Carolina Reid Joins Bruce Norris on the Real Estate Radio Show #255

This week Bruce is joined by Carolina Reid, Senior Researcher at the Center for Responsible Lending. Bruce and Carolina discuss foreclosures and the foreclosure crisis, the connection between the foreclosure rates among communities and the loan products they received, the unintended consequences of delaying foreclosing, loan modifications, and much more on this week's real estate radio show and podcast. 
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Leslie Appleton-Young of CAR #218

Bruce Norris is joined this week by Vice President of the California Realtors of Realtors, Leslie Appleton-Young.  Bruce and Leslie compare this downturn to other downturns, views on home ownership, the effect of gas prices on real estate, foreclosures, delinquency rates, and much more on this weeks real estate radio show and podcast.

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Leslie Appleton-Young of CAR #217

Bruce Norris is joined this week by Vice President of the California Realtors of Realtors, Leslie Appleton Young.  Bruce and Leslie discuss this downturn compared to other downturns, views on home ownership, the state of lenders, foreclosures, home buyer tax credits, and much more on this weeks real estate radio show and podcast.

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Sean O'Toole with PropertyRadar #216

Bruce Norris is joined again this week by CEO of Foreclosure Radar, Sean O'Toole. Sean and Bruce discuss what Sean sees for the future of REOs in 2011; current legislation looking to do away with HAMP, NSP, and other government-funded programs; new short sale tools for Realtors and homeowners on ForeclosureRadar.com; and much more this week on the podcast.

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Rachel Dollar Joins Bruce Norris on the Real Estate Radio Show #209

This week on The Norris Group Real Estate Radio Show, Bruce Norris interviews Rachel Dollar, editor for MortgageFraudBlog.com. Bruce and Rachel discuss everything to why the site started, to how rampant fraud is in the mortgage business, to the most common fraud in the market today.

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The Norris Group Team #208

This week on The Norris Group Real Estate Radio Show, Bruce Norris interviews Greg Norris, the property manager and buyer for The Norris Group, and Craig Hill, hard money loan and trust deed investment lead for The Norris Group. Craig, Bruce and Greg discuss some of the inner working of the company, working with a hard money lender, appraisals in the current market, and much more on tis weeks radio show.

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The Norris Group team #207

This week on The Norris Group Real Estate Radio Show, Bruce Norris interviews Greg Norris, the property manager and buyer for The Norris Group, and Craig Hill, hard money loan and trust deed investment lead for The Norris Group. Transcription will be available next week.

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Ivan Choi Joins Bruce Norris on the Real Estate Radio Show #192

This week Bruce is joined by current president of REOMac, Ivan Choi. Ivan discusses the difference between a mortgage banker and a mortgage broker, the ease of obtaining funds in the current market, the current state of foreclosure inventory, shadow inventory, fear in the servicing market, and much more.

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Mike Novak-Smith Joins Bruce Norris on the Real Estate Radio Show #191

This week Bruce is joined by Mike Novak-Smith. Mike has been a household name in the REO business since the 90s. He has gained national recognition for his work in the REO industry. Mike and Bruce discuss how Mike got in the business, what it takes to stay in the REO business, what's going on in the REO market, and what to look forward to in the future.

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REO Mentor Tony Alvarez #183

This week Bruce is joined this week by long-time real estate investor and now author of "Breaking Into the REO Business," Tony Alvarez. Bruce and Tony discuss the main way Tony buys houses, 14 distinctions for the lazy and incompetent, how Tony describes lazy, market timing, how to get in with agents that already have an investor in place, building relationships, love and its role in becoming great, and much more.

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Appraiser and Investor Rick Solis #177

This week Bruce Norris is joined by California real estate investor and appraiser, Rick Solis.

Rick and Bruce talk more about investing from 2001-2007, what was working and what was not, different skill sets that made a big difference, what Rick did in a downturn, Bruce Norris and the auction business, what Rick would have done differently in a boom, how Rick is buying properties now, competing with other investors, bad investors ruining it for the rest of us, and much more.

