Bruce Norris expects another year of strong appreciation in SoCal. A big point to look at is the percentage of households able to afford to buy a median priced home dropping to 17% as the trigger of the top of the cycle.. He was right on the bubble years, the crash and bottom in late 2008 plus strong rebound a few years later too.. I love people who think independently, are actually on the ground and experts in their fields plus aren't just broken clocks rehashing the same tired mantra..
Below is Bruce’s presentation on CA Poised to Pop last night. I did the best I could. No doubt, I have likely missed out several points of the presentation so I apologize in advance and take my clip notes with a grain of salt, or not.
Bruce mentioned that he is data-driven. Bruce likes charts because it takes the emotion out of decision making. I thought Kaihacker would get a kick out of this statement.
Here are some points that Bruce talked about:
1) I asked Bruce if this economic recovery is real. Bruce’s response was that this is not a real economic recovery. This recovery was policy driven. 70% of new job creation is part-time. I purposely asked this question again because Bruce previously mentioned in his “How I Survived Real Estate” presentation earlier in the year or last year that this is a fake recovery.
2) However, Bruce mentioned that the Bay Area has recipes of a real recovery. With respect to job creation: CA added 1.7% new jobs (252k jobs), while San Jose added 2.9%. San Francisco added 2.7%. OrangeCounty added 1.7%. San Diego added 1.6%. Apparently, Bruce believes the Bay Area gives the best indicator for other cities in CA. He suggested that investors should focus on nearby cities that haven’t experienced the price appreciation like the Bay Area has had.
3) CA home prices peaked in 05/2007 at $595k. At the bottom 02/2009, the median price was $245k. Now, the median price is $434k. YTD, the CA housing market is up 29.8%. It doesn’t matter that the recovery is not real and policy driven. Investors are not complaining about the YTD 30% appreciation. Just be sure you have a chair when the music stops. An audience asked Bruce when this housing market cycle will peak. Bruce said when the housing affordability index of approaches 17%.
4) In Santa ClaraCounty, prices are up 77.5% from the bottom. In 02/2009, the median price was $445k. Now, the median price is $790k. In certain parts of the Bay Area where home prices blew past 2006-2007 prices upward of 30%, they have entered speculative territory in Bruce’s opinion.
5) Bruce said we are in Quadrant 4, which is aggressive price appreciation. It’s possible that we will have back to back year of aggressive price appreciation.
6) An audience asked about the dangerous part of his CA Comeback: Too Fast, Too Furious, and Dangerous presentation. Bruce responded that the dangerous part is interest rate spiking up over-night. So far, Bruce is very happy with the recent mortgage interest rate increase. Bruce was afraid that the mortgage interest rate would stay too low for too long where home prices would keep on escalating to a point of unaffordability. That would do so much damage. With the recent mortgage interest rate increase, Bruce believes that the damage will be less severe.
7) Housing affordability was highest in the mid 90’s at 40% in CA. In 1999, it was at 36%. Now, it is at 36%. Bruce used Q1/2005, where the CA affordability index was at 17% as his benchmark point for the top of the market. Bruce tossed out data from Q2/2005 - 2007 due to stated income loans.
8) At the peak of the housing market, home sales were about 5.5k – 6k/month for the Bay Area. We are now at 4k so we have more room for appreciation because demand is currently greater than supply by 2x in Santa ClaraCounty. Bruce mentioned that sales are currently being limited by supply. In addition, CA has consistently attracted the highest shares of Venture Capital, which is about 50%. NY is about 10%. MA is about 11%. TX is about 5%. So the money is here.
9) How Were The Sales Being Limited? Let’s take a look at some data.
Mortgage delinquency in Q1/2007 was 1.3%. Foreclosure rate was at 0.2%.
The mortgage delinquency in Q3/2008 was at 5.9% while foreclosure rate was at 1.3%. Banks figured out they cannot keep foreclosing at this rate because it would crush the market with REO inventory.
The game began in Q4/2008 to keep foreclosure steady.
Even though delinquency peaked in Q4/2009 at 11.3%, the foreclosure rate was kept steady at 0.8%. The foreclosure rate has remained steady at 0.8% since then.
