John leads a consulting firm that specializes in independent, unbiased analyses of the real estate industry. The company is on retainer with a very diversified group of companies to advise them on market conditions, and also completes a variety of project and portfolio specific advisory assignments. He was a CPA for 2 years and then spent 8 years in KPMG Peat Marwick’s Real Estate Consulting practice (now called Bearing Point). He was also a Principal for four years at a national consulting firm before starting our firm in 2001.
John has a M.B.A. from the University of California, Los Angeles and a B.A. in economics from Stanford University. Specialties: Real estate market research, Housing Analysis, Strategic Planning, Financial Analysis and Valuation
Bruce and John talk about which states are winners and losers for migration. How each state has been impacted based on their response to COVID and a very something very interesting that may come from this housing market.
See below for full video and resources.
Episode Highlights
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- Adult housing growth
- Prop 13 and taxing wealth
- What state are benifting from their response to COVID
- Vacant homes, flips and 2nd homes
- Housing Euphoria and Sub-Prime Lending
Episode Notes
Narrator This is the Norris group’s real estate investor radio show, the award winning show dedicated to thought leaders shaping the real estate industry and local experts revealing their insider tips to succeed in an ever changing real estate market hosted by author, investor and hard money lender, Bruce Norris.
Bruce Norris Hi, thanks for joining us. My name is Bruce Norris. And once again, we’re back with john burns. John Burns owns a company, John Burns consulting has for many years. He’s one of the people that really gets to speak with the big real estate players in our country. Hedge funds, national builders, and they pay him for his advice. John, welcome back to our show. You know, we’re building houses to sell in Florida, and everything goes pending the first day we have it up for sale. And I mean, I’m awfully happy about that hope it continues. I wasn’t going to ask you this question. But this is something you know, it’s kind of funny. I stare at charts like you do and have for years. And sometimes something emerges that I didn’t see before. And I had that happen last year. And I was looking at a charts of population gain. And I had never separated what that was made up of. And I don’t I don’t know if you’ve ever done that. John, but California’s population gain is now great majority 90% of it birth over death. And what’s called natural natural gain. In Florida, it’s 95% migration of either immigration or within the states, and only 5% birth over death. Which which means to me that the migration gained in Florida is an adult that today is ready to buy or rent a house. And in California, the population gain is 25 or 30 years away from that event. Have you ever looked at the population gains that way?
John Burns No, we always look at the population gains that way. And
Bruce Norris Well, I missed out on that,
John Burns You know, for when Britain, you know, when population growth is babies, babies don’t buy houses. I mean, babies might be there by house. But yeah. California what is flipped is the foreign migration used to be the growth. And clearly that’s been shut off right now.
Bruce Norris Right
John Burns And domestic migration has usually been net out. So if you look at California use the same number of adults, it’s usually in decline, except for the fact that there’s a lot of people that move here from other countries. But you’re right, Florida and Texas and Arizona, there’s huge domestic migration there of adults moving in buying and renting homes.
Bruce Norris So So how does California have more demand for real estate when all of the the adults are already here? I don’t know if that’s by phrase that right. In other words, the buying public, basically is already here and numbers they have to grow from maybe 25 to 35. To me, that’s a very different statistic, then people showing up as adults already to do something. So I thought I discovered that I was pretty excited.
John Burns There’s another thing in the data. That’s really, we haven’t quite completely got our arms around, but fascinating, too. So you’re right, really, there is no adult housing demand growth in coastal California. Anyway, right now. I just looked at it in Orange County the other day, but there’s this other phenomenon going on. That’s really surprising. There has been a a Inc, a steady increase in the number of vacant homes. So there’s like it’s like supply is getting taken off the market. And some of that is inheritances, people are inheriting homes and then just leaving them empty. And then all these fixing flippers. I mean, those those homes are empty when they’re buying them. It’s something we really want to do some more work delving into, but I just got into an argument literally two days ago with Mark Zandi of Moodys.com.
Bruce Norris Right.
John Burns It was a healthy argument.
Bruce Norris I was gonna say, high end arguments.