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Appraiser and Investor Rick Solis #176

This week Bruce Norris is joined by California real estate investor and appraiser, Rick Solis.

Rick has been in the business since he was 20 years old. Rick does most of the appraisals for The Norris Group's hard money loan division and also helps train investors at The Norris Group's REO Boot Camp.

Bruce and Rick discuss the changes in the appraisal industry since Rick started, why he likes working with hard money lenders, the misconception of appraising being easy because of systems like Zillow, cost-basis appraisals, different property features that add value and those that don't, and much more. The full transcription can be found in the archives at thenorrisgroup.com

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Aaron Norris and Diana Barlet #170

This week Bruce Norris is joined by Marketing Director for The Norris Group, Aaron Norris, and Investor Relations E with the Norris Group, Diana Barlet. Bruce, Aaron, and Diana discuss the journey of buying a house in the current market as two solid buyers including why they waited, how long it took to find a house, information on buying an REO, the process and difficulties closing a transaction, and much more.

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Mike Cantu and Tony Alvarez #154

Bruce Norris is joined this week by California real estate investors Mike Cantu and Tony Alvarez. The three discuss what they would do if they needed to start all over again after losing everything. They discuss how different strategies work for different people and personality types. Thank you Mike and Tony for your time. Happy holidays all.

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Mike Cantu and Tony Alvarez #153

Bruce Norris is joined this week by California real estate investors Mike Cantu and Tony Alvarez which talk about how they got started, goals, and creating wealth. They also discuss early struggles in the business and how they got past downturns. Tony and Mike will be guests next week as well.

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Craig Hill with The Norris Group #149

This week Bruce Norris is joined by Craig Hill. Craig Hill is The Norris Group's hard money loan officer and California trust deed investments manager. Bruce and Craig talk about things going on in the current market, how they started working together, and the mind set of current investors in the market place. They also discuss real estate investors with an "all-in" attitude and how dangerous it can be in the current market.

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Sean O'Toole with PropertyRadar #139

Bruce Norris is joined this week by CEO of ForeclosureRadar.com, Sean O'Toole. He is a real estate investor and the founder and CEO of foreclosureradar.com.

Bruce bought a trustee sale recently using Sean's website. Bruce asks Sean how has being an investor influenced the content of his website? Sean says that he built the site for his own use, and that he had not planned on making it a public site. Bruce believes that no one could have put Sean's site together unless they new the real estate business. More experienced people are able to recognize the small things that make big differences.

One of the tools on foreclosureradar.com that has helped Sean is the transaction history of a property. You can use this tool to discover how the previous owner of a home bought and lost it. When you are looking at 100 properties every day, in the hopes of gaining just 5, the ability to quickly observe a property is of critical importance.

Foreclosure Radar started in California, and it has recently expanded into Arizona, Nevada, Washington, and Oregon. Foreclosure Radar publicly launched in May of 2007.

Bruce asks Sean how the quantity of foreclosures has changed since 2002. The change has amazed Sean. Sean started working in just a couple counties, but he was having trouble finding deals, so he started expanding. In 2006, the number of foreclosures being filed increased dramatically, so Sean realized that he could not afford to do research on all of those properties.

Bruce asks if the process of getting information is physically obtained, or if it is now computerized. All the documents and information must be physically obtained, and then typed into a computer. Sean thinks that this is a problem.

There is a tutorial on the website. Bruce asks Sean what the section FLX is for. That section is aimed at realtor customers. Sean wanted to make the website more interactive with photos and more search capabilities. If you go to a Realtor’s website, they have something called an IDX search in which you can search for properties with different types of bedrooms and baths. Sean wanted Foreclosure Radar to be the foreclosure MLS. FLX allows customers to show foreclosures on their own website. Consumers do not have many options for foreclosure information besides RealtyTrac and foreclosure.com, so Sean wanted people to be able to access that information for free.

