I Survived Real Estate 2019

The Norris Group would like to thank the following platinum partners: the San Diego Creative Real Estate Investors Association. InvestClub. ThinkRealty. Coach Fullerton. Keller Williams Corona. PropertyRadar. The Apartment Owners Association. MVT Productions and Realty411. Good evening. Oh, this is actually the very first year that we’re not live streaming so I am so much more relaxed. Welcome to the 12th Annual I Survived Real Estate event. I am Aaron Norris. Thank you for being here. Some of you are new to the scene. You’re like “I don’t know why I’m here.” Sit back and relax. We’re having a joke. Every time the word “real estate” is said, you can just have a sip of wine and you’ll have a lovely evening. Sometimes couples bring their significant other and they only come once because they’re not diehard real estate fans. Hopefully nobody here is like that, but please have a great time tonight. I Survived Real Estate happens once a year. We come together in one place for one night to discuss the year ahead while benefiting two incredibly awesome charities. We started this event back in 2008 during the recession to celebrate our industry and to raise money to defeat cancer and to help people who have been impacted directly and indirectly, which unfortunately happens to so many of us. So, as we do every year, if you or somebody that you know is struggling or has struggled with cancer will you please briefly stand up. And that’s why we’re here and why you’re standing. Can we please do the Pledge of Allegiance. READY. BEGIN. I pledge allegiance. To the flag. Of the United States of America. And to the republic for which it stands. One nation under God indivisible with liberty and justice for all. Thank you. Over the past three months. We have together raised over $55,000. Thank you. Bringing our 12-year total it to over $925,000. We are oh so close to the million-dollar mark and we expect it to happen next year. So we hope you’ll all be back. I Survived Real Estate is completely underwritten by the Norris Group. So 100 percent of what we raised tonight via ticket sales or sponsorships actually do go to the two charities that are benefiting tonight. Make a Wish of the Inland Empire in Orange County and St. Jude Children’s Research Hospital. So if you happen to be sitting at a table and you’re given a ticket, don’t worry, we’re gonna be hitting you up. There are ways to participate. Make A Wish has left a card on your table and you can meet them out in the hallway, as well as St. Jude, in your program, has a house giveaway. They actually have a raffle. All of a sudden, that program, everyone’s like, “What, how did I miss that?” Yes, there is a house raffle for here in California. So aren’t you happy you attended? So there are ways that you can participate tonight. Later on if you are watching this online via Amazon, YouTube, Facebook, or any of the digital channels, please go to isurvivedrealestate.com, hit that Video tab, and you can see our program, see all of our sponsors, information on our speakers, and ways that you can get involved and donate to the charities. And if you like the show, please do. With that, I would like to ask Amanda Soto with St. Jude Children’s Research Hospital to share a little bit about their mission. And while she is making her way up, let’s watch a short video. I really, really look forward to playing video games with Zac. Carson is nice and kind, and he loves video games. We both really like video games, so I knew he’d be a friend from the moment I first saw him. I love him. It’s a button sequence that you have to do.
You gotta do the left stick up twice. Press B and up at the same time. B and up at the same time. I call him sometimes when he’s in his transplant, and he would, you know, kept remembering when I’d have my amputation. We always play with each other and we talk about the good things and we encourage each other to do good at our appointments. We make jokes. There was this one time when me Zac we’re going to go to the zoo, but I didn’t feel good enough to be able to go. So we just played video games after when I was better. Good job. Pretty much get together and just play games and have fun and don’t really think about the other stuff. I may I ask if your appointments went well today or if you were feeling good. We focus on our friendship and just make that, like, our main goal and and don’t worry about all the pain and stuff like that. I don’t have to take pain medicine as much. They help distract me, and it’s helped a lot. Cancer’s come back a few times, now it’s gone again, so I’m going to go home soon. We’re gonna, you know, play online and facetime so we can talk
and see each other even from far
away. Uh oh. Wrong button, wrong button. You’re gonna get defeated. I just want to say that St. Jude is a great place and they’ve given me my life back. All the treatments and surgeries and everything else. I think it’s great that no matter
what, people always help us kids at St. Jude. Thank you Aaon. Can you hear me? OK. Wonderful. Thank you once again, and I want to thank the Norris Group for having us here, ,for inviting us once again this year to be a recipient of such generosity. I’m very honored to be here tonight and share the stage with another amazing non-profit which is the Make A Wish Foundation. It’ss truly an honor. And first of all, good evening ladies and gentlemen. I also want to thank you directly. Your presence here is showing lots of support to St. Jude Children’s Research Hospital. And thanks to you, families like those of Carson and Zac do not pay a bill for their travel, treatment, housing, or even food, and that all is made possible because of the contributions from individuals such as yourselves and amazing organizations such as the Norris Group. So thanks to your gifts, St. Jude Children’s Research Hospital is able to continue the lifesaving research that it’s done. Ever since the hospital first opened in 1962, the childhood cancer survival rate has gone from 20 to 80 percent in just over 50 years. I should mention however that that statistic only applies within the United States. Unfortunately throughout the world that statistic still remains like it was in the 1960s where it’s that 80/20. So that means that four out of every five children, unfortunately, will not survive. But because of that St. Jude is saying, “You know, we’re not doing enough.” And thanks to your contributions, St. Jude Research Hospital has made a commitment of $100 million to invest in global programs to help raise the childhood cancer survival rate to 60 percent by the year 2030. And again, all that would not be possible without the kind-hearted support of individuals such as yourselves, organizations such as the Norris Group. So our commitment is that no child should die in the dawn of life as our founder Danny Thomas once said. And once again, I’d like to thank you on behalf of our patient heroes such as Zac and Carson and the St. Jude family. Thank you and have a wonderful evening. All right. Thank you Amanda. Next, the brand new CEO, 16 days in, Make A Wish of Orange County and the Inland Empire, Gloria Crockett. And while she’s coming up to the stage, please watch this great video. So we’re really excited to be here today at the Orange County School of Arts, and their students are actually helping us grant a wish to Kaylin, and her wish was to be a pop star. And so they’re going to provide the band and the backup singers and dancers, and so we’re really going to provide her the most amazing experience ever. Kaylin came premature and just something just wasn’t right. It was like a mommy gut feeling, and then it started with all kinds of issues. Her not being able to keep food down, her throwing up and then we were in the hospital when she first got her first bloody diaper, and then it was just downhill after that. She ended up being T.P. independent. She went through numerous surgeries trying to figure out what’s wrong with her. Nights of her in stomach pain, nights of the crying and saying she just sometimes feels like giving up. You know, her missing out on school activities, family vacations. You know, having no friends to where her friend that she had was just her friend in the hospital. So being through everything she’s been through and still waking up every day with hopes and dreams and goals, it’s priceless. This is probably the most special, most important, best event that I’ve ever done in my entire career. And I want to do more of them. I think that it’s important for all of us to give back and to reach out because the need is there. And, it’s just so fulfilling. And it’s better than any paycheck. It’s better than any name on a sign to give an experience like this to someone like Kaylin who’s so deserving. Thank you everyone from OSCA. Thank you everyone for being my fans. It means so much to me. Good evening everyone, and thank you Aaron and thank you to the Norris Group. These videos we’ve seen tonight. Oh my gosh, these kiddos, are they not absolutely amazing. Because of each and every one of you, you’ve made an impact in their lives. Their lives have been changed. Their lives have been inspired. Because of organizations such as St. Jude and Make a Wish in which you’ve all come together this evening to make a difference. Can you guys believe it? Almost $925,000. That is absolutely amazing. So as you’ve heard, my name is Gloria Crockett. I’ve been with Make A Wish for 16 days, and I am excited. I am humbled. I am inspired. I’ve seen that video three times and I’ve cried each time. It’s amazing what we’re able to do. I oversee the offices that cover Orange County, San Bernardino County, and Riverside County and I’m humbled by the job I get to do every single day. So Kayli’s wish – was that absolutely amazing! To be a rockstar! I might want to be a rock star someday. But my gosh, you saw Kayli’s wish gave her the opportunity that allowed her to shine bright after many many difficult years that were spent in the hospital. For her family, it was a moment to celebrate after years of uncertainty, hospital stays, and doctor’s appointments. As we continue to tell stories about that day, we know that this life-changing experience was not only for Kaylin and her family. It was for the students, it was for the backup dancers, it was for the band, it was for the faculty, it was for the advisors, and we know that it had a great impact on the hundreds of individuals that were out in the audience cheering for her as she rocked out that stage and singing. Wishes inspire hope, they spark inspiration. They celebrate joy for those who are involved in creating that wish and making it a reality. We believe that a granted wish is truly transformational. At Make a Wish this year, we have a goal to grant 348 wishes. That is one wish every twenty five hours. Not only do we grant wishes for our chapter, but we help other chapters across the nation in which there are 60 to help grant wishes in our area. A lot of children want to come in and have wishes granted at Disneyland, or they want to meet celebrities. So we do a lot of that with our partners across the nation as well, actually around the world. Unfortunately, according to the Centers for Disease Control, only about half of the wishes are currently being granted for eligible kids, and so the children that are served by Make A Wish are between the ages of two and a half and 18 and are currently battling a critical illness. But thanks to all of the support today, you’ll help us strive to make that goal of that 348 and continue to allow us to serve those kids that would like a wish to come true. Every kid that is battling a critical illness, we would like them to have the opportunity to live out their most heartfelt wish and make memories that last a lifetime. On behalf of the wish children and their families, volunteers, supporters, our Board of Directors, and our staff team, we want to thank each and every one of you, the Norris Group, and all of their friends for making this a reality for Make a wish. We have to say thank you for all of you. We’re also excited. On the table, you see that there was a wish is being supported by I survived a real estate 2019. They adopted the wish of Elijah. Elijah wanted to meet his favorite entrepreneur Jeff Bezos. Is that not a cool wish. My goodness. And I thought,, wow that’s pretty powerful. So without friends like you, we would not be able to make the transformational changes that we do. And I cannot wait to continue my journey as the new CEO at Make a Wish Orange County in the Inland Empire to create more memories with each and every one of you. So thank you so very much. Thanks again sponsors. None of this tonight is possible without your support over the years. After hosting this event for so many years, now in Year 12, a lot of faces around the room become family. This is almost like a family reunion, throws me off every year. We don’t have name tags, you’re all dressed up. It blows your mind. But we’re so grateful for your continued commitment to come out here. Very briefly, and many of you are already aware, we lost somebody very important to this family this year in Geraldine Berry from Northern California. She was here since the very beginning. She was instrumental in bringing everybody from Northern California down. She was a very dear friend, and if you didn’t know, her legacy lives on by all you Northern California people who continue to come down, and I just really appreciate it. She’s always an inspiration, never forgettable, but we will definitely miss that Irish accent running around, her causing problems. Something to cherish, but wanted to let you know. All right. Now onto the business. I’d like to quickly thank our team Robyn, Vicki, Holly, Donna, Joey, Don, Mike, and Rich who have been helping throughout tonight, running around tonight making it go smoothly. Thank you. White House catering and MVT Productions, who make life so much easier and have been here since the beginning. I’d like you to actually leave your cell phones out. Please put them on vibrate so the show isn’t interrupted tonight. You can follow along on social media using #ISRE. But tonight, I actually need your help. One of the reasons we didn’t want to livestream is because we want you to participate a few times in some online questions. So with your phone out, I can already give you a warning right now. Please don’t – I’ll tell you how to do it first. All one word, no spaces. Text thenorrisgroup to the number 22333. I’ll give you a second. You can tell that too many people have been watching Game of Thrones. Winter is coming apparently in the economy. We want you, after you do that, after you put thenorrisgroup and you text it to 22333, I’d like you to text the one word on how you’re feeling about the economy right now. While you are all busy texting, using your phones for good cause, I would like to invite the man up to the stage who has been in the business, next year when we will hopefully hit $1 million, he’ll have been in the business for 40 years. He is a real estate investor, builder, hard money lender. He hosts our weekly award-winning radio show. He loves to yellow line charts, and he does his best to advocate for an industry he loves very much. I get to call him pops: Bruce Norris. Thank you Aaron. This was Aaron’s brainchild by the way. He’s done an amazing job with it. In 1981, I attended a seminar, a seminar I really didn’t want to go to, and it happened to change my life. A gentleman named Jim Rohn, for whatever reason, I was ready to hear him and he gave this talk. I went home and wrote goals for the first time in my life, and my life’s never been the same. When he passed away, I got the idea of honoring his legacy with an award. And we asked the Rohn people if we could do that, and they agreed. And so, every year we hand out something called the Rohny Award. It is reserved for the very best of the best in our industry. People that have given back to their fellow investors and taught them things that enabled them to better support their