John Burns That’s good. Well, he said, you know, well, housing is so under supplied. And I said that everybody has been saying that forever. Prove it. You know, he pulled out the vacancy chart because he’s got charts lying around just like you and I do. And he said, Well, look, the number of homes for sale and for rent that you and I can buy or rent is lower than usual right now. And I said you’re right now let’s look at the rest of the vacancy. And in fact, we’ve been playing email tag on that today. It’s up the number of second homes is up the number of empty homes that are being flipped is up on you. Yeah, I don’t know if this is true with you and offers but he moved to Florida. If you still have a home in California that says vacant, that would be a reason to There seems to be a lot of people that have done that. That’s been a big surprise to me. It takes supply off the market.
Bruce Norris Well, you know, I think what you what you just said is, is part of the reason why we’ve had such firm prices, I was wondering if sales had gone up until today. I see they have, but I was thinking that there might be a really strong reaction of concern where people put their home on the market after a certain period of time. I know they took it off originally said a lot of a lot of listings withdrawn. It’s interesting to me, I just thought real estate would react in a more negative way than it has, it’s actually been a really positive spot. As far as price aggression, and volume of sales and that type of thing.
John Burns There’s an element we can learn from, which is the remodeling business. So it’s not just interest rate driven, it’s people are very focused on improving their house. And it is because of COVID. Home Depot is a client of ours at $110 billion in revenue, they were looking to grow by a few billion dollars this year, their sales were up 23%. year over year, when you when you run 100 and $10 billion company and your sales are up 23. Va their their shelves are empty. And that’s not people are paying cash for that there’s very little HELOC activity associated with that. That tells you that people have gotten super focused on spending money on the house and having a better house because we’re spending so much time in a house and I’m not spending money on vacation, and I’m not going out to dinner, and I’m not doing all these other things I’m not getting on airplanes. The money is flowing into how
Bruce Norris I think the other thing about that, let’s say you refi your house today at two and a quarter percent. Are the odds better than normal that you’ll just stay there?
John Burns Well, we’ve been saying that forever, we call it the lock in effect. So you know, if mortgage rates are ever above where your current mortgage rate is, you stay, right. And that, you know, that happened for a while then when mortgage rates fell into the threes and then went back up to four, we’re like, Well, of course, nobody’s gonna vote. That’s a really expensive decision, because I gotta give up my great rate and then go get an expensive one. I think you bring up a valid point. And I do think that is going to happen when rates go up. But you know, they’ve been falling for 20 or 30 years, people are saying they can’t fall any further. And I said that in Japan 20 years ago, and rates were similar to today. And they’ve been falling for 20 years. At some point, you would think rates would normalize and that would cause an issue where people won’t move.
Bruce Norris Plus, if you’re a lender, if you’re in the lending business, you think you’re going to refi most of the world this year. And then that represents about probably about half of your business.
John Burns You know, mortgage industry employment is up 11% since February.
Bruce Norris Oh, makes perfect, perfect sense to me about a year from now. It might might be down 50. But we’ll see.
John Burns Right. Right. But I mean, housing is the economic engine leading us out of this right now.
Bruce Norris The Coronavirus impact on different states. So would you say there’s a state that’s going to benefit from this and states that are going to get hurt by it?
John Burns Well, Florida has benefit Arizona has been the biggest beneficiary because Arizona is driven by construction. And so the construction industry is on fire but there as of last month, they’ve lost 3% of their jobs, whereas the country I think it last about nine, Arizona is doing much better. And not surprisingly, you know Miami, New York, Las Vegas, those are the economies that have been hit the hardest, although Las Vegas is benefiting from California migration, the housing market Arizona and Okay,
Bruce Norris I’ve always had a little bit of discomfort with Nevada’s business model is that it’s so dominated by one industry, I saw that not work out well in Grand Junction and oil. So I’ve always just thought, if something ever happened to that, that would, I wouldn’t want to be holding the bag over there. Do you see California? Let’s say within, I don’t know, the next four or five years, where there’s policies they’re really talking about. We have a voting in November, a split roll prop 13, things like that. Do you see that hurting California’s migration of business or people with wealth going forward?