Sean’s clients consist mostly of realtors, professional investors, and government users. Our local and county governments are looking for new revenue opportunities. They are now able to fine lenders up to $1,000 dollars a days for not maintaining their REO properties. Every time Bruce closes an escrow he always checks to see if it is an REO. A trustee sale is safer, because the fine does not begin until the property transfers.

Bruce asks if Sean has considered training people in real estate. Sean has decided to stay out of the training business because he has learned that there are many different approaches and he wants to support everyone.

Bruce asks Sean to compare the default numbers occurring between now and one year ago, in California. The default numbers have remained mostly flat. In July there were 45,000, and in June there were 46,000, and Sean believes that there was a drop in August. Last year, the default numbers were around 42,000 to 40,000. The people who are late on their payments have almost doubled within the last year. Bruce asks if Sean has any explanation for why the default notices have not reflected that. During September of last year, Fannie and Freddie went into conservatorship, the moratoriums began, and Paulson announced that he was seeking TARP. What Paulson’s message told the market was that these assets are being sold in distress, it is a temporary problem, if these loans are not forced into foreclosure then there will be no losses, and we should use funds to buy these assets from banks. This told the banks, if you have band loans, we will help you out, but if you have bad homes, then you will have to take the loss.

Last time this kind of problem occurred, the lenders responded the same way. They chose not to foreclose on properties. In 1995, a rule was passed that required lenders to foreclose on a property after 100 days. Bruce finds it interesting that the government was once forcing lenders to foreclose, but now they are helping them delay the process. The FDIC is now promoting loan modifications and Sean thinks that is just delaying the inevitable.

Bruce asks if Sean sees loan modifications taking a chunk out of the price. Sean believes that this is occurring. Last year, in California, we had 65,000 properties scheduled for foreclosure auction, and nearly 29,000 properties were foreclosed on. This year, we will have 130,000 scheduled for sale. We have doubled the number of properties being scheduled for sale, yet only 17,500 of those properties have actually been foreclosed on. The new home affordability program has a 3 month trial period, so they are putting people into foreclosure and starting this trial period, but they do not actually foreclose on them. What Sean is waiting to see is whether or not the cancellations of these foreclosures sales are going up. If this occurs then we will know that the modifications are working. So far, Sean has not seen any sign that these modifications are working.

130,000 scheduled sales are 6 to 9 months of inventory. History has shown that modifications do not work very well. However, more recent modifications seem to be working better than the previous ones. The average property that makes it through the foreclosure process is about 200,000 dollars upside down.

A new term has come up called a “strategic foreclosure”. This means that a person is capable of making their payments but they are deciding not to do so. Bruce asks if these people are adding to the pile. Sean believes that this makes sense on many levels. If a person makes a bad investment in a property then they can choose to walk away from it, and declare bankruptcy in the worst case. Right now, there are so many people making the decision to walk away from their homes that people no longer feel morally responsible to make their payments.

Sean O'Toole is Founder & CEO of ForeclosureRadar.com, the only company that tracks every foreclosure in California with daily updates on all foreclosure auctions. Prior to ForeclosureRadar Sean spent 15 years building and launching software companies before entering the foreclosure business in 2002 where he has successfully bought and sold more than 150 foreclosure properties.

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National Real Estate Investors Association #138

This week Bruce is joined by Rebecca McLean and Charles Tassle. Rebecca is the Executive Director of Nation Real Estate Investors Association, and Charles is the Director of legislation affairs.

From 2000 to 2005 NREIA’s membership greatly increased. In 2002, NREIA only had 44 groups. In 2004-2005 the membership grew to over 200 groups, and in 2006-2007 the membership grew to 250 organizations. Rebecca estimates that NREIA’s peak membership was around 45,000. NREIA is a federation of local real estate investing associations. Since the market peaked, NREIA has gone down to 230 groups, but there are still people sending in applications every day asking if they can start a local REIA.

Bruce wonders if some of these groups have developed from a group of speculators to a group of investors in which they have the mentality of holding on to real estate. There are more experienced people in the real estate business now than there are people who are new and curious about real estate.

