I SURVIVED REAL ESTATE 2024
The Norris Groups 7th annual award-winning event, I Survived Real Estate, is Friday, October 25 at the Nixon Library in Yorba Linda. Our 17th annual black-tie gala will benefit Make-A-Wish. Since 2008, together we’ve raised well over $1,000,000 for charity!
In a year of lingering inflation, housing shortage, sticky high interest rates, national affordability challenges, a dangerous war and an uncertain upcoming election are just some of the headwinds we face as an industry and a nation. What will the FED do as year year finishes out? How big will the FED decision loom on this year and the expectation of a better 2025? Oh yeah, there is that little decision the country is going to make as this year looks like a big presidential election in terms of what the economy will look like for the next four years. Our panels are always some of the brightest minds to help us tackle topics we never thought we’d have to consider and how they might impact real estate.
In this episode:
- Craig welcomes Selma Hepp, Chief Economist for CoreLogic, and Mark Palim, Chief Economist for Fannie Mae.
- Economic Policies and Their Impact on Real Estate
- Impact of Remote Work and Housing Market Trends
- Fed’s Role in Creating a Soft Landing and Economic Indicators
- Forecasting Interest Rates and Economic Volatility
Episode:
Narrator  Welcome to The Norris Group real estate podcast, a show committed to bringing you insights from thought leaders shaping the real estate industry. In each episode, we’ll dive into conversations with industry experts and local insiders, all aimed at helping you thrive in an ever-changing real estate market. continuing the legacy that Bruce Norris created, sharing valuable knowledge, and empowering you on your real estate journey. Whether you’re a seasoned pro or a newcomer, this is your go-to source for insider tips, market trends and success strategies. Here’s your host, Craig Evans.The Norris Group, proudly presents, I Survived Real Estate. industry experts discuss evolving industry trends, real estate bubbles, inflation, and opportunities emerging for real estate professionals. We want to thank our Platinum partners. uDirect IRA Services, San Diego Creative Investors Association, White Feather Investments, MVT Productions, Inland Empire Real Estate Investment Club,DBL Capital, Douglas BrookeHomes and Realty 411Magazine. See, isurvivedrealestate.com for event details, information on all our generous sponsors and to connect with our speakers.
Craig Evans  Um, so listen, I want to introduce somebody that are, two people, the next two people that are coming up. The reality is they’ve got more degrees than a thermometer, you know. And so there’s a little bit of intimidation that comes to the stage when these come up. But first and foremost, it’s a young lady that I am extremely honored to meet this weekend, and a brilliant young lady. She is currently the SVP and Chief Economist for CoreLogic data. Before that, she was the Chief Economist for Pacific Union, which was many of you may know, was bought out and acquired by Compass. Prior to that, she was an economist with Trulia. Before that, she was with California Association of Realtors and economists. Before that was she was with NAR. Before that, she had a stint at HUD. She has, she’s very, very experienced in what she does within the world of economics. Please help me welcome Selma. Hepp to the stage. Thank You, Selma. The next gentleman I want to introduce, really needs no introduction. He’s been on the panel several times before. I met him, I had the privilege of meeting him two years ago. I believe it was, and has become a good friend and a trusted advisor on several things that I trust to see what he does, and I’m proud to announce for him that he is officially as of the end of September now, Doug Duncan, which many of you know, has retired as the chief economist for Fannie Mae, and Mark Palim is now officially the chief economist for Fannie Mae. Mark Thank you, my friend. Now, as we start to dive into economics, I’m going to preface a little bit of what we’re going to talk about. I’ll be very candid. I have strong political views. I’m going to try to do my very darnedest to keep those to myself. Here’s the thing, I want to push into economics. I want to push into policy, but I want to look at what’s driving that, not the political issues on either side of the aisle tonight, okay, is that fair? Can we agree that, as I’m going through that I simply want to focus on the policy that’s at hand, not the politics. I don’t want to divide this room over whether we’re red or blue tonight. I want to simply look at what does data tell us, and we’ve got three of the brightest minds in this country on stage for that tonight. Is that fair? Perfect. All right, as we jump into this, hopefully my iPad hasn’t died here, I’d be in trouble. We’re a few days from the election.
Selma Hepp  It’s not an economic question.