John Burns Prop 13. You mean? Well, moving around property taxes go up significantly on commercial real estate owners? Yes, you would think that but I’ve been in California my entire life. And then people have been saying here the added regulation, the other regulation, regulation is going to drive people out. It has caused our domestic migration to decline. But I still think it’s one of the best places to live in the world. So you still see a lot of people moving there and we talk about employment, it really comes down to where does the CEO want to live? So the CEO wants to go to Dallas and go to Dallas. A lot of CEOs like California. Okay, so Silicon Valley, but the tech thing I mean, I don’t think Even though rah Austin and other places have great tech markets, I don’t think they’re going to be able to replicate the dynamism of what goes on in the Champions club area, they’ll continue to attract a lot of smart people,
Bruce Norris The population that migrates away versus the population that migrates here. Is there a difference in their economic picture to wealthy people stay and less will wealthy people leave so they can afford a house? How does that work out?
John Burns So I’ve looked at that a while ago is it’s changed. So it used to be a lot of the migration was coming from south of the border, so with lower income people, but that stopped a long time ago. Now it goes all the way back to NAFTA when it started helping Mexico’s economy. But what we’ve seen is a lot of young, smart college educated people want to work in tech and want to work in entertainment. And we’re seeing a lot of migration of higher income young younger people into California, probably more so than 10 years ago, that that’s what’s been going on. And then they’re, you know, this whole element of the executives are going to retire or leave California because of the taxes. But I do think there is some truth to that. But you know, it’s happening by the hundreds, not by the millions.
Bruce Norris The reason one of the recent ones they’re talking about was the wealth tax. And there there’s just some things that I think about going I thought that was like a federal level decision. When California State came up with they’re contemplating how to figure out how to tax your wealth. I just thought I didn’t know they could do that.
John Burns 11:37
Yeah, Art Laffer was famous years ago, he left California and moved to Tennessee, because there’s no estate tax in Tennessee. Gone Forever.
Bruce Norris Okay, well, not a state tax. They’re talking about taxing your wealth every year, a net worth tax. To me, that’s the new one.
John Burns They’re talking about doing it at the federal level two, I believe that’s been on the table for a very long time. And somehow magically, they would they increased what the state tax, which I know is different than a wealth tax. But I went all the way north of $11 million, you know, that could come back down to a million with the stroke of a pen here. So we didn’t talk about this, but with with what all the federal government’s been doing and all the deficit, they’ve been running forever. And now all this spending is just the deficit of all. You know, I was taught you should have a balanced budget in school and members, we seem to have people in decades now without a balanced budget. But at some point you you’d have to raise taxes. If you wanted to get close to a balanced budget, we don’t seem to be paying the price for that. which blows my mind. Although the way I look at it, I’ll just I’ll just say we should be paying the price with inflation. But America is still the reserve currency because America’s balance sheet is bankrupt. But every other country is more bankrupt. I think if there was a big country out there that was more in stronger shape financially than us, we would have a lot more problems.
Bruce Norris That’s interesting. Do you know who Ray Dalio is?
John Burns I follow Ray religiously, yes.
Bruce Norris That’s a pretty smart man
John Burns Yeah, he’s a pretty smart man. And you know, he’s saying we’re gonna pay the consequences for this, because 800 years worth of history says wishes. And he can’t predict the timing of it, and neither can anybody else. I mean, Ross Perot ran for president on this platform in 1992, saying that US was going to go bankrupt any day. And here we are 28 years, hasn’t happened yet.
Bruce Norris Do you consider federal debt maybe safer than state debt? Because the federal can write their own currency basically. But let’s say a state that has a lot of debt that’s coming up for people that are retired that type of thing. Do you see that hitting the fan? Or do you see the national budget somehow taking that over and making that be okay,
John Burns I think most state and local governments there are a huge percentage of them are technically bankrupt. If you look at their balance sheet, and right, you only want to print money to pay off their debt to the federal government. So if you look at it that way, the federal government should be safer. You know, when when Stockton and Vallejo and some of these other cities filed bankruptcy, the bondholders seem to get out. Okay, from what I could tell, you know, and maybe pensioners or other people that are left holding the bag. It’s not my area of expertise, really.