Charles believes it is better to approach legislation with a group of people who are viewed as investors rather than speculators. When NREIA representatives present themselves to state and federal legislation, they try to explain to the government that they are just as much of an investor as they are a local business owner. They contribute a significant amount to the community just like associations such as CAR and NAR. Bruce thinks that too many associations approach Congress with a single minded purpose. They do not consider the investors when they work with the government to change things. Rebecca agrees with Bruce on this issue. What makes NREIA unique is that membership includes Realtors, appraisers, and investors, and this has helped open the eyes of government leaders to realize that NREIA’s members represent a different segment of the real estate industry.

California has too many homes that are going to go back to the lenders in disrepair. Most of the loan programs are geared towards selling the next home to owner occupants, but owner occupants will not be interested in buying these damaged homes. These loan programs will not work without the help of investors, and NREIA has tried explaining this to congress.

Part of the purpose that NREIA has in coming before Congress is to gain respect, so Congress will be more interested in hearing NREIA’s opinions on important topics. Congress has a niche mentality. Each Congressional office latches onto different groups that deal with specific issues.

Bruce has interviewed many people and he has found that people appreciate when he helps to explain what his interviewees are trying to write about. Bruce asks if Charles gets to assist Congress by explaining legislation. Charles says that Congress does ask for NREIA’s perspective.

Bruce asks how politically motivated Congress members are to stand up for certain ideas that may be unpopular. Charles says that in the end, it comes down to the impact of voters. NREIA is supporting the bill HR 3440 which changes the way Realtors and dealers are recognized so that people will not be considered a dealer just because they have done a couple installment loans. This will increase the number of land contracts. As NREIA has explained this to Congress, they gained an understanding of how their voters would benefit from the bill and they started to gain interest in the bill.

203K loans were once available to investors, but that program was taken away from investors in 1996. The program allows people to get financing for a house including the repairs. Bruce asks if it is politically unfavorable to help investors. Charles says that investors are no longer an unfavorable group to support. The mortgage brokers and the appraisers are currently the politically unfavorable groups. People who are rehabbing properties are considered politically favorable. REIA has been making an effort to display investors as an important group of people in the real estate industry. Communities that were once not so open to investors are now open because investors have done a great service for them. There are a lot of misconceptions about what happens to an area when there are a lot of rentals there. Bruce was recently interviewed on a television show and the people who viewed his properties were astonished and pleased by the results they saw. People need to be exposed to the changes that investors make in communities. The work that investors do increase employment, increase the values of neighborhoods, and also increase tax revenue. Rebecca estimates that investors contribute about $3 billion dollars to the economy because of the other businesses that are affected by investors.

Bruce asks how investors can send a message to the people who are in charge of financing options that we need more generous financing because it is very difficult to get financing for rentals and properties that need to be fixed. Charles says that banks are looking for a 750 credit score. Right now the banks are sitting on a lot of cash, and NREIA is hoping that HR 3440 will help encourage the banks to lend that cash out.

Right now there is a program that gives owner occupants an $8,000 check for buying their first property. Bruce thinks that it would be better if existing loans could be taken over subject to without worrying about an assumption fee or the lender calling the loan due. FHA once had a loan in which people did not have to qualify for taking over the payment. Under this loan, all you had to do was send in a fee. Bruce asks if there has been any talk about this sort of loan being available again. Charles says that this has not been discussed, but the chances of this showing up will increase as long as NREIA has an influence on Congress.

In California, there are many investors who 1031 exchanged to other states, but cannot return back now. If they exchange without financing, they will have to pay a hefty tax bill, and they cannot get financing once they pass the 10 property limit. A lot of the decisions we are making are preventing our problems from being solved more easily. Rebecca says that part of the problem is that making good changes, which will help investors, may not be politically favorable. As investors continue to be displayed in a positive light, our chances of having helpful legislation get passed will increase.