family. Tonight, we have Jack Fullerton here, who was the first recipient. And Pete Fortunato all the way from Florida back from him getting the award last year with John Schaub. Tonight, we get the honor Dyches Boddiford. You’re too early. Somebody has given me something to read I think, and I think your family has put some stuff in here. So it’s gonna be fun for you. Dyches grew up on a farm in rural South Georgia where he learned the meaning of hard work as he watched his dad and uncles running various agricultural businesses in the area. His pursuits did not include farming but instead resulted in his grandmother banning him from conducting scientific experiments in the house. His astute grandfather bought him a chemistry lab and helped him set it up in the barn far away from the house. He eventually pursued his love of science and attended Georgia Tech studying physics and eventually obtaining a graduate degree in computer science. Even today many of his friends still refer to him as Rocket Scientist. Dyches met his future wife Debbie, who’s with us tonight as well, at Georgia Tech. But incredibly, it wasn’t until years later that they would reconnect and get married. They have two daughters, Dorsie and Lori. Working as vice president of a prestigious engineering firm, he became involved in Georgia REIA and started learning about and investing in real estate on the side. Debbie still reminds Dyches of one of his first investments – a small apartment in a less than desirable area of Atlanta where she would go pregnant to collect rent. When the engineering firm was eventually sold, he moved into real estate full time. Dyches learned about land trusts; and as he began investing and got so many questions about trusts, he started teaching a small class on the subject. Over time it would grow to include information on entities, tax strategies, asset protection, which many of us know him for best today. Wanting always to include his family in the business, daughter Dorsie recollects that in order to be allowed to watch cartoons, she had to first compile binders for the upcoming events. She later discovered that her dad had gotten a quote from his printer for binding, and he used that in class as evidence of how a couple of children could save you a lot of money. All those funds went toward their IRAs of course. Dyches would sometimes be a guest on an Atlanta real estate investment talk show, and one day his daughter Lori happened to hear him on the radio. She thought that was the coolest thing ever and asked him later in the evening, “Daddy are we rich?” And his response was, “Who’s this we?” Today, both daughters are real estate investors. His daughter Dorsie is a full-time investor and also helps with the education business. According to Dorsie, Dyches is a guy that really enjoys reading tax codes. I like him already man, and figuring out the best ways to protect assets and save money. He constantly is learning and has passed on his wisdom to thousands over his 20-year teaching career. If there’s one downside to Dyches, it’s hard to get anything done at the office because he’s constantly answering questions for friends and students. And personally, I know that’s true because I’ve been on the other end of that generosity most recently. Not bad for a rocket scientist. With that, we have a short video for people to let you know how they like what you’ve done. We just want to congratulate you on this wonderful Rohny Award. Well-deserved. All the teaching you’ve done, wonderful books research. Incredible. 1994 you put on a program called the Mobile Home Money Machine. And little did I know that was going to be the catalyst to let me leave the corporate world five years ahead of schedule. You wrote an IRA book and I had bought it and called you with a question. You were so helpful. Words would not totally express my humble memory of that conversation. His material is excellent. His delivery is superb, and he walks the walk. He has so much wisdom, and he loves studying topics and sharing knowledge with other people. You’ve done such a great job of keeping us all up to date on corporations, LLCs, trusts. You have just been an awesome influence on me, my business, our family. He’s brilliant. He’s smart. A lot of people don’t know that we call him – his nickname is the Professor. Another nickname is Rocket Scientist. A lot of people don’t realize that Dyches really is a rocket scientist. Though truly I am no Shakespeare, Dyches, your teachings I hold dear. Over the years, we couldn’t be more impressed with your wealth of knowledge, your integrity, and a fantastic family man. Dyches Bodiford has done nothing but help me, encourage me, and has really provided me with the knowledge that’s invaluable. He’s a valuable example and counsel to me and to many, many others. Really meeting you changed my life, not just in the amount of education I received from you, but in the people that have flowed into my life because of you. There is a whole group of people, Dyches, that you will never know, that you will never meet, whose lives have been impacted by your teaching and by your leadership. You’ve helped thousands over the years. You’ve been a leader and an inspiration for all of us. Dyches has just been an amazing influence on our lives. You’ve not only been a teacher of ours, you’ve been a mentor, and most of all you’ve been a friend to us. Congratulations again. Thanks for all you do Dyches. Thank you very much Dyches Bodiford. Thank you Dyches. Thanks bud. Thank you. Thank you. Thank you. Thank you. Thank you my friend. Thanks for all your help. This is no joke. So yes thank you. That’s heavy. Thank you. Thank you. Thank you. Wow. I was told to be ready for this that it was pretty heavy, and he’s exactly right. Thank you for telling me that. And thank all of you all for being here and thank you for the award. I appreciate it very much. I’m reminded of Socrates when he went to get a haircut. His barber asked him, “How would you like your hair cut?” Socrates said, “in silence.” So I will be very short with this, but I will tell you that if you ever want to learn something, teach it. You’ll get enough questions that it will force you to learn all the nuances of whatever you’re teaching. And I learned that early on, fortunately, and I’ve enjoyed the teaching. It’s not only been an income stream, which obviously people understand, but it’s also been a source of education for me. You know, what’s happening in everybody else’s marketplace, and I was able to use that not only to improve my teaching but improve my investing. So thank you all for this. Thank you. This is about the children tonight, so remember that. Thank you. How about that. Thank you. Watching Debbie tear up was everything to me. Thank you for supporting what he did. Very important. All right, we’re going to have three panels that will ultimately be up here. I’m going to do what’s called an economic panel. We’ll have three people up here with me, and then Aaron will do three that will have to do with the tech world, which I can’t be a part of because I don’t have a clue. But Aaron does. And then collectively we’ll have a panel where I’ll be asking questions at the end of the evening. All six people will be up there and I’ll do my best to try and gauge everybody in something that’s meaningful. We have a lot of very smart investors in the audience, and when I speak in front of you I realize there’s some concern. And so a lot of the questions that I’ve thought about to ask tonight, it’s kind of come from you and what you’ve been concerned about. So that’s what we’ll be doing all the rest of the night. There’ll be three people I’ll invite right now, and I’ll introduce them one at a time. But they can come up collectively when I’m done. Jim Park is the CEO and founder of the Mortgage Collaborative. Jim provides day to day oversight of the Mortgage Collaborative business initiatives and works closely with TMC’s board of directors to ensure that the company achieves its annual and long term goals. With nearly 30 years in the housing and mortgage banking field, Park has held various positions in the corporate sector, starting several businesses, worked in Federal and local governments, and helped to launch a number of prominent nonprofit organizations. Second on the panel will be Doug Duncan, Chief Economist of Fannie Mae. Doug is Fannie Mae’s Vice President Chief Economist. He’s responsible for managing Fannie Mae’s Strategy Division and economics and mortgage market analysis groups. He is a frequent speaker on national and state, economic, housing, and mortgage market conditions. He’s been named to the Business Week 50 most powerful people in real estate. And last for the panel: John Burns, CEO of John Burns Real Estate Consulting. John founded John Burns Real Estate Consulting in 2001 to help executives make informed investment decisions. The company research subscribers received the most accurate analysis possible to inform their micro investment decisions, and the company’s consulting clients received specific property and portfolio investment advice designed to maximize profits. John co-authored Big Shifts Ahead: Demographic Clarity for Businesses, a book written to help make demographic trends easier to understand. We would welcome all three of you up to the front. Where to start. Doug, I’m going to
ask you a question and some of this will be interconnected. Anybody that wants to comment is welcome to do that. Today, the U.S. economy has about a 2 percent GDP growth, a 50-year low unemployment rate, inflation under control. Why are bond deal so low? We just recently inverted with those types of stats. It’s a great question. If I knew the answer completely to that, I’d tell the Fed because they’d like to know too. Well, we’re the best looking horse outside the glue factory. I was raised on a farm, so that’s a visual. But, if you look at our tenure, I think it’s about one point seven. Most of the developed countries in the world actually have negative rates at tenure. So we’re growing. Two percent growth is pretty good. Typically, economists think about the growth, the rate at which the economy can grow without inflationary pressures as being the sum of the growth in your workforce on an annual basis plus productivity gains. So we’re not too far from that. We think that’s about two and a quarter percent going forward so we’re pretty close to that. So the U.S., relative to other countries around the world, is a pretty good place to be. The question of why inflation hasn’t come – that’s the issue that the Fed would like an answer to. This influence outside of our own borders – are their economies likely to worsen and put more downward pressure on our interest rates? That’s certainly a possibility. China is clearly slowing. That is one of the effects of the trade discussion that’s going on. They’re actually about twice as sensitive to trade as a share of their GDP as the U.S. is. And so, you’ve seen recently some easing of credit conditions, even some of that will flow into their shadow banking system, which is a real concern for them today. So there’s no question that people are worrying about whether the U.S. is actually isolated from those effects of slowing in other countries. We’re still the biggest economy in the world. China is the second biggest. So as China slows, it does have an impact, but not as much on the U.S. as it does other trading partners of theirs around the world. So looking at the Fed’s actions, are the interest rate reductions in the U.S. kind of a preemptive rather than necessary? So for those of you whose lives are so exciting that you watch the press conference of the Federal Reserve chairman, we typically form our cocktail parties around Fed press conferences. But, so I do watch them because there are some clues; and in the rate cut that they issued in July, they call it a midcourse correction, which the suggestion then is that the economy is actually doing OK. But, the risks are on the downside so we’ll just temper it a little bit, be a little bit easier on money. So we’re listening in September to see, does he use the words “mid-course correction” or does the word insurance show up? In fact, he used the word insurance, which suggests their view is that the risks are greater to the downside than they were. We actually have another rate cut in our forecast in December on the insurance idea. If we go back a year ago when we had this meeting, the anticipation was we were going to have three rate hikes going forward. Now we’re probably going to have three rate cuts. That’s a big difference. Absolutely. Okay. And real estate’s feeling the effects of that, right. We saw the run-up in rates to that expectation late last year bled over into the market the first half of this year. OK. John, when I see that your business only was started in 2001, I mean, it’s an amazing accomplishment first of all because when you got started you had a nice run for builders. But, when you and I really got to know each other, you invited me to debate to some very smart people in 2005 and 2006. At the time that that went on, your clientele was basically builders, correct. Yes. OK. I mean, I had to pivot, well, and that’s a great word. I listened to where you were being interviewed, and that’s a word that you use and that’s an astonishing pivot because almost all the builders that survived had to do exactly the same. Yeah. And maybe thanks to you, a number of my builders actually sold their company before they wrote, you know, what hit the fan. So, you know, nobody can time this stuff right. But, I think you can figure out when the risks are higher than usual, and I think there is a parallel with what’s going on right now. I mean, I don’t know what’s going to happen next year, but I’m confident the risks are higher than usual. And so, that’s how our clients are running their business again. As you expanded your client base, you’ve also added to your life kind of the input from very smart people across the board. And that, for you that has to be a pretty cool experience. Oh yeah. No, I mean, I’ve got 250 the smartest clients out there who pay us every month to make me smart. I mean, that’s a pretty deal. Pretty good business model. Has the urgency or animal spirit to own a home changed from what it was? Like, when I was a young adult, I mean, that was it. Yeah. I’ll say it another way. I think the animal spirit to own anything has changed. In that demographic research book we did, it was very clear to me – we’d nicknamed those born in the 1980s the sharers because they basically invented the sharing economy. They’re like, “Why do I need to own anything when there’s an efficient way to rent something?” And it starts with prom dresses, and it goes to houses and Airbnb. I’m just gonna borrow stuff. I’m going to borrow a bike. I’m gonna take one of those go cars. Same thing with the house. I mean, they don’t like rent hikes. They would like to own their own stuff. I think most of them are gonna become homeowners. But, are they gonna achieve the homeownership rate as their parents did. I would say the odds of that are less than 1 percent. They’re just not going to get there. The reason I say that with some