Bruce Norris Okay. I interviewed the lawyer that basically was very familiar with the way the law was in like a bond holder. If you’re looking at trustee position. pensioners are the first trust deed and everybody else’s below them, or they’re even like the state property tax. There are somehow a superior lien, so I’m not sure. But I guess when you when you run out of money, I just I was thought the national government would probably have to write some checks because they’re capable of doing it and not too probably would be a big mess. You mentioned the name Raphael Bostic that was interesting. I had a meeting with him in 2008 or nine at FHA, he was he was there at that time, we were talking about the problem. And I said something to the effect about, I There used to be a subject two way to transfer property where you didn’t have to qualify for an assumption. And he says, I have no problem with that. I said, Well, that’s great. Would you put that in writing for me? And he laughed? He said, No, I couldn’t do that. But I wanted to bring something up to you. And I know you and I have disagreed with this over the just on the email. But I guess I’m trying to think, Okay, how does real estate maybe help? I don’t know, help society mend. I feel like when I didn’t own a home, I mean, I was pretty young, I got married at 17. But when I didn’t own a home, it was just a very bad feeling. And when I, when I owned a home, when I was probably 21, or 22, I didn’t have a dime worth of equity, but there was something significant in how I felt about my prospects, with my name on a on a grant deed. So you and I have gone a little bit back and forth on this concept of having a nothing down loan program for people that that could qualify, like a, you know, like a VA lender, would qualify people and give people a chance to own a home. The only thing that would be different about the program was that you’d have one foreclosure process, that would be for all states. And that if in fact somebody didn’t make their payments for, you know, pick the timeframe, three to six months, you’d have the sale and the sale would be for the back payments, and the lender would get paid current and a new buyer would take over and make the payments going forward. And the reason I think that would work well is I think it would give a lot of people a chance to own and I think you’d have a success rate. Well over 90%. And I think you’d have a lot of people turn into owners that weren’t. So what do you think of that idea?
John Burns Yeah, no, I mean, you said the magic thing that 90%, what happened to the other 10
Bruce Norris It gets sold.
John Burns What happens to those people?
Bruce Norris Well, they lost their chance to own that home. That was always part of the deal, doesn’t mean they came in?
John Burns Well, that I mean, that’s pretty darn close to what goes on today. I mean, FHA will insure people, but with the lowest credit scores in the country with nothing down to become homeowners, and then for the payment to be more than 50% of their gross income, which probably works fine if you’re living alone. But if you’ve got four dependents, it’s probably too much. I mean, I’m not a policy setter guy. But I just I just look at things from kind of a market rate thing. And you know if I’m the lender on this, but I make 100% loan to Bruce Norris. Absolutely. When I do it to somebody who has a demonstrated track record of not being able to make their credit card payments over the last three years. I know that’s a higher risk. Why would I do that? I think it’d be better to get that person to get their act together financially, that would be great. And then make them alone, not make them alone and then hope they magically get their act together, which is the policy?
Bruce Norris Well, the VA must do something right with nothing down. Obviously, they have pretty good track record. So whatever, whatever qualifications they have, that wouldn’t be a bad idea to mimic them.
John Burns I guess I’m fine. With that. Data, right to people. My understanding is they underwrite to people’s disposable income. Which is
Bruce Norris That’s correct.
John Burns Exactly how you that’s exactly how you should underwrite. That’s how I got banks underwrite businesses, that’s what your revenue, what are your expenses? What do you have leftover to pay the mortgage? Not you know that the mortgage industry underwrites to people’s gross income, whether they have you know, 17 children or zero,
Bruce Norris Correct?
John Burns It makes no sense to me.