The shadow inventory never came to fruition.
In addition, the debt issue has been addressed by the bankers and policy makers using the following methods.
1) Solving The Debt From The Bottom Up
a) Make other investment volatile and with virtually ZERO return
b) Gradually reduce inventory for sale REO bulk sales.
c) Bruce mentioned that the buyers cannot resell the property for X amount of years.
2) Solving The Debt From the Top Down
a) Modify loans
b) Debt Forgiveness
c) Short Sales
There were 300 subdivisions recorded in RiversideCounty in 2002. In 2005, there were 399 subdivisions recorded. Now, there are only 22 subdivisions recorded.
CA Underwater Mortgages – At the peak in Q4/2009, 35% of mortgages were underwater. Q1/2013, 21% of mortgages are underwater. There is hope for the underwater homeowners. Now they can see the light at the end of the tunnel so they will likely hang onto their underwater house.
10) So Where Is The Inventory Coming From?
The answer is equity sale. Bruce noticed that trustee sales are now not being resold/flipped like the previous years. Bruce doesn’t know any place that’s over-building right now because builders are virtually not building enough when they should be aggressive.
11) An audience asked about the impact of Hedge Funds buying in real estate. Bruce said negligible. Bruce said regular investors still dominate the market. Foreign investors and H.F. don’t make much of the market. Foreign investors control about 6% of the market. Hedge funds control about 2% of the market. Sean O’Toole has a lot of data on foreign buyers. Bruce also mentioned that Carrington went out of business.
One interesting note: Bruce said as home prices going up, we will have more foreign investors buying. They don’t just disappear. Why? Because they are human. In addition, as prices going up, everyone wants to own a house again like the Joneses. They quickly forget the pain during the previous downturn. It is forgiven when the housing market is going back up again.
12) The pent up demand is much greater than Bruce’s thought. People that lost their home through foreclosure and short sale will buy back again in 3 years. One thing that hasn’t changed yet in this cycle is the willingness to lend. Currently, 70% of the business is to buyers with 740+ FICO score. However, Bruce believes that the lending standards is politically about to be loosen. Just this month, FHA changed the rule that buyers can buy a home after 1-year of foreclosure. More people are starting to use ARMs again, but it’s not as dangerous as the Stated Income/Subprime Mortgage program in the previous cycle because they still have to qualify for the loan.
13) Here are some other items that Bruce also talk about:
a) CA Debt Forgiveness from the State level is still in limbo 2013. If the State doesn’t pass the Debt Forgiveness, Bruce said short sale might go away, and we will get more foreclosures due to the 1 action rule.
b) At the bottom of the housing market, houses in San BernardinoCounty were selling for 20% of the peak value. How could we have missed the bottom?
c) Sales of new homes are typically about 5% of the market share. 95% is existing home sales. When new home sales are about 10% of the market share, we are at the peak of the market. When new home sales are almost zero, we are at the bottom of the housing market.
d) FL and NV have shadow inventory issues. FL takes over 1,000 days to foreclose. NV has 60%-70% of houses underwater, but lenders cannot foreclose due to the change in state policy. However, new construction has begun again. These two states will get smacked hard during the next down turn.
e) Some names that Bruce mentioned were Christopher Thornbergh (Economist). Chris believes Prop. 13 is going away. Others names Bruce invited on his radio show to get their opinions on the market as well as their predictions were Sean O’Toole, John Burns and Harry Dent although he disagreed with their opinions and conclusions sometimes.
f) Bruce did some sales pitches for his Saturday Training “How to Make $1 Million in 24 months” such as Subject To, How to find motivated sellers in any market, How to buy properties at 65-70 cents on the dollar in a hot market. How to buy free and clear properties at a deep discount, etc……
g) Bruce’s Trust Deed business is yielding 9-11% returns for his investors. He currently has about $70M in the pool.
h) Bruce got married this year so congrats to Bruce.
I had a conflict in schedule so I cancelled the “How to Make $1M in 24 Months” event for this Saturday. I received a full refund immediately. This gives a lot of credibility to Bruce in my opinion. If it were other gurus, god knows if I would get my refund or the run around.
Have a great weekend everyone.
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