confidence is it’s not just attitude. The GDP growth in the last 20 years has been a full point lower than the prior 20 years. So they just haven’t had the same economic tailwinds. When you look at the numbers for people that retire with their home free and clear and they retire as a renter, that’s not a pretty sight. So are they going to make that money in another direction or…. So let’s look at it through their lens. You know, it’s not a pretty sight in their lens to see their parents get thrown out in a foreclosure. If you were born in the 1990s, the word “recession” means foreclosure. That’s the same thing. They want to be homeowners, but my clients have done some really interesting research on that. A lot of them are not stretching as much as you would think. They’ll stretch on the downpayment, they’re putting nothing down. But I still, you know, I don’t want to go up to my eyeballs, particularly in California, interestingly, and particularly the college-educated people in California. We see that in our data that this group has the smallest share, contributing more than 30 percent of their annual income to buy a house of any of the last three generations. Much more conservative. I don’t mean to say a lot of people aren’t stretching because I’ve got a lot of data to show people are stretching. What’s the main reason to buy today? It’s because I’m ready to settle down and have a family and I’m stable. And that’s another part of it. You know, it used to be you would take a job and be someplace for 30 years. Now, you know, hey, it’s probably not going to be, and even if I want to be here for 30 years it’s not my choice. And even in big markets like Phoenix, Phoenix is a good example. If you buy a home on the west side of Phoenix and then decide to take a job on the east side of Phoenix, you’ve got to move. I mean the traffic – some of these sprawl markets have really – and everybody’s a dual-income household too, so both of you have to have a job on the west side of Phoenix. It just creates a lot of psychological barriers. Jim what was what was the year that Mortgage Collaborative started. It started at about six and a half years ago with kind of a concept that we thought, you know, lenders could learn from each other, support each other’s growth. So what we do is right now we have 170 lenders throughout the country that are members of the organization. We benchmark their performance against each other. We helped to raise and elevate their performance level in terms of our operation and efficiency. It’s an important issue in this environment. Right now, the average cost to produce the loan is ten thousand dollars. It was about eight thousand about a year ago, and it was much lower. If you go back five years. Now there were some issues around regulatory costs that were embedded into that added cost of producing a loan, but there’s higher loan officer comp and other things that played out. That makes it very hard for lenders to survive in this market. And frankly, a lot of our members were struggling at the beginning of the year before the rate started to drop. Everyone’s feeling really good again. But you know, as you know in this business it’s a very cyclical business. And so we expect that to last for a little bit. I don’t know, I’m not sure how long you think it’s going to last, but hopefully it’ll last a little longer. But you know it’ll come back to that. The balloon will come back down again or the bubble will come back down again, and so we’ll see we’re expecting to try to run the business more efficiently yet again. So you ultimately rely more on purchase? So there’s other avenues of loans. So are you interested in, let’s say somebody gets aggressive with loans to investors and stops at four or 10. Maybe 30, or something like that, would have an impact on your clients being able to make money. You know, the bulk of the business today, and Doug knows this very well, is very safe and sound lending. Some of these aggressive lending products that are in the marketplace is still a small piece of the business. Generally, a book of business today is better than ever. That’s why I think a lot of people are concerned about the bubble and what the market will potentially hold for years down the line. But you are creating some of the manufactured loan we’ve seen in our history. I don’t have as big a concern about the potential mortgage downturn in that same way. There are other issues at play in terms of the broad economics. But, in terms of the mortgage side actually bringing the economy down, I don’t think we have that issue ahead of us. One of the things we track is what we call early payment defaults. That is, when a loan is new, how many of those loans go into delinquency, 30, 60, or 90 days? How soon? Those numbers are the lowest they’ve been in over 20 years. So, to Jim’s point, the quality of the loans that are on the books, and also to John’s point, a lot of those are younger people that are being much more
conservative. Partly, it’s the tightening of underwriting criteria that has supported that, but it is factual that it’s unlikely that the mortgage space will be the problem next time around. When you look at the current lending laws that are still in place, does it indicate that we’re still going after safety first, or are we trying to get the percentage of owner-occupants up again to people that own their own home? You know, it’s in Doug’s point around the low level of delinquency that we are experiencing the market historic low. It does tell you that maybe it could loosen up a little bit. Obviously, that has a direct correlation to how wide the door is to let people into getting financing, although I do find that people, and to the builders’ side, supply is the bigger issue less, so the kind of credit availability in the market. The supply of what? Housing. So I think that’s a bigger issue. You’ve got plenty of people looking for housing. They got financing behind them, but they can’t buy the house that they want or afford. Particularly at the mid-level or start-up mid-level, I think that’s where people are struggling. I think we can try to create more buyers, but we’ve got to find places for them to buy. So that’s the challenge ahead for us. I just want to bring some clarity to the mortgage thing because this is what we were talking about earlier. The mortgage underwriting isn’t tight in every aspect. So the documentation is as tight as ever. So if you don’t have great documentation, it’s tough. If you don’t have a FICO score of 640 or above, it’s a little tough. It’s a lot tougher than it was 10 years ago, but pretty comparable. About 10 percent of mortgages are going to those people, and that was similar to the 1990s. So they could loosen on documentation, and they could loosen more loans to the sub 640. We have 57 percent of mortgages putting 10 percent down or less, which is the highest ever. The down payment is as loose as ever, and Dodd-Frank came up with an arbitrary number, 42 or 43%. We should not be above somebody’s gross debt to income ratio except for Fannie, Freddie, and FHA. We’re going to let them slide. So, 43 percent of all mortgages are above 43 percent debt to income ratio. So, we’re not loose on the downpayment. I mean, we’re not tight on the down payment, and I don’t think we’re tight on debt-to-income either. I think part of the reason why you see the trending down of the down payment amount is because home prices have moved up. You’re talking about an average, you know, teacher or fireman and how long it takes them to get 10 percent or 20 percent down. It’s quite substantial. And so people want to jump into the market. I think that’s all. Only option they have is to go towards more than a low down payment product. With Fannie, Freddie, and FHA, obviously you have a vehicle for making that happen. But the point is that the product is there. The thing that was different than in the 2004-2006 time frame is that the underwriting process now is diligent about what they call layered risks. So, if you have a spotty employment record today, it might be OK as long as you’ve got good savings and you have a good record on repaying your debt. But, if you have a spotty employment record and a weak record on repaying your debts and you don’t have savings, you’re unlikely going to get that low down payment loan. Right. That the underwriting has removed those layered risks. We survey households, a thousand a month. We’ve been doing that since June of 2010. Each quarter, we survey the universe of mortgage lenders, and we’ve watched the parallel recognition of both households and lenders of the pace of slowdown in credit easing. So starting at the post-crisis period in the 2010 period, credit was very tight. It’s gradually been easy, and both consumers and lenders have recognized that. Part of it is our rules. So we’re part of what’s driving that. But over the last year it’s flattened out. In the most recent quarterly survey of lenders, there was actually marginal tightening in every group except the part that Jim was talking about, that private label issuance, which is less than 5 percent of the total market. But there was actually a slight tightening. FHA tightened a few rules, the debt to income ratio that John talked about, we saw some layered risks emerging there. We tightened a little bit of rule. That was translated into the industry very quickly. It’s been in the news every night for a week. I got to ask: repo market. It’s not a repo like we’re used to. It’s not a repossession. It’s a real repurchase. The Fed only wishes it was a kind of repo that you’re thinking. There’s been billions of dollars that have had to be added to shore up something. I’m not an expert on this but I’ve tried to try to make myself a little bit familiar with it. Basically what happens is you have lenders that have money and you have lenders that need money. What occurs is the lender that needs money actually gives up ownership of something. Is that accurate? They have to rebuy it within a certain a certain tight timeframe. Why was there a shortage of 75 billion dollars in that exchange? And now it’s going to what? October 2nd? And it could add up to $2 trillion. So I’m I’m going to pitch watching the Fed press releases press conferences again. I’m going to get at least one of you to join me, and we’ll have drinks because liquidity, as we know, is very important. All right. That’s why you have drinks or lubrication. Well, either. They work together. So in the press conference, the chairman was asked, “Did this surprise you?” He said no because it happened in December, although at a much lower level. Bu,t what did surprise us was the magnitude. And then he quickly said. “but of course, it surprised the market as well.” So then the question was asked, “Well, what’s the cause?” And he said, “we don’t fully know.” That’s a troubling statement. But, it’s also an honest statement. It’s an honest statement, but we don’t want him to did that. So, it is true that the whole capital markets community is attempting to understand this, and there’s not a good solid answer to it. If you really want to get into this, there is a guy named Zoltan Poznar that is an analyst for UBS. He’s been warning about this for about a year. I’m going to get a name change Because Zoltan is a much better name than Doug. Well, we had him come to the company this past week because we wanted to talk to him about this because we put a lot of money because of the mortgage payments that come through our business. We put a lot of money into the cash component of that repo market. Right. And so where we are concerned about the fact that it’s difficult to understand part of it is the huge volume of issuance of Treasuries that are having to be done because of the deficits that we’re running. And there are 24 companies that have been granted access to the Treasury. They’re called primary dealers. You can look it up on the web, and you can see who they are. 24 global banks. They’re the ones that actually execute the sale of treasuries into the market, and that’s where the reserves either shrink in the banking system or increase depending on when whether they’re selling or buying. So that’s one of the things. The magnitude of the issuance of Treasuries and those institutions all have capital rules that say on a daily basis what their liquidity has to be. So they will go into the market, and if they need more liquidity they will be dedicating some of those treasuries to the trading partner who will then give them cash to meet their regulatory growth. Then, the next day they sell those treasuries back at an incremental nightly interest rate. That’s a piece of it. It’s also the case that on a quarterly basis there are corporations that have to meet tax issuances. Some of them access cash typically through the money market funds, which also has to do with the reserves on bank balances, and that that also happened. What is their collateral? Is it bonds? It’s the same. Typically it’s Treasuries or agency securities. So those are a couple of other things, but that’s not all of it. I’m not going to pretend to understand everything that Poznar has written about it. I’ve been trying to make my way through it. We’re trying to understand. He doesn’t fully understand the elements, but he’s been the one person who’s been really accurate that this is going to be a problem. He suggests it will ultimately drive the Fed to expand its balance sheet and drive the funds rate to zero. That was one of my questions. Is the act of what they’re doing actually already doing that and adding to the balance. So the follow up to the Governor Powell question was, given that you’re not fully sure, but there is liquidity. You’ve said that you would start to let the Fed balance sheet grow organically. A New York Times reporter asked if you can give consideration to actually increasing it today to a higher level because of those reserve requirements and then let it grow organically. He said no, that’s not what we’re going to do. There was another follow-up question that said, “shouldn’t you stand up a permanent repurchase facility.” And he said “not at this time.” So they’re still trying to understand the dimensions of the issue, and it does have some global components to it because some of those primary dealers are global bank components. I’m just going to throw this out there because we’ll come back to it later. When Lehman Brothers came to the table and wanted money, was it the same type of meeting where they came only the asset base that they had wasn’t valuable and no one would exchange money for them? Is that in that world, or is that a different world? It’s sort of in that world, but there’s some differences. The issue in that world was it was the single scariest day of my entire professional career. It was the second Friday in the month of August in 2007, and I had Michael Berman, who ran CW Capital, the biggest BP holder of commercial real estate in the country, call and say he just had a $3 billion deal that evaporated, and I can tell you that market’s not coming back. So we’re sitting at the desk trying to figure out what do we do about this? Who do we talk to? We’re not a regulator, we’re a trade association right. So then the phone rings at quarter to 5:00, and it’s Don Cohen, who is the vice president of the Federal Reserve Board, and he said hello. And then he said, “Doug what do you think we should do?” And so, honest quote, I said: “Governor, if you are calling me it’s a lot worse than I thought because I’m not at the top of the totem pole.” But that issue differs from this one in that what was going on then, and this is what I told him. I said “I always read down to economics 101. In order for an asset to have value, it needs to have a price. It’s valued by its price. And to have a price, there has to be both willing buyers and sellers. And today, Governor, there are only sellers. So I think you have to be a buyer.” Which they did 11 months later. All right. But it’s because no one trusted the value of the balance sheets of their trading partners. That’s not what’s going on today. All right, we’re gonna show your answer to how you’re feeling about the economy. Opportunity. This is an investor crowd. So I don’t know how to take that. They probably think it’s going to crash and they have an opportunity. I don’t know. Good to know. All right we’ve got another one for you. We are going to ask a different question. The quiz now is: Is the buy iBuyer model here to stay? You don’t have to retype in thenorrisgroup to 22333 unless you haven’t participated yet. But what you’re going to be typing in is A: if you think. Yes, the iBuyer model is here to stay. B: No it’s not here to stay. Or C: what is an iBuyer? It’s OK I’m not judging. It’s anonymous. We’re not tracking you. With that, I’m going to call up our next three panelists. Mark Lesswing. He’s the senior V.P. at T3 Sixty, a management consultancy firm in the residential real estate brokerage industry with a specialty in technology. He’s got a lot of research on blockchain technology. He’s a blockchain entrepreneur, and we’ll be talking about that tonight. Simon Chen the Executive V.P. of innovation for Realogy. Simon has recently been appointed to head of new product and innovation for Realogy. He’s fresh off of being president and CEO of the ERA franchise systems. He actually walked here tonight. He lives in the neighborhood. What are the chances? And last but certainly not least, Sean O’Toole, founder and CEO of PropertyRadar, now in his 11th season at I Survived Real Estate, our longest-running panelist. He is the founder of PropertyRadar, the property data owner information platform real estate pros have trusted since 2007. I use it every day. Please come out gentlemen. And if you could all give them a warm welcome. OK, let’s now go back to the slide of the iBuyer. OK, we have to talk about the iBuyer. Simon, since Realogy is dabbling in iBuyer space, would you like to give your definition of what an iBuyer is. Sure. So there are neuro competitors in the space now that are talking about iBuying. You know, in brief terms, it’s basically the ability for a seller to be able to sell their home in a very rapid fashion, usually in a span of five to seven to ten days or so. Typically it’s at a discount, so usually the buyer of the property, it’s sort of a bit of a misnomer, is an investor that is looking for very specific parameters around what they would be willing to pay for these properties so that they go very quickly. The practical usage for the seller obviously is people that you know can’t be bothered with selling their homes because they don’t want to clean it out. You know they’ve got 20 years worth of stuff that they’ve accumulated or what have you, or you know, folks that have a contingency on their homes or folks that are relocating or moving to some other property or something like that where getting rid of the property is contingent upon moving to the new place. So that is the dynamic that’s out there. They’re basically getting in our space. All cash. Fast. Flexible. Nobody’s walking through the house. I think I was speaking, and a realtor came up to me and she’s like, “I got a call at 8:30 last night. Somebody was in front wanting to see, and she’s like, ‘you’ll have to wait till tomorrow.’ And they’re like, ‘but it says that I can just come in. There’s an app I can let myself in.'” And the agent was very uncomfortable. They had just been cut out of the chain. This is Wall Street money backed by lots of technology, and when we’re talking about the kind of money, up on the screen you’ve got some of the players. OpenDoor – only around since 2014, yet they’ve raised $1.5 Billion. They’ve just announced this summer a partnership with Redfin. It’s no wonder. They have been spending millions of dollars on advertising on all the markets they’re in. OfferPad has been in California for a few years but started in 2015. They’ve raised $115 million. Nick Bailey was here a couple years ago touting that Zillow absolutely not would be in the iBuyer space, and they threw their hat in this year and they’ve gone pretty hard pretty quick, at least here in California. Keller Williams announced early, I think it was about a year ago at Inman, that they had secretly done about 100 deals and this summer announced that they’d be working with OfferPad. Knock is not yet, that I’ve seen, in California, but they’ve raised a total of $430 million. Been around since 2015, and then NRT is a brand of Realogy. And you’ve got the catalyst Cash Offer, and you’ve been around since about, well, how long would you say Realogy has been around? You are the parent brand for…. I was not aware of Realogy as a parent company to all these brands, but can you share the brands. So the brands under Realogy….so not a lot of people have heard about Realogy because we don’t go to market as Realogy, but you might have heard some of our brands. We own Coldwell Banker, Century 21, ERA, which is what I formerly was heading up, Better Homes and Gardens, Sotherby’s Real Estate, as well as Corkran. So we represent about 18 percent of the U.S. domestic residential real estate market. And that’s a lot of money really quick. ,Sean you work with real estate investors every day. Is there a sense of like, eh, they can’t do what we can do? Is there a Wall Street arrogance about the iBuyers in the space? What do you think? Arrogance? I love the…which one was it you said just closed in on 100 deals? That was Keller Williams secretly behind the scenes. So, anothern six months they’ll catch up with me and another 20 years they’ll catch up with some of the folks in this room, right. And I guarantee we all had better margins. So you know, there’s too much money out there chasing too little return. And you know, they’ll put that money behind folks that went to really good schools and can build really good models rather than people that, you know, are actually out in the marketplace doing things. And I think that probably this room has a lot to teach that group. And you know, I don’t think as it’s being executed right now it’s a well thought out plan. I think of it …was it the the Tyrannosaurus Rex and, what movie was that, like, “Master, this isn’t a very good plan.” Was it Toy Story? Yeah, Toy Story. I belong to several associations, and I’ve talked to some of the iBuyers and they’re very young and very hungry. But there’s a sense of competitiveness that’s happened as well. So my question to them was like, “How are you feeling about this brand entering the market?” They’re like, “we’ll get them.” I’m like, “I don’t know if that’s a good strategy.” And I do have real estate investors that are actively pitting them against each other as they 1031 exchange outside of California. So they’re purposely getting offers from every single one of them, taking the highest and best, and for the most part I’m hearing they’re really happy with the offers. They understand this model. So when I spoke to OpenDoor about six months ago, I’m like, “Why aren’t you working with real estate investors?” And at that time they said that the brand was so important to them they didn’t want to work with, you know, Main Street. They were Wall Street. They were about scale, and they’re spending a lot of money on advertising. But I do think that this summer them announcing the partnerships with Redfin was really important. I’ve heard that OpenDoor is one of the only iBuyers up in the Sacramento market. They’re spending hundreds of thousands of dollars every month and no home for the leads for things that they couldn’t buy. That’s horrendous. But, let’s get to vertical integration, one of my favorite Wall Street words, because maybe they don’t need to make all the money on the buy-sell side of real estate. Maybe it’s because they’re opening up lending offices, closing businesses. Mark, you’ve been in this space for a long time and I know this isn’t why I had you on the panel, but T3 Sixty is really well known for all the research. So, you were joining some fantastic company. Really nice to have you here. Is this a big concern for a lot of the clients that are looking to T3 Sixty for research? Is there a lot of pressure for every real estate brand to get into this business? Yeah, there’s always a lot of pressure. I tell you, I love this iBuyer stuff and all the other things that come along. Just when things seem to be calming down, we have to always invent something that gets a crisis mode, and then it calms down. So it’s just kind of the the thing right now everybody’s looking at, so you would address it all way up and down, getting into other businesses, and you can make it more efficient. But this too will come to pass, and some new crises will come up after that to occupy your space. Well then let me ask it this way, and we’ll go down the line. A lot of these brands have not been around since 2014. It all works until it doesn’t. Are they recession proof? If there’s a recession that hits and the prices start going down, even if not a lot, will they survive? Yes. So one of the innovators, I guess, in this space is OpenDoor. They’ve received a lot of money from SoftBank. You might have heard about Softbank recently. There was this little company called WeWork that didn’t go public over the last couple weeks or so, and their valuation went down over 80 percent over private money valuations in the last couple of rounds. So we as actually profitable operations are looking at that with a fair amount of interest because we want to see if this is, you know, 1999 all over again. Basically, where the private equity investments into a lot of these companies is going to sort of turn around and bite them when they try to, you know, get public investments into them. So, the net-net from our perspective is there is certainly a place…we’re brokers, we have 300,000 agents globally. You know there is certainly a place for people like my dad, for example, right, who is very concerned that he does not pass along a legacy of debt to the kids. And therefore, if he needs to go to senior housing, for example, right, he wants to be able to turn his house easily without burdening us in any way, shape, or form and I’m like, “Hey dad, I’m a broker, we could sell your house, no big problem.” But for him, he doesn’t want to burden us at all. So I do think that there will be some portion of the market that wants to sell their house at a discount for convenience. Just like you go to 7-Eleven to buy that pack of gum instead of Costco because you don’t want, you know, eight thousand packages of gum at your house. But you know the unit cost is is very different, right. So I think there will be a role for it. Some people are saying that it could be as much as 60 percent of the residential real estate market. I don’t happen to believe that. I think it’s going to be more when it all normalizes after 10-15 years, it’ll be more like, you know, 10-15 percent or so. Yeah, I’ve heard the 60 percent number too. Sean, are they in or are they out? Well, so first of all, I totally agree that they are addressing a market need, right. Like, there is a reason, well, why so many folks are pouring so much money into this. The normal house sale process, it’s difficult, time consuming, expensive. To your point on vertical integration to the degree they can pull in title and mortgage and other things and build that into their stat cred, I think that there is an opportunity for savings there, and we saw that in the trustee sale business. I had multiple trustee sale customers that started to vertically integrate as the market got more competitive. Ok, I can’t make as much money at the sale. But boy, if my construction company does the repairs, one even went so far as to have a title company and a mortgage company and the real estate brokerage. And you roll all of that in, maybe there was zero profit on the flip, right. But the profits on all those other pieces still made that business work. So. So I totally you know believe that you have to have some level especially with this level of competition. Vertical integration is going to have to happen. You know I still think that maybe what they’re paying for properties in order to try to prove out their model is certainly not sustainable. There needs to be more margin there. And you know as we all know all right. You let the margins get too thin. You take more risk and you get hurt in a downturn. So I do think that they face a lot of risk in a downturn. I’m using PropertyRadar to track every buy-sale transaction for all the major iBuyers. I’m that nerd. I love OpenDoor because it says it puts it on their credit line. Every time they buy, it’s like $400 million. Wow. Mark, what do you think? I think if you look at the motivation behind the iBuyers, once it does calm down I totally agree. I don’t if it can ever get to that 16 because I think it’s going to take part of the market that’s the physical market today. In a physical market, you got 12-13 percent, so it’s going to be a percentage of that. So I think it’s even going to be lower. I think it’s gonna be more near 5 to 6 percent. It can’t take over the physical market, but the buyer, or the seller there is kind of motivated by the same kind of things that you find in iBuyers. Yeah. And I think there is going to be real estate investors that there’s going to be stuff that they’re just not going to buy. Craig in our office calls them situations and he often uses quotes. It’s the messy stuff, the people who put up the duck wallpaper or the grapes in the kitchen. They’re like, “We just put that up like 20 years ago, and it’s not worth twenty thousand dollars more.” So complex probate transactions, so I don’t think they’re going to be taking over all the real estate investor transactions. But definitely there are competitions for realtors and investors, especially if we don’t keep up. That leads into disruption. And you just got named a pretty big role, and Realogy, what does a good investment in technology look like? You’ve got Keller Williams that, over the last year, says that he’s planning on spending a billion. Where do you invest a billion dollars in technology for your agents? Sure. So number one, you know, not to incite a riot from any Keller Williams folks in the room but, you know that billion is sort of the amount that he’s investing but it isn’t necessarily being spent in any sort of defined timeframe. We at Realogy actually spend about $200 million a year on real estate technology, and that’s for our for investor, or for our aging population. So you know, where do we spend the money? Right now, if you look at real estate technology…actually, let me back up a second. So I’m reasonably well connected in the real estate world, right, and I buy for a number of properties a year. I’m an investor myself, and frankly, the experience is kind of crappy, right, for consumers. And so, you know, one of my great passions being in the industry for the last 20 years or so is how to make it a nice experience and a place that I shamelessly spend a ridiculous amount of my income is Amazon.com, right? I’m sure by the time I get home tonight, walking, right, there will be a wall of boxes in front of my door that I have to bring inside when I walk in. The point to that, though, is that, you know, they create value. Otherwise we wouldn’t be spending money there, right. So how do we make the consumer experience more like Amazon.com because I think we would all agree that the consumer experience is far from it right now for real estate purchases. And that’s, I think, the direction that we’re moving in, right, is actually applying more modern technology so that the consumer experience is a lot more intuitive. There’s a lot more transparency for the consumers, kind of like there’s increasingly being on the mortgage front where you can actually see what’s going on in the transaction. You can sign your forms online, you can see the workflow, the contingencies, and everything like that all online. And then, heaven forbid, once you close escrow that whole homeownership experience, basically the Amazon of homeownership for the consumer, is all on the website as well. So if you ever need to pull your documents for your taxes or if you ever need to see what is installed in your house and whether maybe you should anticipate getting your air conditioning serviced before it ends up costing you four times as much because it’s hot outside. Those sorts of things should all be within that experience, right, and your engagement with your realtor over that nine out of 10 years that you’re not transacting is all sort of in there. So I think there’s an awful lot to still be done on that front, and that’s a big part of the load that I’m bearing right now. I’m glad you went that far deep into the sales process. So a lot of people think that the sale is over when the transaction stops. But what you’re talking about is taking it all the way through further. What it feels like is that there’s a lot of pressure for real estate brands to, once you enter an ecosystem, you’re controlling it not just for the first transaction of the buy but much further down the road. Well so the interesting stat about that is that, yes, ideally right, you hope you would get a consumer rating and then they’re yours forever. Right. But the numbers actually belie that. Right. So 90 percent of consumers say that they would work with their agent again right after they close escrow. Right. So hey, congratulations you got the key, we’re so happy. Boom boom boom boom. The actual percentage that end up using that agent again after seven to nine years depending on whose data you’re looking at-12 percent. Right. So if my technology that I just described can help bridge that gap between 90 and twelve, you know we’re dancing in the streets as a publicly traded company, right, because we’re suddenly capturing a tremendous amount of business that we don’t have to go out and re-farm again. All right. Sean, what do you think real estate investors and realtors should be focused on? It seems a little overwhelming when you see the amount of vertical integration that some of these huge brands are pouring a lot of money behind and not all of us are behind, you know, just $1.5 million credit card, spending money on technology. What do you think we should be