Bruce Norris No, I agree with that. See, that’s what I mean, this would be a different loan product with a different approach that I think would have a big success rate and give, give a lot of people a chance to own a home, it matter to me because obviously, sometimes they go up, and all of a sudden, you’re part of the equity position, and maybe you get a credit line and become a little bit of an entrepreneur. It’s that’s just what happened to me. So I’d like to see that. And I think perhaps it would change some of the People’s mood about them having having a shot. That’s, that’s kind of where my heart is in it. What do you think you guys are going to be doing for the next 12 months at your company? Do you think it will be real estate’s just doing doing really well? People are going to be, you know, thinking about the big picture and building lots of new homes, or there’s going to be on the back of their mind that there’s a second shoe to drop, and then we’re going to have to be really careful.
John Burns I actually think it’s gonna be a third choice, Bruce, which is people are going to do really well. And we could end up with housing euphoria, where we start to see double digit appreciation year after year after year, and stupid lending starts happening again. It feels a lot like 2002. To me, in 2002, everything was great. There was I mean, I’m seeing a lot of capital that is still fighting to get mid teens returns. How do you get mid teens returned in an environment where rent the risk free rate is zero? Right, you have to take it, you have to take a lot of risk. I would not be surprised and being very speculative here, though. But if interest rates stay in the tubes for a very long time, and home prices go up 10% a year for 10% a year after 10% a year and we run out of all the most qualified people in the country to make mortgages to that somebody sees an opportunity to make double digit returns. Going back to subprime or something along those lines, I can actually see is more likely to hurt I guess, there’s a downside and more just rah rah rah, housing is unstoppable.
Joey Romero So do you think regulation would go away, and that would lead to that or that would still go on even with the regulation that’s in place,
John Burns Don’t underestimate the ability of lawyers to come up with new structures to get around regulation. There, they’re now sued Wall Street is now securitizing short term fix and flip loans. I never thought they’d be able to do that.
Bruce Norris Not only that, but one of the big debt concerns probably going back a year ago was the corporate debt, correct? Yes. Yeah, there was corporate debt. Everybody thought, Okay, well, that’s the next big problem. And then the Fed basically solved that
John Burns They did. And there was more debt issuance last month, I think, than any month ever before. Because all those companies were able to tap back into the debt market for a lower interest rate and stick the maturities out for four or five more years, because that’s what they’re able to do. And you know, I’ve seen some structures where some of the subprime feeling like stuff looks like a lease to me right now. So it’s at least on the program, so that you can get around the mortgages that way, because it’s just interesting.
Bruce Norris  Well, john, I appreciate you taking time to talk with us. I really do. I always enjoy talking with you. And I learned an awful lot. I would suggest anybody get big shifts ahead. Is there big shifts ahead to coming?
John Burns If I can find the time, so not anytime soon. That was a lot of work that they asked for the plugin. And once again, I learned more from you with your questions that make me think but sure.
Bruce Norris Glad we I glad we share each other, you know, share time with each other once in a while in line and and thanks again for participating in our I survived events. It’s a
John Burns Of course.
Bruce Norris Yeah, we just really appreciated
John Burns Are you going to go virtual this year with that?
Bruce Norris I, Joey, you’d probably know. I think the answer is yes on that. It’s going to be later later this year.
Joey Romero Can’t spill the beans yet. But yes, there’s there’s something in the works and it’s going to be okay. It is going to be kind of townhall ish. That would kind of describe it accurately. And we’re just going to divide it into you know, how we’ve had it. You know, where it’s the panelists, then the you know, the real estate legends, and then, you know, we’re gonna give some time to the clubs too. So, but yeah, it is gonna go virtual.
Bruce Norris Alright, John, again. Thanks so much for joining us today.
John Burns All right. Take care of Bruce
Bruce Norris Talk to you soon. All right.
Joey Romero By the way, John, I’m squatting in his house so it’s not vacant.
John Burns There you go.
Bruce Norris All right. Okay.
Narrator More information on hard money loans and upcoming events with The Norris group. Check out thenorrisgroup.com for information on passive investing with trust deeds, visit tngtrustdeeds.com
Aaron Norris The Norris Group originates and services loans in California and Florida under California DRE license 01219911. Florida mortgage lender license 1577 and nmls license 1623669. For more information on hard money lending go to thenorrisgroup.com and click the hard money tab.