Bruce asks what date NREIA’s “Day on the Hill” is scheduled for. This event traditionally goes on during April. The technology conference is coming up soon. This conference will allow NREIA to tell people about what NREIA is doing legislatively. NREIA is trying to make investors look good to the public. Information for “Day on the Hill” will be posted on the website after the technology conference, and people will also have the ability to register there.

Bruce asks Charles if there are any bills coming up that are bad for investors. Charles says that there a couple bill trends that are concerning. One is the foreclosure moratoriums, and there is a foreclosure modification process being proposed. This means that judges or someone else will be given the power to modify loans. This modification process is meant to save people from foreclosure, which seems good, but if we do not deal with our problems on a piece by piece basis we will cause more problems.

To find out more about the National Real Estate Investors Association, visit their website at nationalreia.com

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Rick Sharga with RealtyTrac 8-15-09 #135

This week Bruce is joined by Rick Sharga, the Senior Vice President of RealtyTrac. Rick joined RealtyTrac in 2004 as the vice president of marketing. Rick is also a panelist for I Survived Real Estate 2009.

Bruce asks Rick “What services does RealtyTrac offer?” RealtyTrac publishes the largest database of foreclosure and bank owned properties in the country. They also put a lot of related information about those properties in the database including property characteristics, comparable sales, and loan history. It used to take much longer and more expertise to get into the investing business, but RealtyTrac has helped change this.

Rick Sharga congratulates Bruce on producing some of the best educational services in the country.

Realtors use RealtyTrac in a couple ways. Some agents subscribe in order to get up-to-date information on foreclosure activity in their neighborhoods. Others use RealtyTrac to post their properties for sale and to advertise their services to buyers. Appraisers and investors look at property regions to determine property values. You can also use RealtyTrac to check the future inventory of a market place by checking the number of properties in the trustee sale stage. Realtors also use this tool for broker price opinions and to discuss short sale processing.

RealtyTrac’s data goes back to 2005. In 2005, about 530,000 were given foreclosure notices. Over 1.5 million properties have received foreclosure notices through the first half of this year.

Besides the great depression, this is the worst down turn we have ever had. Even professionals who knew this down turn was coming were stunned by how quickly the down turn hit us.

Prices are also falling with the number of foreclosures. In the past, people were taught to honor their contracts, but now one’s financial well being encourages people to walk away from financial responsibility. In many cases, the only option is to execute a deed in lui of foreclosure. The other option is to take the next 15 years to break even on the property you’ve bought.

Bruce asks Rick if he thinks that people consider it more acceptable nowadays to simply walk away from a payment because they do not feel like making the payment. Rick thinks that foreclosures have become so common nowadays that now people are not bothered so much by walking away from their homes. There is discussion in the industry about creating a forgiveness program for people who have gone through foreclosure during this period because the lending programs participated in making this problem worse. Bruce thinks that might make sense because they cannot make houses fast enough to solve the problem. There is discussion about shortening the forgiveness period from 5 to 7 years to 2 or 3 years.

This cycle is unusual because in the past downturns have been caused by an economic occurrence, which then caused unemployment, which then caused foreclosures. This time foreclosures started the problems because home prices were too high and people could not buy a home unless they bought a toxic loan.

Unemployment forces a selling decision that did not exist before. Option ARMs are going to be coming fast for the next 24 months, and they have already experienced a price hit. Option ARMs when they are resetting are always upside down in Riverside. Option ARMs are resetting a little early too because people are making teaser payments.

These home owners have very few options. They have no equity, they cannot afford the higher mortgage payment, and even if they can, they have to decide if that is the best decision for their family’s financial future.

Bruce asks Rick how loan modifications are working out. Rick says that they have done nothing other than give us a lot to talk about. Servicers are only focusing on the length of the loan and the interest rate. The Obama plan does not compel servicers to do principal balance write downs, and it does not moderate their loss. The only way to modify loans effectively is to do a principal write down.