focused on? Probably not that. I mean, at the end of the day, right, if you focus on your core business and find efficiencies in your own business – these guys are trying to find efficiencies on a massive scale. But we can all find additional efficiencies, right. I think that is one thing, you know, a lot of the trustee sale customers, like I said, started to vertically integrate themselves. Sure, maybe it was on a small scale, but if you’re doing a larger investor, flipping quite a few deals, it’s not out of the question to own your own construction company, to own your own even title agency, right. That’s possible. But you know, there are a lot of things you can do. You know, I even think, you know maybe it’s interesting for real estate investment groups or clubs to start thinking about sharing things a little closer. We can all be a little more efficient, and I think that’s one thing we can take away from from all of this. In terms of whether these things going to completely dry up, every deal in your area, to your point earlier, you know the hoarder houses, there’s still gonna be all these things that these guys aren’t going to want to touch. Right. They grew up on Wall Street. They went to really nice schools. They want nice clean houses, kind of like what we used to buy in 2009 when that first wave of foreclosures came through and you got brand new houses that were two years old and the carpet was clean. We made a joke last year that I Survived Real Estate if brands like Amazon and Home Depot would come up with the Sears catalog. You and I have talked about this as well to where if Amazon gets in the game or Google. Amazon invested in a company called Plant Prefab. If you listen to our radio show, one of the reasons I interviewed them was because Amazon was investing in them. Berkshire Hathaway owns Clayton Homes. You’ve got some very big money behind prefab, and I’m just really interested in DIY. But, you know, what if Amazon starts listing homes that you could just get delivered on your back door. In some cases, you already can. But they don’t have water and toilets. So just be careful what you buy. Like, I could buy a house for eight thousand dollars. Yeah, it’s basically a treehouse. I don’t want to go too deep into this, but one of the reasons I wanted to bring you in specifically last year as well is you spent 17 years at the National Association of Realtors and you were on a radio show a couple of years ago talking about blockchain. Sean and I were talking about this before, and Simon and I talked about it a little bit as well. You’re really deep in it. Is anybody in this room ever really going to touch blockchain and understand what it is, or is it going to be one of those things behind the scenes that it’s just really cool, it’s secure, and we’re good to go? Well first of all, the best thing is, the best news is you’ll never have to worry about touching it because it’s actually going to be buried in the applications. But, I can probably describe what blockchain is. So you go home tonight, I can do it in under a minute. That would be amazing. All right. OK. So buckle up. Here we go. So if you had a driver’s license, it’s pretty clear all the fields on the driver’s license, so you have like 15-20 fields. You can’t add any information to that, right. That’s a database. You can probably list all the information in an Excel spreadsheet. Very rectangular. Now as you go and drive around a little bit and you get stopped by police, you have a driving record. There’s a number of things, it’s like a chain of things. Some people have a long one, some people have a short one. That’s a blockchain. So a blockchain is a record. It’s a log of what’s happened versus a driving license. So driver’s license. Driving record. Database. Blockchain. Also, the crypto stuff is crazy. Definitely the easiest way I’ve heard it described. Two years ago I interviewed blockchain.info for a report that we were writing. And he’s like, “Yeah, you’re not
going to see it in the United States.” We’ve got a lot of bureaucracy in real estate. You basically have to get the Appraisal Institute, ALTA, the National Association of Realtors, the Mortgage Bankers Association. We’d all sort of have to agree, and what I’m seeing right now is title companies sort of creating their own private blockchain, and that seems like not what the technology was supposed to be. I totally disagree because if you think of things as a driving record, every offense is chained out there. Therefore, I think if we try to use blockchain to rip apart all these repositories, whether it be MLS, title, lending, or even the county records, we’ve done ourselves a great disservice. But actually, it can actually help you move the transaction across them and therefore making vertical integration, as we talked about before, more of a reality. Therefore, it will help what we’re doing. It does not replace it. Therefore, I think it’s foolhardy to think that we’d be replacing all this stuff with blockchains. We’re just gonna make it more efficient by adding blockchain. I was gonna try to find a fun way to do this. We’ve got about five minutes before dessert. Chocolates on the table. I was trying to think, “Do I play this?” You know, if I have a 10-year old I’m raising, and they really have to be in the real estate industry, what sector would I send them to? Or, do we play a nice game of Mary Cuddle Kill with all the different sectors? Yeah that was a much nicer version, some of you are laughing. Let’s talk about the industries we think that are really going to be disrupted and probably go away, whether it be because of artificial intelligence, blockchain, whatever it is. So the things that get disrupted: Is anybody making money out of holding on to data and then making profit off of your data? Therefore, they take your data, put it someplace, and they make money and never give any money back. That is going to be out. Therefore, the concept of data as labor. Your data is your labor. You should be rewarded for it. These new technologies can track where all that data came from, and we should change the economic model. Uh oh, he’s thinking. So you know, back in the day on the real estate agency side, a big part of the value proposition for agents was showing properties, right. You had The Secret Book of listings, you had the secret book of this set. Obviously, that’s gone the way of the dodo. Right. You’re seeing that more and more. Companies like Zillow, for example, have effectively made leasing agents obsolete because you can actually generate more leads just throwing it up on Zillow than you could putting it up on your MLS. So I think those within the next few years basically will be an obsolete lifecycle. It’s kind of like a toll booth operator going up and down the orange corridor, right. I mean, why do that anymore. You no longer need that. So I think those folks are going to disappear within the next couple to a few years, and they’re going to have to focus on higher value functions, and I’m okay with that. Right. Like if those relatively low value functions, if your claim to existence basically is that you happen to have the brochure that nobody else has that you can claim that those are your listings, you’re going away, you know, and I think that’s ok. It was really interesting to watch Purple Bricks pull out of the U.S. market this year. They were based out here in Irvine. Wow! Apparently we don’t have big fans of purple bricks in the audience. I thought it was really early. I was actually very surprised. But they had gotten hammered on stage saying they were….I forgot it was an Inman Conference. Somebody said they were like plumbers that couldn’t represent anybody, but they got really hammered. But from a listing agent site for people who don’t think it brings a lot of value, isn’t it weird at this time in the cycle that they got pushed out. Is it just cause they burned all their cash and they just didn’t have a good business model, or what was it? Well yeah, I mean the U.S. market versus, say, the U.K. market and the Australian markets function very very differently. Right. And so to be able to compete in a more of an open market economy like they do in the U.S. and run the same model is not going to be successful. Right. I actually sat on a panel at the DOJ with the CEO of Purple Bricks actually in Washington. And the problem that they have is even though they claim to provide full service, the difference between full service and actually providing full service from our perspective as a brokerage is very very different. Right. Their folks are all about, you know, their average real estate agent does about 250 deals a year, right, whereas your average real estate agent without a team cannot do anywhere near that and provide any sort of service. Right. And that was something that became quickly evident. He actually said on the panel when the DOJ attorney asked what happens if a client calls you and asks you to help them trim their yard or paint their wall or something like that to get a house ready for sale to maximize their profit. And he said, “Oh I don’t have time to answer their calls.” He said that in front of the government. So I mean, I found it appalling, actually, and it’s in the public records, so you can look it up. But I mean, you cannot effectively scale to that level with those kinds of costs. And that’s why they left. All right. We’ll end with this. Real estate or otherwise, what is the most exciting technology that you’re watching that you think will be disruptive in the next five years? Probably the one I think will have the biggest disruption that people don’t really realize because, you know, we’ve gone from 3G to 4G. The move to real 5G, if we really deploy it, right, real 5G. You know, my phone pulls up and it says 5G from AT&T and it’s like “what is this?” You know this is a joke, but if we deliver on the true promise of 5G where there’s very low latency that just……. latency, if you’ve been on an international phone call and you have to wait for a second to hear for the other person, that’s what latency is. That gets tighter. It really changes quite a bit. Yesterday I was trying to come up
with good examples for you. But, you know, you think about augmented reality, right, like the glass holes, the Google glasses, and things like that. Well, now you can start having that where you can have a full overlay of a lot of information, real time talking to servers rather than having to try to have all that computing power on you. And I think it’s going to be a bigger transformation than the Internet. Yeah, Amazon just released the ring. We’re going to wearables. I really think that we’re going to be getting away from phone screens in the next five years with all the push for wearables for sure, and 5G I think we’ll lead the way. Yeah and 5G allows you to put all the computing power somewhere else so you can have less battery power, smaller devices, and a lot richer functionality local. So maybe that’s the end of the phone. It really is going to be disruptive. I think in five years in parts of the world that are actually investing in things, right, we’re laggards now on technology from a large infrastructure basis. Yeah, I think in five years, although it won’t be fully out there, I think the autonomous vehicles as it applies to trucking will be interesting to follow because I can’t imagine if you don’t have cab forward anymore on what’s going to do to all the shipping bays that are out here because you could pull the truck in either way. A lot of design will change as far as warehousing and commercial property. It’s interesting because the Inland Empire has a lot of warehouses, and because if 5G comes on, all of a sudden all the jobs that people are touting, a lot of that can be happening via the 5G connection and Minneapolis targets. That’s where they’re based. They could be controlling entire warehouses with robotics and Internet. The trucks themselves might be the warehouses. I’m uncomfortable. OK. I kind of agree Mark. I’m a big fan of the potential for automated vehicles, but less so for the commercial shipping and more for just all the cars on the road. Imagine if all of them actually knew how to drive and the efficiencies that you could gain from that. But the lady that’s responsible for this haircut, which is obviously not very expensive, you know she bought a Tesla and she spent like $70 grand for this thing. I don’t know how much she makes, but I’m not paying her a lot. She said that her Tesla, she got the automated driving thing, whatever it’s called. Elon Musk says that in the next couple of years, that car can go out and make money as an Uber driver by itself while she’s cutting hair. Right. And I think that’s fascinating. You know, when you dump your lease, the car will drive itself away the new ones show up. There’s a lot of people that cry because they realize how many more cars are going to be on the road. For here in California, I have people that say, “Oh the traffic is going to be way better,” and other people were like “Are you kidding me?! It’s gonna be so cheap.” Families are going to not be taking their kids to soccer anymore. They’re going to be just sending the car. So you’re going to go from a two car household to maybe more. You would think with the way it’s oriented as an autonomous vehicle, you can actually buy a 17th-century coach and go around with your queen of France because of the way the doors open and everything. All right. So Dad, I’m handing to you. You have to translate all that to how it impacts real estate and how we live with that. Thank you. We’re at Desert time. We are going to start back at 9:00 for our last hour. Thanks guys. The Norris Group would like to thank its gold sponsors for supporting I Survived Real Estate Coldwell Banker Town and Country. In A Day Development. Inland Valley Association of Realtors. Keystone CPA. Las Brisas Escrow. LA South REIA. Michael Ryan and Associates. NorcalREIA. NSDREI. Orange County Investment Club. Pacific Premier Bank. Pasadena FIBI. Rick and LeeAnne Rossiter. Shenbaum Group. SJREI. Spinnaker Loans. South Orange County Real Estate Investment Club. uDirect IRA Services. White House Catering. Wilson Investment Properties. I’m going to end the way I have always ended the event asking one of these two questions, but I’ll put it in your guy’s brain right now. Anything keeping you up at night, like a black swan event? What’s the one thing you’re most excited about for 2020? So at the end, we’ll respond to either one or both of those. There is a question I wanted to ask but haven’t asked before, and we can just quickly go down. We’ll start on my left. Your favorite source for information, newsletter, podcast, for learning and understanding. You know what. There’s so many out there. Actually, I use this little app called Flip. I’m actually playing into this whole…I’m building an ecosystem of stuff that I only want to hear about, right, so it pulls data or information news on things that I preselect. Instead of someone telling me what to look at, I preselect it myself. I actually flip through that literally every morning for about 15 minutes. I can get all the highlights and I can start my day. So I like to use that app to get it going. The people you rely on to tell you what’s coming? Maybe that’s even more specific like a trusted….. It is so hard. I mean, that’s a tough question nowadays. You know, we are able to grab information from so many different places. I just don’t feel like I can go I go to one place anymore. For me, if it’s an issue of whether it’s politics or the economy or whatever, this particular app allows me to look at all the articles that have been written about certain topics. So then you can just read about it from different perspectives. I just don’t know if there is anyone who, aside from Doug Duncan, I would say I don’t really listen to any other economists. Is that going to be a unanimous thing? That’s pretty cool. People got to raise their standards. You know it probably sounds incredibly shallow, but I mean, I have Facebook up on one of my monitors all day long. And you know, I have a good-size sphere just having run ERA for quite a long time. And so honestly, you know your sphere on Facebook is your peers or people that you respect or that you acknowledge or what have you. And so things that bubble up that seems to be resonating with them tends to create more awareness on Facebook. That’s where I get an awful lot of at least what the headlines are, and then I’ll click down into them more to figure out some of the details although I do have Flip on my watch. I actually love it. You’re able to just instantaneously get all the information you want from lots of different sources. All right. I’ve been out of the loop. I don’t have one flip, not one. You don’t give a flip? I’m more of an open source. I’ve been a kind of open source software developer for so many years that I kind of go to this
