foreclosures list in Riverside being non-owner occupied but 70% out of the 90% that are owner occupied have simultaneous first and second at the time of purchase. Almost 100% of these properties are 100% financed. Joel Singer brings up refinancing. The number of first payment defaults is huge because of bad credit and no skin in the game. The good news, he says, 2 out of 3 will stay in their home most likely. However, he is much more concerned about price drops then the mortgage resets. He thinks more people will walk if the prices get too low. Bruce also brings up unemployment and how it will continue to go up. He says out migration will then probably force more to leave. Bruce asks Annemaria if loan tightening happens during every cycle. Annemaria talk about how there?s a cycle and she thinks that this will never happen on this scale again. Lenders are in sheer panic because of what?s gone on and all the legislation now being presented. It?s a little late to implement since everyone has already got in. Bruce feels once we get into a safe market, the next person will dream up the next special mortgage. Christopher says financial investors are always slipping in risk and hiding it. Incentives from Wall Street are bazaar and we need to not trust them so this doesn?t happen. Bruce sees the foreclosures coming as being a huge problem and much worse then the 90s. In the 90s we had two times as many sales as we had foreclosures. This year, we?ll have two times as many foreclosures to sales. Joel Singer says the 90s downturn was caused by unemployment. There were 7 years where prices were flat. Joel is curious to see if the market will clear faster because of the steep price drop. He thinks we have to make the market clear and he feels that it really already has. Joel is stunned at how many sales are currently being made and he doesn?t think it?s investor purchases. It?s cheaper to buy then rent in some places. Builders are having a hard time competing because homes are being bought below replacement costs. Bruce talks about his Grand Junction, Colorado experience buying all of HUD?s condos. Bruce set all the costs at $8,000 a condo but no one would buy because the market was too scary. Emotions definitely play a role. Rick says he talked to a man who handled the REO assets at a credit union and the man was wondering if RealtyTrac could supply him a list of who owned the first. Rick was surprised since he thought that would have been information that was gathered. The man said they did not have the information as little information was gathered on the first mortgage and little was taken on the homebuyer. More next week or see YouTube or Google video for the entire program. Next week is the final week of the audio. |
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10-03-2008 |
Part six of ?I Survived Real Estate 2008? picks up with review from last week. Since this is the solution portion it?s very important. Later in the interview the Q&A with all panelists begins. Bruce shows the audience a list of 20 homes The Norris Group purchased in the past 45 days through auction or out of the MLS and the huge price hits lenders are taking. On 20 transactions, the banks took a $4.6 million dollar loss. Bruce says he?s worried about the domino effect. Too many people owe more than their property is worth. Bruce says there are three ways to solve a vacancy. We can tear down houses and create an artificial housing shortage. We can leave it vacant and wait for till household formation catches up with supply. Or, we could make it possible for investors to have financing to hold them. Four solutions that are needed to get us back on track. The 203k loan program from FHA should be made available to investors. It was available to investors until 1996 and then FHA discontinued because it had done its job of getting rid of foreclosures. FHA doesn?t have a ton of foreclosures because they didn?t make a ton of loans. However, the loan program needs to be made available for investors to expedite the foreclosure problem. Fannie and Freddie need to increase the number of loans they will give to investors. Both want to open offices in California to help unload inventory more quickly and investors are likely candidates. At the same time, they are cutting back on financing available. Both are in a dire situation. Fannie and Freddie hold a huge amount of the foreclosures. Option Arms are the next wave and these loans represent 50% of Fannie and Freddie losses. Bruce shows the Option Arm reset chart. The chart shows the expected resets and what?s currently happening now. A huge number of these Option Arm loan holders are making teaser payments. Once the loan balance hits a certain percentage, the loan resets. 90% of the borrowers of these loans made the minimum payment. Many won?t walk until the reset because the payment is cheaper than rent. The foreclosure process is now taking longer because the banks are so slammed but because of the new regulations as well. The bulk of these are set to land in 2009. The loan amounts were typically more than subprime and the lenders will have to recalculate what they made because of how they were writing things off. Bruce says a due on sale moratorium would make it possible for investors to buy properties that would undoubtedly become foreclosures, it would allow Realtors and auctioneers to make commission on properties with no equity but favorable financing, allow a consumer to move on with credit intact, and improve liquidity in the system. In the 1980s, foreclosures exploded but price deterioration wasn?t bad. Assumptions of loans saved the market. When interest rates were 17%, people were able to assume better financing. Bringing back the simple assumption could really help. Bruce also suggests the 90 day seasoning period on properties to be removed so investors can fix houses and sell them more quickly. Bruce shows the audience the picture of one of The Norris Group?s fixed up properties. Bruce describes why our fixed up inventory is so important for the market. The assumption that investors are committing fraud is completely wrong and is actually causing more problems. The creation of the two levels of comps is necessary to keep prices stable. Bruce also wants to see long-term financing for investors so we can get the market cranking again. Bruce then starts the second part of event. All eight guests appear on the stage to discuss the solutions brought forward. Tommy Williams starts off by speaking on the point that there are some properties that should be bulldozed as some neighborhoods would actually be better off. Christopher Thornberg brings up the political ramifications and complications of solutions and the difficulty of getting people to listen. Christopher also brings up the myth where some people renting must mean that person?s life is a complete wash. Christopher also brings up how investors were blamed for the current market. Bruce brings up the fact that all the solutions he proposed are not new and that they had existed at one time in the past. It?s nothing new and they worked before. Rick Sharga says the number of properties in foreclosure that are not owner occupied have not gone up that much. The myth that the investor caused it is not correct. Rick points out that many of the solutions would have to be implemented one piece at a time and it would take time. Rick also talks about non profits getting involved. Habitat for Humanity is taking REOs and rehabbing them instead of starting from scratch. Rick also talks about how numerous investors are coming in with large pools of money ready to take down portfolios of notes. Bruce talks about how he gets called by Wall Street often and how they are putting together multi-million dollar pools to do that and they want to know when bottom is. Bruce is not excited about the thought that the very companies that helped get us into this mess will be the ones who also take advantage of the current situation. More to come. |
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