Craig Evans  I said I’m staying neutral. Okay, I promise. Give me a second. We’re a few days from the election, and right now, both sides of the aisle are throwing financial policies, whether we agree or disagree. There’s a whole lot of things being thrown out. There’s a lot of stuff that has happened over the last two administrations. So I want to be clear, I’m not looking at one side of the aisle, but there’s a lot of things that are being talked about from a fiscal policy perspective that don’t make a lot of sense to me. Maybe that’s because I’m the country boy from Georgia, right? But when I look at the amount of money, the debt that’s been run up. My question is, everybody in the room here is dealing from a real estate investment perspective. How do you guys believe that the fiscal policies that are being thrown out there and the amount of money and debt that’s been run up? How do you believe that affects the real estate market. You’ll let them go first on that one?
Mark Palim  So I think I love your look at charts. So I think you can look at a couple of things to give that context. One of them is you think about debt to GDP, which is now getting to levels close to where it was at the end of World War Two. You look at how much of the budget is getting used for interest expense, I believe that is, or very soon will be, as much as the Defense Department budget. So that’s getting to be a big number. And then you think about what impact it has on interest rates, which is what you care about for your business, right? So I think if you look in the data, you can see that at certain points, I remember last August, the bond market has focused, or bond investors focused about what the size of the issuance of treasuries is going to be, and rates respond to that. So the baseline budget deficit is already pretty large as it is, and if you add to that, you know nothing’s free. That’s going to put upward pressure on on interest rates as government borrowing crowds out other investments. Recall that for many financial institutions, banks, other people, it’s got the best rating from the liquidity perspective and a risk perspective. So, you know, that’s kind of where we’re at.
Craig Evans  Okay, any thoughts
Selma Hepp This is, this is really a hard one. It doesn’t directly. It’s not directly in my space of housing economics, other than as it pertains to mortgage rates. I will say that there is a concern that, there is a concern that interest rates, in general, mortgage rates as well, long term, are going to be higher and maybe considerably higher than we you know, think about at the moment, particularly now, giving the memory of 3% or three or less than 3% in last few years. So what I think about, when I think about that, is, what does that mean for the turnover in the housing market? We already have such a low, so we’re basically the lowest turnover rate that we’ve had. We’ve been at, other than coming out of great financial crisis and the 1980s inflation situation and so other than these two periods, we’re not at the lowest level of housing turnover. People don’t want to move. People are not moving, people, and then why mobility matters is because, you know, it’s traditionally thought as that people move, that it gives them better economic opportunities. It allows them to move up the economic ladder. So you have to allow people to move, enable people give them good foundation for moving, so that when they move, they are in a bit better financial position. But with mortgage rates having been locked at these really, really low mortgage rates and not wanting to move, what does that mean for their economic opportunities going forward?
Craig Evans  So go ahead. I’m sorry I don’t want to cut you off.
Bruce Norris  I was just going to add something. Is this on or off? An extra one. I was just going to add that during the time that the interest rates were so low and they kept going lower, one thing that happened in the housing market is people started adding dream amenities at no monthly cost. So these guys wanted an office, but now I can have one and doesn’t add a dime to our payment. I want a pool. Those were permanent decisions that made that home good to go for a long period of time. So you have a lot of people that got their dream home right in their own home, and they’re sticking around, and so that’ll be a telltale thing for a long time, that a lot of that inventory is not showing up. But if prices, you know, still high with the interest rates climbing, you’re going to have a hard time with prices escalating. So we’ve used up a lot of the price of the future, and people to your point, I think people now are staying in their house 13 years. That’s the longest that chart has ever been. The first time I looked at that chart, it was four or five years. That’s a big, big change.
Mark Palim  You know, I think we’ve done surveys of consumers around this issue of the both the lock in and ability to work remotely. So you do see that a lot of people saying they’re going to live in their house longer than expected. It’s not because of the rate, it’s because of what Bruce was saying. It’s the house they want with the neighborhood they want, etc, etc. And remote work has enabled people to have the job market flexibility without having to sell their house and move.
Craig Evans  Yes, so we’re talking about rates as we brought that up. You know, I’ve had a lot of people over the last, let’s call a year, everybody’s waiting on the Fed to do things. Everybody’s waiting what’s going to happen. How many drops are we having? And we keep, especially from an investor standpoint. I’ve talked to a lot of people that have made the comment that, boy, if only we had 3% rates, we could invest. Well, people were investing in the 80s, when rates were 18% you know, there was still investment going on. So there’s two things I want to kind of clarify out of that. First of all, I don’t believe we need 2 or 3% rates to be successful in an investment situation, but I want to ask you guys, do you believe that there are any situations in the next five years that we see a two to three in front of the number on a percentage rate? Is there any lever that puts us in that situation over the next five years, let’s call it?