crowdsourcing type model. So I actually read slashdot.org, and they have articles that are really wide ranging. And I get to hear from people that I’ve worked with all my career weigh in on different things. It’s kind of a way to get an opinion. Just to be different. I read a lot of science fiction, and you know, it’s amazing. A lot of my thoughts on crypto currencies and digital currencies, which I know Aaron’s interested in. There’s a great book Crypto Nomicon. Most of these things that still seem out there or that we’ve seen recently, the internet, cyberspace, all these things were in science fiction first. And so I always think about what of those things are close. Not for daily news, obviously, but it’s a source of inspiration. One of the things I’ll mention is that for almost 10 years we’ve been riding in the limo, and most of what he told me was coming I had never even heard of. Eight or nine years ago, he’s talking about 3-D printing and self-driving cars, and I’m just like, “what is he talking about?” And now, here we are. So I really like our rides because you never know what he’s going to say and I’m a big believer that he’s probably right, I just got to figure out if I can even comprehend what he just said. If Doug had a podcast, I’d be listening to that. But he doesn’t. So I’ll go with Nick Timrose from the Wall Street Journal because I know him very well and trust him. He used
to be the housing beat reporter, now he’s the Fed reporter, and I think he calls them like he sees it. I follow him on Twitter, and he tends to like articles and comment on them with some good intel and disagree with people with facts, and I like that. I talked to him a lot during the foreclosure crisis, and I talked to a lot of reporters, and he was definitely one of the brightest. So I can totally see that. He’s the journalist Fed reporter now too. Do you listen to yourself? Is that it? Nobody else in my house does. Maybe the dog once in a while. I read these things that are called books, like hardcovers and pages. They’re printed on paper. I’m a liberal arts guy, so most of the reading that I do when I’m not in the office has nothing to do with economics. So I read history and biography and world events. I think that the world of ideas has a lot to offer economics from people who are not economists, and so I do that. In terms of daily news, I read both The Wall Street Journal and New York Times every day. And I like things in print. I haven’t watched a television news program in 20 years. In terms of the business I read, there’s probably six or eight other analysts or economists that I read because I certainly don’t know everything. And I like to see the people that differ with me because it tells me I might not have thought about something. So I try to try to do that. No YouTube fans? I’m just curious. Am I like a college kid? I actually like that source. Since you guys would understand that better than I, I got into it and wondered if I could listen to Jim Rohn teach the same talk he did in 1981, and lo and behold it was there and I went, “Oh my, that’s unreal.” And then it connected the dots to other similar people though. And that I didn’t expect. Then all of a sudden, now I’m introduced to other people that are big influencers. I did discover there was at least one incident of very useful YouTube. Our 16-year-old Ashley came walking into my office one day, and she’s looking at her phone, and she looks at me. She looks back at her phone and goes,
“You know, you’re actually funny,” I’m justified forever. A 16-year-old. So now we’re back to the business of business here. Doug, you invited a number of investors we went to Washington and spoke to Fannie Mae, and it was interesting, at least from my perspective, the first meeting seemed like we were a little perfunctory and we were not really taken seriously. But, by the third one, it was a very different meeting where they had separate groups. Remember, they went and they discussed it and they came back with really good questions. So I wanted to know what is your sense of Fannie Mae’s attitude toward growing that side of the business to investors. The other thing is what is the journey of going to a private company again? Well, as you probably know, the regulator has said that we can’t do any business outside of our current footprint, which is the 10 maximum loans to investors. That is a rule that has been imposed on us by the past regulator. The current regular hasn’t said anything about that yet because he’s been focused very much on what it would take to release us back into the private sector in a more competitive market. So I think the most important thing to watch for is the issuance of the capital rule which has been a matter of proposed rule and taken commentary from the public on that proposed rule. Then they will have to issue a final rule. When they do, it suggests to private investors what level of capitalization and the potential returns that we could offer to a private investor. So that’s the first thing that has to happen. It may happen this fall. If the rule is reissued, that will delay the whole process. There there is a move to allow us to start to retain some earnings, which would build capital because the two agencies, Fannie Mae and Freddie Mac together, given the current level of capital, which is, you know, three or four billion dollars, would need to have many many times that. In fact, a single capital rule would be the biggest – a single capital raise if they were attempting to recapitalize both agencies in one raise would be the largest IPO in the history of the United States. So that’s simply not going to happen. So they’re making progress in that direction, but there will be some time. OK. John wanted to ask you about, I wanted to deal with the household and then go into the rental market. So, how is the makeup of what we think of as a household? You know, when I was a kid, it was two kids, two-point three kids, and two adult parents. So what is the makeup now of America’s household? And does that lend itself more to more rental households? Well, I do think we’re gonna see more rental households. Some of the data is just like one line, like number of people per household and stuff. So it’s very misleading, but you’ve got to drill into it. So seniors are going down, the number of people per household, but they are tending to rent out rooms in their house. The fastest-growing landlord at Airbnb is seniors with a mortgage, and I think you’re gonna see – someone just raised her hand over there. “That’s me.” Seriously, this is going to grow. There’s more than, conservatively we calculate there are 44 million empty bedrooms in homeowners’ homes right now, and people are retiring and need another $10 grand a year, and I think you’re going to see a lot more of that. And then the baby boomers are really the only generation around the world or ever in America who left home as soon as they possibly could. Everybody else stayed with their family as long as they possibly can. If you look around the rest of the world and you look at the people that are moving here, they live multigenerationally because it’s smart. And I like my family. We’re going back to that. I mean, we make fun of some of the millennials who are living with mom and dad, but mom and dad are okay with it. The millennials are okay with it. It’s saving money. It’s smart. So I think you’re going to see bigger households when you strip out that retirement who’s become single because one person passed away. The businesses that got involved in buying rental inventory first round of homes or bought below replacement cost. Were most of those bought to keep or to flip? You should ask the audience. That would be one of your poll
questions. In fact, I did ask the audience last year. You let me do that. For sure, home prices were falling this year. Would you be a seller? And most of you in the room, when I asked that, said I would not. The big institutions are not. They cannot because they have bonds secured by all those real estate so that they cannot. And if you’re a REIT, there’s a huge tax penalty if you start doing it. So there is no threat of Invitation Homes or American homes for rent playing that game. But what you’re also alluding to is a part of our business that is just ridiculously exploding which is this new trend to build homes with the intent to rent them out. It’s not happening here in California. It’s happening around the rest of the country, so the whole thesis of buying below replacement cost is shot when you’re building it. But, there’s a lot of capital on Wall Street in this environment that says, “Hey, if I can get a brand new home with low maintenance and a yield of maybe 5 or 6 percent, I’m feeling OK about that versus some of the other investment opportunities out there.” There’s a lot of money chasing that deal right now. Literally, I bet we’ve done 60 studies for people in the last 18 months exploring build-to-rent. When you go to build-to-rent and you build a new house, first of all, when they were buying REOs were all scattered. Now you’re building them and you have a choice. So do they have a preference of the choice? I mean, think of it like a luxury apartment complex. Is it idiotic to be building luxury apartment complexes? No. You know, every neighborhood could probably use a brand new rental neighborhood where all the homes are next to each other with some amenities, and I’ve learned some pretty interesting things in the consumer side too. When a consumer moves into your neighborhood and is the renter, you kind of look at them like that’s the renter, they’re transient, they don’t feel as welcome. Seriously, when they move into some of these neighborhoods in Texas where everybody else is a renter, they’ve never felt as at home. They have block parties, there’s none of that kind of taint. These are professional landlords who take care of them. So, there is a market for this. I actually think 10 years from now we may be talking about it getting overbuilt though, just like luxury apartments get overbuilt from time to time. Is the builder the end owner, or is he building for a fee to somebody else? It’s interesting. They’re all brand new companies that are formed that don’t know how to build houses. So they’ve contracted with big companies. Lennar is building for two of them. Toll Brothers is building for BB living. Taylor Morrison is building for Christopher Todd communities. So they are hiring builders to build for them, and it looked really good on Wall Street because they’re booking it as a sale. Seriously. So there’s a new buyer for a new home now. It’s these companies that are taking one hundred homes as soon as you’re done with them, and they’re going to their trades and saying, “Guess what, I’m going to lock you up for the whole year. I can keep your entire best crew busy all year long.” They’re getting better pricing from the trades because of it too. When you said amenities, as you know I’ve bought some lots and built some rentals, but those are just houses, you know. Are you talking about where these houses are they have all the whistles and bells, almost like the villages? They don’t have 50,000 golf carts like the villages. We’ve actually done a report on this, so there’s segmentation developing. There’s the 600 square foot home with a small yard that’s pulling the person out of an apartment complex for the same rent who didn’t want to be in an apartment but wanted a place for the barbecue and a dog. There are seven unit long townhomes. Some of them, frankly, look like horizontal apartment complexes. And then there are traditional homes, and each builder actually is specializing in one or the other. The ones that are actually doing luxury houses are very very few and far between. There’s a company out of the Midwest who’s built 90 of these already 90 neighborhoods built around homes, all townhomes. Okay one more for you. I don’t I don’t mean to have anybody dominate but there are just some subjects that are your expertise. So bear with me. In an interview, there was a couple of things that caught my attention. This was from Brookfield Residential, and he had bought over 100 malls to do well with. So we all know what’s happened to the mall industry. So General Growth filed bankruptcy, one hundred and sixty five malls. Brookfield Residential, which has a longer than usual investment horizon, picked them up. It was a bidding process, so they probably paid more than the next guy, but they got one hundred and fifty million square feet of retail surrounded by 300 million square feet of vacant land. We coined this term “Surban” where people are wanting to live closer in, these malls are in awesome locations. They’re redeveloping 12 of them already. Interestingly, they picked twelve of the best, not twelve of the worst to get started because they wanted a good footprint here. You’re going to see apartment complexes and other things popping up on the outer edges of these parking lots now that the other bidders weren’t putting into their pro forma. I think it’s gonna be super smart, and the CEO of Brookfield is speaking at our conference in November on this topic. Now the other thing that he said was surprising to me. He expressed concern about the potential of having huge competitors come into the marketplace. Is he not a huge competitor? How big is big? We titled that one The Biggest Checkbook in Home Building, but there’s maybe about 15 companies that could compete with him. He’s talking about Amazon and… That’s a different issue. So they’ve partnered their homebuilder too, and they’ve partnered with Amazon and others. Amazon could build a home for no profit and be totally happy if they set you up to be doing all the purchases you ever do for the rest of your life in that house. And you laugh, but that is what they’re trying to do with Alexa. That is part of their strategy. If