Bruce asks Rick what the ramifications are for giving people principal write downs when they have lied to receive the original loan. Rick is not sure if we will induce more foreclosures by doing this. He thinks we may be overstating the number of people who are in the circumstance. There were not many people putting 50 percent down on their properties in the early part of the decade. People were using ridiculously relaxed financing to obtain properties that they could not afford. Rick thinks that it may be better to do a long term deferral instead of a principal write down. This might keep the home owner at a rate that they could afford, and sometime in the future that amount would be payable. Equity sharing is also one of the options for solving this problem. This involves writing down the principal balance, and requiring sellers to give a percentage of their profit back to the lender. Rick does not think that home owners would be interested in that plan.

States that have non recourse loans in place have a higher percentage of homes that become bank REOs. However, Rick has not seen a comprehensive study on this. There is a lot of discussion right now about increasing the number of loans that have a recourse option.

The House of Representatives passed something recently that will mandate a lender who forecloses on a property to give the former owner a five year lease option on the house. This has not been passed by the Senate yet, but it is coming to them next. Bruce and Rick think that this bill will affect loan programs going forward. Rick says that this is a valiant attempt to help prevent people from ending up on the street but most lenders are not set up to be property managers. People wonder how this will affect their capital structure. How do they treat the loss on that property, how do they treat the asset value, and what does it do to the loan risk profile? It could be a higher risk because more people will default, and it could be a lower risk because lenders will see more revenue.
Bruce asks if moratoriums have worked. Rick says that the only thing that these moratoriums are doing is delaying foreclosures. This could extend the length of the down turn. Moratoriums do not accomplish what they were intended for.

There are probably 10 states that account for approximately 75 percent of the total foreclosures. Most of them are doing moratoriums.

Core Logic says that 9 percent of California borrowers are at least 90 days late. Bruce asks Rick how that affects his outlook for 2010. Rick thinks we have seen the end of the subprime problem. The two big variables are unemployment and how badly Option ARMs will default. RealtyTrac’s forecast is that we may hit a numerical peak this year, because the raw number of option ARM loans was not as large as the raw number of subprime loans, but 2010 will look very similar to 2009. We may see an increase in foreclosure activity. If unemployment extends, and if prices continue to decrease, then 2010 may be worse than 2009.



Rick joined RealtyTrac in 2004 as the Vice President of Marketing. He is responsible for building and maintaining the RealtyTrac brand, corporate positioning and messaging, public and investor relations, and marketing communications activities. As a spokesman for the company, Rick has been quoted extensively in the press on foreclosure, mortgage and real estate trends, and appeared on NBC Nightly News, CNN, CBS, ABC World News and NPR.

Prior to joining the company, Rick spent more than 20 years developing corporate and product branding strategies for technology start-up companies and international corporations such as DuPont, Fujitsu, Hitachi and Toshiba. Rick created and executed successful sales and marketing programs in B2B, technology, consumer electronics and retail for companies like JD Edwards, Philips, Cox Communications and Honeywell.

Rick began his career with one of the world’s largest ad agencies, Foote, Cone and Belding, and also had successful engagements with Ketchum Communications and McGraw-Hill. He founded his own consulting firm, CJ Patrick Company, in 2002 to help companies develop business and brand strategies that clearly communicate a unique value proposition, create a position of competitive advantage, and leverage the strength of their brands in the marketplace.

A nationally-recognized speaker on Branding, Rick spends his spare time taking Tae Kwon Do classes with his 10-year-old son, and trying to keep up with his increasingly-mobile 4-year-old daughter. He also continues in his lifelong quest to find the perfect wine to compliment his BBQ'd baby back ribs.

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Christopher Thornberg of Beacon Economics #133

This week Bruce is joined by Christopher Thornberg. Christopher is an expert in the study of regional economies, real estate dynamics, and business forecasting. In 2006, he confounded Beacon Economics which is economic research and consulting firm that specializes in real estate markets, local economic development, and public and private policy issues.