Selma Hepp  Well, in my opinion, I think we would have to have another black swan event. Black Swan event is an event that it’s unpredictable, right? Like COVID was. So you’d have black swan event something very unpredictable shock to the US economy, or some external shock, maybe in terms of, like a war situation, our economy slows very considerably to where the Fed has to drop the rates to essentially zero. I mean, it would be, have to be something pretty bad.
Craig Evans  Right.
Selma Hepp  Yeah.
Craig Evans  Any thoughts?
Mark Palim  Yeah, I think base, you know, I agree. I mean, you think about it, and with your question about Fed rate cuts, something to keep in mind is that mortgage rates, I know a lot of people in the room are probably borrowing a shorter rates versus someone who buying a house taking the mortgage rates up. So the shorter rates will probably continue to come down if inflation continues to come down, and the labor market is doing okay, so you could expect that your cost of borrowing is going to continue to come down over the next year. Mortgage rates going back to 3% that would mean the bond market thinks that there’s no inflation and there’s not a lot of growth, or there’s just an outright deep recession.
Craig Evans  Well, and the reason that why I want to get into that, I know we’re talking about economics, but I also want to the whole way through tonight, I want to look at the fact that the people in the room, we’re not economists, right? We’re looking to you guys for that process. We’re investors, we’re builders, we’re business people that run this. And I want to make sure that we’re hearing the fact that, listen, don’t wait around for two to 3% to form your strategy. If we’ve got to pivot, if that’s your strategy, you need to figure a way to pivot. And that’s why I wanted to get you guys on the stage and say, short of a black swan. And, you know, Mark, that’s really what you were even leaning to, I don’t even see how that’s a healthy market to be in a two to 3% you know, because it’s great for the consumer. But that’s my question is, do we even see that as a possibility? And you’re answering that.
Bruce Norris  You know, what’s interesting is, we don’t need the two or 3% mortgage to return. We already have it, if we would use it smartly. A couple years ago, I was asked to go. I had an hour and a half meeting with the chief, not the chief of Econimist, the CEO of Fannie Mae, in his private office. And this thing that we discussed was, how about letting the mortgage go forward, right where it’s at, either let the owner take it with him so he can buy another house and it drags the mortgage with him, or it used to be a simple assumption. So the first house I bought was a VA loan. I got to assume it, but I didn’t have to qualify for it. I put $500 down on my name, replaced the gentleman’s name that owned it. We have how many mortgages in place, two or 3% that could successfully move to another property where there’s a realtor that could make a commission and the lender is not at any risk at all. That would be a smart decision, but that’s a policy decision, Mark, we just have to push on that.
Mark Palim  So some mortgages are assumable and FHA, I believe. And VA, so that’s a nice feature of those. May I think the FHA, I don’t know the details of that program, conventional, conforming and not assumable at this point. And MBs, investors would probably have an opinion about that.
Selma Hepp  Can I actually add to your question about whether it’s good time to come in, depending on the rates I think. You know, I’m not investor, I’m not a business person, I’m an economist. Everything is in theory in my world, it’s not really, you know, in practice, it’s all in theory. But I would assume that what’s also important is demand and the relationship between demand and supply. We do know that we are in the most undersupplied market that we’ve ever been. We also know that we have a huge pent up demand. We have all these young people still living in their parents’ basement. We don’t talk about it anymore because it’s an old story, but they still live there. We have a lot of unmarried couples who still have yet to get married because, you know, there was a pandemic. Largest cohort of our population is still about to turn first time home buying age. We have a lot of investors in the market. We have a lot of, we have huge influx of immigrants to our country who also need housing. So when you add that all up, you have a lot of people looking for housing that’s not there. In my sort of theory world. That means that home prices are going to keep going up, irrespective of what happens, not completely irrespective. But I’m saying separate off whether mortgage rates are two or 3% for investment, as a reason for investors to be positive about the housing market.
Craig Evans  So as we’re talking about rates, you know, the Fed is working hard where the buzz words are, and I should say that that’s not fair, but they’re working hard to create a soft landing. You know, we don’t want to swing that back and and now create a separate recessionary situation by bouncing rates too hard. We’ve dealt with inflation now over the last two years. You know, inflationary kind of situations. Do you think that the interest rate is the key thing, the key metric that we should be looking at? Are there other outside factors that we should be looking at that can create a soft landing inside the economic side of things?