someone wants to know if the air filter needs to replaced, you get an alert. We’ll just we’ll put you on a subscription for the air filter. There’s a lot of things Amazon can do here to disrupt the industry, and he was watching it carefully because he’s partnered with Lennar and Brookfield and others who Amazon has learning the business. Okay, and that was leading me to you guys. How does somebody that’s not big compete with people that that have almost no end to the size they can grow. Is that the nature of where most businesses are going to go – dealing with a few people? I guess that’s my question. So I think from our perspective, even though we’re the largest in the world we still only represent about 18 percent of transactions across the U.S. So there’s still that remaining 82 percent that’s available to the rest of the world. We actually did just recently sign a deal with Amazon, and it’s exactly what you described. Right. They’re not trying to get into the home transaction business. It’s too sloppy of business, frankly, for them to be able to really scale. What they’re trying to do is basically generate a referral platform with their hundred and fifty million prime members and who knows how many regular members to say, “Hey, you know you’re on our site. We have all this traffic. If you’re interested in buying a house we have a referral program and a Realogy agent at one of our brands will represent you. Then there is basically a commission split, but it’s not a commission split because it’s not licensed. But basically, there is X amount of dollars that are spent in buying home products and services from Amazon as a welcome to your house gift to those consumers. And you’re exactly right. I mean, once they get Alexa plugged in they own you, right? They know everything about you. So I think it’s interesting. From the earlier panel. An interesting thought was we have a hard money lender that helps us buy properties for our iBuyer program, but for the vast majority of real estate agents that are out there that would like to be able to offer some sort of an iBuyer program but they have no means to be able to do it other than maybe financing them themselves, that would actually create a great synergistic relationship between you all and them to be able to say, “Look, you know if you have these opportunities I’m willing to buy those properties. How much of them? Usually, we’re looking at somewhere in the neighborhood of only about 5 to 6 percent are investor grade. Right, or the seller is willing to take the haircut that you all will be looking for in order to have your margins. That other 95 percent of leads are meaningful to the real estate agent. Right. And so they’re thrilled to be able to have a relationship where if the seller does need to sell in some sort of timeframe and is willing to take that convenience fee, right, the 7-Eleven factor that you all step in. Otherwise, it generates much much more deal flow for them. My final point on that is the Houston Association of Realtors just did a study on this, a couple of weeks ago actually, and you know 86 percent of the consumers that they surveyed, the potential sellers, said that given the prominence of iBuyers in the marketplace now, they want to get an iBuyer price to at least know what their backstop is for when and how they might sell their house. I think your point around the iBuyer, as you know only a small percentage of iBuyers are given an offer. Right. So the remaining 90 percent or 85 percent leading opportunity for that, and then that’s gold. Right. And so that’s why a lot of these folks are able to monetize that business across because they may not make that much money on that one particular deal, but they’re able to capture that lead and that’s what people are doing. You see more real estate companies and small brokers trying to set up that iBuyer operation in key markets where they want to try to grab those sell-side opportunities. How does the lending industry look at the Fringe customers? So I mentioned financing for investors, and you’re talking about that getting to be a bigger business. That’s a repetitive customer. Seeing as somebody in this audience owns 50 houses with 50 loans, that’s one stop and a loan. The other thing, I was thinking about reverse mortgages. Are those niches not big enough to put all the effort in, or is it just solely the owner-occupant? Well, I think there’s obviously still businesses. Reverse mortgages are still a decent size market. There has been, obviously, some scrutiny over the years around how that’s been executed. Kind of disclosure. But with the aging population, I think that’s going to be something that’s going to be needed more and more. It’s been through some rough waters in the past. In terms of financing for investors, obviously you’re all in that business. Most of my members that are independent mortgage banks, or in some cases community banks that have high net worth clients will provide some of that funding. It is still sort of outside of what their sweet spot is really. Is there an underserved market right now in the home….the people that can’t get a yes answer right now that should be able to. What did they look like? I’ll just look at the demographics. If you look at some of these countries that are dealing with stagflation, it’s not that the country is not growing, or the housing market is not growing. It’s because our population isn’t growing. We are growing as a country, but that growth is primarily being driven by minority immigrants. The savings pattern, the credit history, the patterns of saving is so different for this new population. There are a lot of people looking at new ways of calculating creditworthiness. So do you have to have a certain number of trade lines with certain number of activities, or can you capture it in a different way? At the end of day, you want to make sure you want to lend to people safe and soundly and that you’re going to get that money back. But I think there are some new technologies and ways that people are looking at lending, credit scoring models that are different. Frankly, there are a lot of these Fintechs that are looking at different ways of lending and capturing creditworthiness. I actually expect a lot of improvements in that regard. I mean, there’s some crazy stuff that’s out there around looking at your Facebook and deciding your creditworthiness off of Facebook. Setting that aside, I think we are going to see some innovation coming out of that side of the business. I just have to smile inside because there was a meeting we had. Hundreds of people in the audience, and I hadn’t borrowed money in quite some time and so I was really kind of dumbfounded. I was looking at charts that had gone way askew from what I thought would ever happen. We actually interviewed a lender, and it was a very short interview. I said, “Okay, stated income loans. Where does the stated income number come from?” And without batting an eye in front of hundreds of people, he said, “Oh, we just make it up.” Yeah, that was the normal course of business, unfortunately. She asked us to remove that. Hopefully that person’s out of business now. No, but she probably doesn’t have that loan program available anymore. I follow charts and try to look at trends. Now, I’m talking about California but I wouldn’t mind, John, if you could just give me some feedback from that from a national point of view. With a set of charts that we currently have we have affordability at 30 percent in California. Normally, we don’t stall until we get to 17. That’s a big spread. We have very full employment. We’ve got inventory at reasonably low levels. We have great equity positions. We have almost no foreclosures in the marketplace. These charts usually are accompanied by price increases in double digits. Extraordinary volume of sales. We usually have four years of enormous volume of sales. We haven’t gone up in 10 or so. So I’m just curious why we haven’t had the breakout in sales and price this cycle, or is it yet to come and I’m missing it? The Boomers are doing what they said they were going to do. They’ve said all along we intend to age in place. I would say that’s exacerbated by their knowledge of what happened in the downturn. In addition to which, if they still have mortgage debt left, it’s probably at 3 1/2 percent. So why would you give that up? So you know you’ve heard me comment on Cape Coral, Florida, which is where I live in which you’re now doing some work in. The kids call it God’s waiting room. You can tell being that raised by an economist there’s no feelings whatsoever and not a part of that transaction. But, the story 15-20 years ago is when the kids move out, the boomers are going to sell their suburban house and buy a condo downtown because they were raised in the 60s and 70s. They are going to party the night away. Well, the evidence from Cape Coral is if you want a good restaurant reservation, wait till about 730. But the fact that they’re not moving, and they’re not. They’ve said they weren’t going to move, and they’re not. So if you adjust for population, the existing home supply on the market is at 30 year lows. So there’s nothing to buy. But why don’t you have soaring prices? You’re telling me that you have a shortage of supply. If that was matched with capable demand, we’d be off to the races. Now we’re not doing Powerpoints, but I have my favorite chart I’ll be happy to share with you. We track the inflation-adjusted real house price year over year change along with current new construction. Those two data points are very tightly correlated for 30 years until the end of the crisis. Now what has happened is that price piece, which price is signaling to builders to build or people to supply their homes. It’s not just builders, but it’s people to supply their homes. There’s a huge gap that has emerged between those two. The builders are steadily building, but it’s never been the case that first-time homebuyers bought a significant share of new construction. That was move-up buyers. The other part of that is the Gen Xers who are the group that their homeownership rate fell nine percentage points in the crisis. That’s huge. They’re the ones that really took the lesson that said, you know, if you held onto the house you own it. You already own the land which, is in an urban area, probably the most expensive part of the house. Tear the roof off and put another floor on or push a wall out and add a room. So they’re doing the remodel. They’re also not listing that existing-home price. So real house price actually has appreciated very strongly nationally. The average inflation-adjusted appreciation from World War 2 to today is about three-quarters of one percent. For five years, it was over 4 percent in real terms. I think one of the issues is that affordability, you know, percentage, that went so low in 2006. That’s been measured exactly the same way throughout this whole period. But, lending has not been exactly the same throughout that whole period. So you know, when you can get a pay option ARM in 2005 to afford a house, affordability can go lower. I think that there’s also maybe 30 percent affordability by the way they measure it. It’s maybe not very affordable. It may be kind of the equivalent of 11 back in 2017. I don’t disagree with that. That’s what the market is reacting like. It’s that we’re sort of done So we have a lack of supply, but we really are probably pushing up against what people can really afford. Earlier they were talking about the number of mortgages with greater than 43 percent debt to income ratios and the number with higher than 90 percent loan to values. I mean we’re seeing a lot of like 104, 103 percent loans. Together with that, I heard from a couple of you that well there’s not a lot of risk in that, right, because the underwriting is much better and all the rest. Well, if you go back and look at the foreclosures of 2008, some of those folks were fine on an underwriting. It wasn’t an employment issue, it wasn’t anything else. It was I overpaid for this house and I want out. I think from that standpoint, if house prices were to fall 40 percent, all that paper you think so great is absolute crap. Let’s talk about the next recession then and the ramifications on our industry pricewise. So, is there any consensus like that? Would you say we’re going to have a recession in the next twelve months? Yes. No. Maybe. I’ll say no. I think we’re already starting to see early signs of it. It’s definitely obviously not going to be anything like 2007/2008. But in the next 12 months, sure, I’ll say yes. Yeah, I believe there has to be a
small correction. I do. I think that we don’t have a market economy, and I think with our current administration we would throw anything at not having a recession. We built an index to predict recessions, and normally within the two years, there’s a twenty seven percent chance. According to the data, it’s at seventy-five right now. So I’d say that’s probably yes, but I agree with him. I’ll throw the kitchen sink at it if it’s coming. We don’t have the same numbers as
John, but the risks are rising and we’re never able to predict exactly when they happen. But the 12-18 month time period is… Let’s go through the process of we get a recession and we’re going to prevent it from getting worse. So the first thing the Fed does is lower interest rates by typically 4 to 5 percent. And we don’t have that. Well there you go. I read that. You can go negative. It’s in a report I read. It’s not a big deal. It must be true if it was written in a report. So if you look at sovereign debt around the globe, take the U.S. debt out of the picture. 50 percent of sovereign debt is paying negative yields. That’s $17 trillion. You pay them to have your money. I’ll tell you what was funny. I sent most of the people on the panel an e-mail because we were messing around with the idea of negative interest rates. I said, “So hypothetically, you owe a trillion dollars and you’d be able to get a 50-year loan at minus 2 percent. You would never have to make a payment. It would resolve itself in 50 years just by taking your interest credit. I thought that would be good. If we have a recession and we don’t have that weapon…and by the way, what I was going to say is those countries really are not at the end of their negative cycle. They’re at the beginning of their negative cycle. Like, Germany or wherever is going negative. Is it going to get more negative? There’s no question their economies
have slowed. In fact, the Germans were, depending on how you define it, were in a recession for a little bit. They’re heavily dependent on trade and on manufacturing, and both of those things have been slowing because of the trade debates that are underway. So if you want to see Germany shudder, all you have to do is use the words “car tariffs” because that’s Germany. So no question around the globe things are slowing, which is part of the reason that the rates are where they are. The Fed can only lower so far, then it starts doing injecting money? Yeah, one of the things that Paul did say in an answer to a question was that it put the damper on the idea of negative rates. So I think that is the evidence that central banks around the world have seen as it really hasn’t helped growth. But yes, they would ease, they would expand the balance sheet. They would offer whatever liquidity services they could in the industry, but then the rest would have to be done by the fiscal policy. Tax cuts probably would come through. What they’re controlling is the short end, basically. You had negative rates that got into pretty negative territory. There’s an IMF report I read – it was minus 3 percent. They’re trying to figure out ramifications of that. So, what would happen to our 10-year if something like that was to occur somewhere else? Would we have that invert to quite a low number? I’m just curious. Well, for those global institutions who do not have regulatory requirements to hold sovereign debt from their nation, which we do for example, our banks have to hold Treasuries as part of their capitalization or asset classes for liquidity and safety issues. So some of the institutions obviously hold those securities or that debt, even though it’s going to generate a negative yield over the course of life because of regulatory requirements. But if they are not burdened by that – part of the reason rates in the U.S. are low is because capital flows to the U.S., because it is a positive return. Yeah that’s my point. Even if it would be positive, even if it was less negative than where it was coming from. That’s where expanding the balance sheet, increasing the size of that balance sheet, will come in to attempt to hold those rates up. OK. So we have a recession. Does it cascade into lots of foreclosures this time and therefore have a negative impact on prices? No. The whole regulatory framework changed in 2009, right. The regulators, pre-2009 , required the banks get rid of bad assets as fast as possible at any price. As soon as they change that, the course of the foreclosure crisis changed. I’m not good enough on the history of the previous ones, right. We let the savings and loans fail, right, and they said, “Oh we learned a lesson there, we’re not going to do that next time.” I think we learned something each time. We’ll make a new mistake next time, but it won’t be that. So I’ll agree with Sean, but I’ll put