Beacon Economics will be doing its first Los Angeles Forecast Conference in the last week of July. There will be a panel of CEOs representing health care and the financial industry who will be talking about the changes occurring in their industry. It will be their first annual event. They are partnering with the LA Chamber of Commerce and Pepperdine to make this event happen. Southern California is the economic center of gravity within this state, and the center of Southern California is Los Angeles.

Bruce asks if a company is looking to relocate would find California to be a leading option. There are some things you have to consider if you come to California. You have to worry about where your employees are going to live. Nowadays homes are much more reasonably price compared to a few years ago. Companies coming to California will be able to rent commercial property for a lower price per month as well. The prices have not come down as much as they should have though, because of the leasing situation, and because there are still some landlords who seem to be in denial about the shape of the economy. Residential and commercial property are two sides of the same coin, and yet they come at different stages of the business cycle. Residential leads the business cycle, and commercial lags it.

The commercial real estate market is about to feel the same hit that the residential market has taken, but it is taking more time to mature. Part of the reason the commercial market is taking longer to go down is because the banks are not pursuing bad debt. The banks have more incentive to be lenient towards people they have lent money to, because if you foreclose on a loan then you actually have to mark that loss down in your books, but if you do not foreclose then the FDIC will allow you to keep that on the books at face value. They call it extend and pretend.

In the residential market there are a lot of properties that have not begun foreclosure, and some people have not made payments for 18 months. There are some banks that are willing to delay the foreclosure process, and some banks just can’t catch up, and there is also a problem with moratoriums that are slowing this situation down. Christopher thinks that if you have a problem then you should be trying to work through it and move forward, but we seem to be fond of dragging this problem out. Some will tell you that you want this problem to be solved over time, because the economy is already so weak, but Christopher says that there is very little evidence that foreclosures significantly hurt the economy. Moratoriums on foreclosure make it a lot longer problem.

On Christopher’s website there is a quote saying, “It’s not what Wall Street troubles me to California, it’s what California troubles me to Wall Street.” When we had a big financial meltdown last year, many reporters called Chris saying “What does this mean for California?” Christopher laughed at this, because Wall Street has presented itself as the leader of all financial things, but that is nonsense. The stock market can change its direction in the afternoon if it gets afraid. California has been in a recession since 3rd or 4th quarter of 2007, yet Wall Street made many bad bets and it did not seem to affect the economy for close to a year. If you did have a true meltdown in the financial system then you would have massive deflation and things would be far worse than they are now. We had a depression expert in the Federal Reserve, and he wasn’t going to let that happen.

Trillion has replaced billion as the cost of solving problems, but Christopher says inflation does not seem to be a likely outcome of the spending we are doing. This is because a large portion of the money we are spending is being done through treasury bonds. That does not have an inflationary effect. What does have an inflation effect is the expansion of the money supply. The Fed, through its program of quantitative easing, has expanded its monetary base by 100 percent over the last year. If that money was to get into the real world then it would have an inflationary effect, but it hasn’t. Most of the money that the Federal Reserve has made has ended up in bank reserves. If the banks started lending that money then we would have an inflation problem, but Christopher thinks that if that ever happened that the Federal Reserve would start to get rid of that excess liquidity.

Bruce asks Christopher what the ramifications will be for 12 to 13 percent in California. Christopher does not think that unemployment is going to be a big problem. Unemployment is a lagging indicator. However, it does increase the amount of stress being put on the financial system. People over their heads in debt and underwater in their home but beyond that he doesn’t see a direct effect on the economy.

Bruce asks if he thinks lower wages will be an issue. Will renegotiation for lower union rates will come up? Christopher thinks it will have a little impact. Hours are already being cut for government and education jobs.

If California is one of the leading states in unemployment then it will affect migration patterns in the short run. The number one reason people move is for job opportunity. The number two reason is relative home prices. This means people will not have as much motivation to move into California for a while, but some people may start moving back into California because of the low home prices.