Mark Palim  I mean, of course, inflation something to look at. The key things, other key things to keep an eye on when you think about the economy, is what’s happening to business investment, because you need in business investment to keep growth going. You can watch the labor market, see what’s going on with job openings, the quits rate, what’s happening to wage increases. Gives you a sense of what’s going on in the economy. Unemployment rates kind of a lagging coincident to lagging indicator. So obviously, the most important thing for real estate values is jobs in the location from where you can work from that house, right? And it used to be very, very easily to define given commuting patterns. Now, with remote work, it’s a little bit broader what it is, but the key thing is employment growth, right? And that’ll support rental housing, owner housing, both those supported by by employment growth. So that’s thing to watch for.
Selma Hepp  Yeah. So you know, when you think about the trajectory of rates in general, the Federal Reserve has two mandates. One is price stability, which is inflation, it refers to inflation. The other one is maximum employment. And so if you follow closely, as we do, the Federal Reserve, the chair Powell’s remarks, they’ve pivoted from focusing on where the inflation is at the moment, because they are now confident and inflation is moving in the right direction, to focusing on employment, and more particularly, on unemployment. And so in their comments, they sort of made a commitment to ensuring that rate of unemployment doesn’t increase more than it has, or it peaks at 4.4% which is their projection, and we’re already close to that. It’s now, we can go into details why unemployment went up, which it didn’t because people lost job. It went up because there was more people in the labor force. But if you want to think about what the federal decision moves are going to look like? For me, the best indicator, and it’s on a weekly basis, is unemployment claims. Because you can have an increase in unemployment rates, such as we had, but we didn’t have commensurate increase in unemployment claims, because people weren’t losing jobs, in fact. And so you know, if you really sort of trying to have a finger on the pulse of the economy. I would look at unemployment claims which are weak. It’s a weekly indicator. It may be a little bit lagging because, you know, going into digging deep here, but, you know, one can get a severance. And so it would take them a little while to actually go on unemployment. But still, it’s out of all the employment indicators, it’s one of the most telling ones.
Bruce Norris  My turn, okay. I was just thinking we recently heard, didn’t the dock workers make a deal for future wages? Is that inflationary? You know, that’s whatever they got 60% in five years. Is, I guess, is labor cost a big percentage of the inflation package?
Selma Hepp  Well, I think still the biggest one is material costs, cost of materials, and the fact that we still have supply chain disruptions with all this geopolitical stuff that’s going on, I think when you look at wage increases at the moment, they have moderated considerably to where we were in the midst of the pandemic when inflation was really high.
Mark Palim  I think, on the union you’ve seen, if you think of a chart, you’ve saw wages of most workers, particularly hourly workers and also those with a high school degree only rise significantly coming out of the pandemic, when we had that sudden increase in demand for a lot of services and travel and leisure and restaurants and rest. And it was at the same time you had the great resignation. You probably felt it in your businesses, right? You had to give people a wage increase to keep them that has dropped way off. And now you’re seeing for unionized workers that doing because they tend to have longer contracts, you know, two, three year contracts, they’re coming to the end of those and saying, Hey, I’m not at all commenting on the dock workers, but in general, part of what they’re doing is catching up with the inflation that has already occurred and resetting those wages. Now, that wage price spiral is what the Fed worries about. These, you don’t have a situation like in the 70s where people are getting cost of living adjustments built into their contracts. And then, you know, that adds the to the precious current wage increases. I would agree with Selma. The current in the on average across the labor market, wage increases have come down to a point where it’s not inconsistent, with the Fed getting back to two or two and a half percent.
Craig Evans  So you and I were talking a little bit about this in the car on the way over here. Where do you guys think the the energy situation comes into play as we’re looking at wages and even from an economic driver that is going to continue to drive supply and demand issues, which can ultimately start to say on that now, how is that affecting rates? How is that affecting unemployment? Where do you guys look at and think the energy situation is hitting, and is that a causation? Or…
Mark Palim  You’ve actually seen recently, the price of oil has been on the weaker side, dropped below $80 a barrel. So even though, you know, you drive down the highway and you see the price of gas, the price of gas and has not dropped back to where it is, but it’s not increasing anymore. So that has helped the monthly inflation numbers. Energy is a part of everything in the physical world and even in the service world. It works its way through right? It affects construction costs, affects cost of running a hospital, you name it. So a little bit of good luck on oil prices has definitely helped the inflation numbers.