a different twist on it. So I think if there’s a recession and people stop paying their mortgages, the servicing companies are required to foreclose on them. So I think we’re gonna see the foreclosure process started. I think the lesson learned this cycle unlike last cycle was there’s gonna be a huge amount of money raised to do non-performing loans, and you can sell the pool to non-performing loans. Now you have all these rental companies who would be like “Give me a thousand homes with somebody in them that I can restructure as a tenant. I’ll take it.” Actually, we had conversations in ’09 with with Doug at Fannie and Freddie and FHA about FHA becoming the landlord in this situation. They just couldn’t do it. I think they’re gonna find a solution next time. And the other thing is that they really do hit the market. I’ve asked American Homes, Invitation Homes, and all these guys this question: how soon are you guys going to start gobbling them up? And their answer is as soon as the yields make sense. The odds of a 40 percent price decline or even a 20 percent are pretty low in my view. I actually think those guys would see a lot of new money come in and compete with them. I think the other thing that that is out there is, given the shortage of supply relative to the level of demand, if the recession is mild, say, unemployment runs to 7 1/2 percent, you still have 92 1/2 percent of households working. Interest rates come down because the Fed eases. The demand curve backs off because of unemployment. But for those that are still employed, that means price appreciation is slower or maybe at zero. And interest rates are great. It’s a pretty good time to buy a house, especially if there’s a foreclosure that they’re aware of. From the lending side, what I’ve
witnessed is an unbelievable effort to not foreclose on houses in the last years. It was sort of drinking out of a fire hydrant, right, for these institutions. They had never seen that kind of volume coming through of delinquent notes and obviously foreclosures. I mean, remember, I actually at one point had an asset management firm that operated out of all 50 states, and one of my clients was Bank of America. They had one point two million delinquent notes, and I thought, “Okay, this contract for me is going to last forever.” But, you know, lo and behold they started selling off their notes left and right, and literally over about a six month period it went from 1.2 to light less than half that, right. So I do think there’s there’s a huge appetite to buy, and I’m not sure whether people will be able to buy 30 cents on the dollar or 40 cents on the dollar like they used to last time around. That certainly is going to happen, but you also have a situation right now where the average down payment with Fannie Mae — What is the LTV on your typical book of business right now? You just make something up and nobody will know. Well, eighty four percent of
statistics are made up. The downpayment cushion is quite substantial, even for FHA right now. So, it would require a pretty big hit in terms of price depreciation for the big flow of foreclosures and all that to happen. From a lending institution point of view, I mean, obviously, you know, a lot of the community banks that hold the notes, they obviously would get hit. People that are selling into the market. A lot of independent mortgage banks, unless they’ve done something wrong in terms that were originating that loan, they probably don’t have any repurchase risk related to it. So it just sort of depends on who you are. And my guess is that we will not see what we experienced in ’08, ’09, ’10. I don’t think we’ll deal with anything like that quantity, but I was thinking that the consumer has been taught “I’m going to get a hug and get a recast and a 2 percent mortgage, and they’re going to put it on the back end or they’re going to forgive it and I can stay for four years without a payment. I mean, that’s what they just experienced. They did experience that, but you also had about 5 million people who actually lost their home. Yeah, that was the first round and that’s when they went “uh oh, we
better not do that.” I think the pain of those five million people is still alive and well. Obviously they’re people who got the pass. They didn’t have to pay a mortgage for three years or whatever it was, you know, and you certainly had those situations. But I do think just the general perception in the market is people got hit pretty hard. A lot of people literally lost their home and really lost their trajectory in their life. People are just recovering from all of that now, and I don’t know if it will be viewed as this kind of positive experience that somehow they’ll get saved through the process. The economic policies that have been in place for quite a while, have they benefited the asset holder versus the wage earner? And if so, what are some of the ramifications of that that were seen? You just answered your own question. Yeah, I did answer my own question. You’re right. So we’re seeing these things, and it’s almost on a daily basis. So I read something and it just floated a net worth tax. That was a new one. Up to eight percent of your net worth if it’s over $100 billion a year. What used to seem completely ridiculous is now being considered reasonable. That’s that’s scary stuff because now you’ve got a list of stuff: college debt forgiveness, free medical. And I just think okay, is this going to ultimately change some policies that are going to be really expensive for the U.S. economy? I guess that’s where I was going with that. You look at the whole rent control thing, right, and in the state, right, I mean it’s going to have a detrimental impact on the investment side and frankly the property. But, because of the pain people are feeling, they are willing to go down this path. So there’s no real good answer. There’s got to be a solution for the consumer and the renter when they’re paying 40-50 percent of their income torent, then you have people making irrational decisions to support something that’s going to, over the long haul, hurt the industry and, frankly, consumers. So I don’t know. That’s why you’re having this kind of wild swing in political debates right now. What you just brought up was interesting because when we got the rent control, I e-mailed and I don’t remember if it was you, but I said I don’t recall voting on that. Because I do recall voting on it last year, and it was no. And we didn’t get to vote on this one, and it was yes. I was like tongue in cheek going, “OK what else don’t we have a right to say no to, or if we say no they can trump it. So Prop 13. Prop 13 is coming up on the ballot, not for the house portion of it but for everything over for units, right. So I actually thought that’s a good chance to pass, I thought I wanted to. But if it doesn’t pass, is that something they can trump and say, “well, we disagree, we’re going to go there anyway.” That’s astonishing. Well, if it passes together with rent control, your taxes are going up every year but you’re being capped on your rents, so it’s going to be a margin squeeze. But isn’t that what they would like? Oh yeah, clearly. The less supply, the less being built, and other issues. Sanders has his proposal of a 25 percent tax on flips, which should be of interest to everybody in this room. So every flip would get taxed at 25 percent. I think you can thank ATTOM Data Solutions out there because they keep talking about how much money everybody’s making on
flips. What they’re doing is they’re taking the purchase price and the sale price, and they’re taking the gross number. How many of you have achieved that with zero expenses? But that’s what all these folks believe. They think everybody who’s flipping a property is making all this profit. We got to tax 25 percent of it. I mean, with all that talk about dangerous statistics, everybody in this room needs to call ATTOM and tell them to knock it off. I was on a radio show and they challenged me with that, and I said it was just the most ridiculous formula. So here’s what the real deal is. Ok, I’ve got to ask this one question because last time there was a big pile of residential debt that caused problems. Are there big corporate debt bonds that could tilt over and be downgraded, could that cause a liquidity problem? And I guess the secondary question is are there side bets against the outcome of those bonds that are enormous in size? The WeWork thing right is really interesting. So you’ve got WeWork, OpenDoor, Compass Real Estate, and Katara on the construction side. I mean, these are like half-billion-dollar or larger investments in each of these things, and I think as a thesis it’s a good thesis, right. Real estate is ripe for disruption, right. I think we’re all hearing and talking a lot about that, but there’s a lot of money just in those. If you take that and go out wider, like how these iBuyers
are working, they’re raising a lot of capital. Are they doing it to make really great investments, and could that go wrong? Could it go wrong in a big bad way, and how broad or wide is that? I think there’s a lot of risk. If you look at non-financial corporate debt, the share of it that is rated high yield or triple B is the highest it’s ever been. In the triple Bs are some companies that have regulatory requirements that they can hold securities lower-rated than that. So one of the potentials is if there is a shock in capital markets that downgrades those triple Bs, there’s a bunch of companies that would have to make an adjustment and there’s a question, given the liquidity discussion we were talking about earlier, whether that liquidity exists in the market for them to make that shift, it’s one of the consequences of a long-term, low-interest-rate environment that the low cost of credit keeps firms in business that would naturally have exited the business at a higher cost of credit. So that is a risk. In one of those movies, there was a discussion about the ratings and how they were not accurate. They had these tranches of triple-A rated garbage, and that’s what these guys were betting against. So when you have corporate debt that’s got a rating, has that rating system now been cleaned up to where we feel that that’s really telling the truth, or is that a competitive business where if you don’t give a rating you don’t get business? I’m just curious. I think the problem there is we’re always looking in the rearview mirror. Right. So we’re saying, “Gee, these loans we made last year were really good, and they haven’t gone bad, so we can loosen a little bit.” We keep loosening up because we’re looking in this rearview mirror and things are just, well, they made the payments last year, we can get a little looser, and you know, and I think that is absolutely the issue until you reach a point where there is some sort of little thing, and then suddenly there’s no market for that debt and it becomes a big thing. Are there bets against the outcome of other people’s investments to a big extent? Not to the degree that it was during the crisis. But, there are still derivatives, significant numbers of derivatives out there, and the worry in the derivatives space today is how many of those are tied to LIBOR, which they’re trying to replace. For an index, I’d say the Federal Home Loan Banks were just given some guidance to be moving off of LIBOR or by the FHFA. So there’s some risk in that space. I think Glass-Steagall and the Commodity Futures Modernization Act had more to do with the last crisis than anything else. We didn’t fix either of those. All right. We are almost out of time so I am going to repeat the question I had asked before. You can answer one or both of them if you want. Anything keeping you up at night, like a black swan event, and what’s the one thing you’re most excited about for 2020? OK, it’s late, so I’m gonna give the same answer to both: the elections. It keeps me up at night. I’m looking forward to it for 2020. I think what’s keeping me up at night is if you’ve seen the Reaogy stock lately, it’s unfortunately a bit lower than our profitability and our operating expertise would show, so you know that definitely weighs on me a lot. But I also think that as some of this hype boils over in the marketplace that sound operating margins and discipline will prevail in the next year and we’re going around the corner. Like what Jim, said it’s sort of the same thing, just two edges of the sword. You know what keeps me up at night is actually the erosion of the trades in this country. I can’t imagine how far down we’re going to go if this trend keeps going. What gets me excited, although artificial intelligence is an oxymoron, it’s not intelligent, it’s actually how much more thinking we can do if we start relying more on machine learning. I am thinking 100 percent of the time about we, after being in just five states for 12 years, are right on the cusp of going national, and I’m working on that 24/7. That’s also what I’m looking forward to most. It’s getting through that and being done. What keeps me up at night as I’ve got 72 employees, so I’ve got a lot of payroll, so navigating through all the changes in the world, the election and everything else, is actually something I’m excited about next year. What I don’t know is what I worry about, and you asked one of the key questions. Nobody tracks the derivatives that are going on with all that crappy junk debt, so nobody knows the answer to your question, and that scares me. Spicy foods eaten late. Teenagers. The thing that bothers me the most is that all of us have grown up with an interest rate path that future rates are higher than today, which is an encouragement to put off consumption and save, which is one of the fundamentals of a capitalist system and the perversion of that through what is a very unorthodox monetary policy, that really worries me because of that huge outstanding amount of debt globally. It’s the largest it’s ever been. That definitely keeps me up at night. What I’m optimistic about, and this is not to be obsequious, is what happens here watching the videos of these children, which is they’re all our future and the investment that people here make in that, and I’m very optimistic about the future of the country. Thank you very much. I guess I will end by saying that I, and I’ve ended it this way every year for the last 10 years. My biggest wish is that every politician would not be a Democrat for the next four years or not be a Republican, but be an American, and that we would do what’s best for America not for whatever.

Paul Whisler


  1. Great as always. Hope to attend next year. Thank you for the information

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