Builders couldn’t possibly be interested in creating building lots right now, so Bruce is worried that there will be a housing shortage around 2012 or 2013. Christopher thinks that is possible but he does not see us having an issue with single family housing. There are lots of lots ready out there, and as soon as someone sees the opportunity they will build. Christopher does think there will be problems with rental houses. When people start moving back, there will not be enough housing for low income families. Christopher hopes the state will make policy changes to encourage multi family production.

Bruce thinks that it might be a solution to give investors financing so that they can hold properties for a reasonable price because then the market would dictate what the rent would be. Christopher thinks we got into this mess because of too much financing but now there is not as much financing as people would like. Christopher wonders if there is a true market failure occurring right now or are people simply suffering from credit withdrawals. There was never too much financing for investors who buy and hold properties and eventually pay them off. The financing problems occurred when speculators and owner occupants got involved. If your goal is to find reasonable rentals, they are all over the place in Moreno Valley and San Bernardino, but the financing is not available for investors to get these homes. What seems like a sure deal to investors does not seem like a sure deal to the banks.

Bruce thinks that the number of bank owned properties is going to dramatically increase in the next year. Bruce asks if Christopher sees more price damage coming to California because of that. Christopher does not think that these bank owned properties are not going to really decrease prices but they will help hold prices down. There is pent up demand for housing. If you go to an auction, you will see people who want to buy foreclosed units. Bruce thinks that this is true in the short run.

Bruce wonders how we can have pent up demand when we have the most generous financing programs in existence. It is surprising to Bruce that there is this much demand when there are so many people who have been artificially allowed to participate before they were ready.

In Riverside and San Bernardino, rent is more expensive than the PITI payment. That has never occurred in California. This is occurring because there are many people who cannot qualify for mortgages because they already have a bad mortgage on their payment. Unemployment and foreclosures are at a record, so Bruce does not understand who is actually going to borrow the money to buy these homes.

Christopher thinks there are more potential buyers who smartly sat on the sidelines and waited for these opportunities to come up. There may be other people who are being co-signed by their parents. If you talk to bankers they will tell you that there are people coming through their doors who have a recent foreclosure, and they will look the other way because they know that these people have made a mistake and there is no point in turning down a potentially good loan. Bruce agrees with Christopher here.

Most of the mortgage market is being dominated by Fannie Mae and Freddie Mac. Unless Fannie and Freddie are willing to back mortgage product and buy them off of banks, there is going to be very little money available.

Current loan modifications in California do not change the principal balance. Christopher does not think these have any chance of working. You cannot expect to have a true recovery by simply modifying the payment. People are not fooled by these modifications. Even though we are modifying their payments, they are still in an incredible amount of debt. It will take many years for them to get rid of the debt they have taken on, and their credit score will heal faster than their equity position. In 2008, 7 out of 10 people who applied for a loan modification ended up in foreclosure eventually.

Bruce asks Christopher what he thinks will indicate that real estate is starting to get healthy. Christopher thinks that sales are important and mortgage delinquencies from the Mortgage Bankers Association. For California, about 9 percent of all mortgages are delinquent. That tells you that we are no where near the end of this problem.

We look forward to Christopher being on our panel for I Survived Real Estate 2009.

Christopher Thornberg is a founding partner of Beacon Economics. Dr. Thornberg is an expert in the study of regional economies, real estate dynamics, labor markets and business forecasting. He has been involved in a number of special studies measuring the impact of important events on the economy, including the NAFTA treaty, the California power crisis, port security, California water transfer programs and the September 11th terrorist attacks. Prior to launching Beacon he worked with the UCLA Anderson Forecast where he regularly authored the outlooks for California, Los Angeles and the East Bay as well as performing a number of specialized forecasts for regions and industries. Dr. Thornberg lectures on a regular basis at a variety of public and private events, has appeared on CNN, Fox News and CNBC and is widely quoted in the press. He received his Ph.D in Business Economics from The Anderson School and his B.S. in Business Administration from the State University of New York at Buffalo. He specializes in International and Labor Economics. Dr. Thornberg continues to teach in the MBA program at UCLA and previously held a faculty position in the economics department at Clemson University.

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