Craig Evans  So one of the things I know everybody is wanting me to ask is, you know, when we’re talking about rates, we’re talking about the Fed, they’ve been looking at what it’s going to be, where we coming. What do you guys see from, you know, some of the things that you look at, look at in the data and and all the studying through that, you know, Mark from, from a different side of that, being inside the government, so to speak, even though I know you don’t, you know, hang out with Powell every day. I mean, you’re, you’re still looking at that from a separate lens, so to speak. What would your forecasting, that’s what, you that’s what you guys do, your economists, what from a forecasting perspective, what do you believe the rates will do between now, we’ve got, we’ve got an election in a few days. There’s data that tells us what will happen by January and February with certain things from an economic perspective, not necessarily a rate perspective, but between now and the end of 25 What do you believe will happen to a rate perspective?
Mark Palim  Yeah, so we put out a forecast monthly, which is good. I’m glad we get to redo it every month. That with that in mind, the October forecast is a current public one. We have mortgage rates gradually diminishing next year, throughout the year, and ending in the at the end of December, at 5.7% of end of December, 2025, 5.7% in terms of Fed cuts, we have 25 base points in November and 25 in December, and then a few more going on next year. So that’s the base forecast, as you’re planning for your businesses. I don’t think it would be a bad idea to be thinking about, you know, we’ve got the election, we’ve got all the issues you had in the introduction. You know, soft landing is awesome, but the economy doesn’t often just go sideways. So, you know, maybe think through and on that day, can you take off for reading and thinking, which is an awesome idea. I need to implement that like block more time for that. But on that day, think a little bit about your business and say, hey, if we had a lot more rate volatility, even if we landed at the same place at the end of 25, how would I be right if, if the we’ve seen after prior elections, consumer spending for the share of the population whose candidate lost, can drop a little bit. Consumer confidence can take a hit. You know, maybe the bond market, as you implied in your first question, global investors get a little more nervous for a quarter or two, you get a more bond market volatility. You know, are you ready for that? So that might be another way to think beyond the base forecast. What is the range around that?
Selma Hepp  Yeah, so I follow Mark’s forecast very closely, and we follow actually, all the public forecasts. There’s other companies that do them as well. You know, Freddie does, NAHB, NAR, I don’t know everybody in real estate world as a forecast for mortgage rates, so we sort of like fall right in the middle. We take the average all of them and fall right in the middle, because it’s very, you know, really, it’s…
Mark Palim  That’s how she beats me every time.
Selma Hepp  It’s a dart, you know, it’s a dart in a chart, in a sense, because you know, think about what happened over the last couple of months, or even over the last month. You know, rates dropped to 6% now there’s 6.8% I mean, you cannot take, I don’t think that we’re going to see less volatility going forward, because markets get so much ahead of themselves. As soon as you see, like a weak employment report, or, you know, weaker inflation reading, markets get so ahead of themselves. And then, you know, then there’s a step back and like, oh, wait, maybe, maybe that was little too much. And so I think what worries me. I think, while we are, of course, in the same range as Mark, because we took that average, you know, I worry about the volatility going forward. And the other thing is, you know, investors in mortgages, are still very reticent in the sense that, you know, they we have to get to the certain point at which they know that their the prepayments are not going to be mortgage prepayments, meaning that anybody who bought over the last couple of years, you know they’re going to refi as soon as mortgage rates are some 50 basis points below where they locked in their mortgage rate And so and you know, do investors make money if a prepayment happens too fast, they don’t, and so they don’t like to jump in too soon either. So we still have the spread being pretty wide between 10 year treasuries and 30 year fixed. And I think that’s two and that too has varied over time. So you have variation in volatility in all way, in all different ways when looking at mortgage rates. So yes, you know, mid fives next year, but a bumpy ride to get there. You don’t like that. That didn’t sound good to you.
Craig Evans  You know, I try to be very realistic in how I run our businesses, and you I can’t create a different interest rate, right? So we’ve got to plan and pivot and the whole process as I’m planning to build I’ve got to look at, okay, what are the rates? Where are they driving to? You know, if I’m building few 100 houses next year, what does that look like? Where do I need to be? Am I in an affordability side of things that is very rate driven, and I situation to where maybe I’m building something that’s not so rate driven. So there’s, there’s aspects like that that I look at. But
Narrator  We’d also like to thank our Gold Sponsors, Inland Valley Association of Realtors, Keystone CPA, NorCal REIA, NSDREI, Pasadena FIBI, PropertyRadar, The Collective Genius. Thompson Group, Aloia Roland, Coldwell Banker Town and Country. See, isurvivedrealestate.com for event details.For more information on hard money loans, trust deed investing, and upcoming events with The Norris group. Check out thenorrisgroup.com. For more information on passive investing through the DBL Capital Real Estate Investment Fund, please visit dblapital.com.
Joey Romero  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.