One of the important abilities people in this industry need to have is adapting to changes because the real estate market can be pretty elusive. Kicking off this first of a two-part series on market cycles, host Lauren Hardy is joined by veteran real estate investor Bruce Norris of The Norris Group. As a market forecaster, Bruce helps us navigate by predicting market crashes, especially how to profit in any market conditions regardless of market circumstances. He also talks about how we can protect and position ourselves to win in these very turbulent times. Just perfect in the current situation we are in, this episode offers great wisdom that is not only timely but timeless in this industry. Join Bruce and Lauren to not miss out!
Market Cycles – How to Profit in Real Estate in Any Market – Part 1
This episode is the first part of the two-part series on Market Cycles – How to Profit in Real Estate with Bruce Norris of The Norris Group. Bruce Norris is a veteran real estate investor and market forecaster who has made over 2,000 real estate deals!
Welcome to part one of a smoking hot two-part series, Market Cycles: How to Profit in Real Estate in Any Market. Lauren talks with veteran Real Estate Investor and Market Forecaster Bruce Norris of The Norris Group, who he himself has done over 2,000 real estate deals. Isn’t that crazy? He is one of the leading experts on predicting real estate market cycles and especially how to profit in any market conditions, regardless of market circumstances. Are we on the verge of a real estate market crash? You’re going to learn all of that as well as how to protect and position yourself to win in these very turbulent times. Enjoy.
I have a huge, amazing expert on the economy. I’m so excited to have Bruce Norris on. Bruce is somebody that I look up to. When I first got started, I would go to every REIA that Bruce spoke at. He taught me everything there is to know about market cycles. I thank you, Bruce, for the fact that I have not lost money at all since I’ve been an investor because you taught me how to understand market cycles. Let’s welcome Bruce to the show.
Lauren, thank you very much. I appreciate that.
I am so happy to have you. First of all, it couldn’t be better timing with what is going on in the economy. I want to first introduce you so people understand a little bit about you and what you do. I’m going to ask you all the things. Tell everybody where did you start with real estate? Give us a little background on your story.
In 1980, I started to work for a company that was flipping houses. I didn’t know anything about real estate. I just became very successful for the company very quickly because I got the concept that we had cash. They had equity and our stuff was cooler than theirs. I could convey that. I made about three years worth of money in three months and I then went out on my own. I did that for a long time, several years before I had the event that struck me as I better try to figure out why things happen. My son, Aaron, graduated from high school in 1995 and I bought him a Honda Civic for $15,700. The only reason I would ever remember that number is two days later in Riverside, I bought a house for $13,300. It dawned on me what the heck happened.
In 1989, it was like 2005. Prices exploded. You could do nothing wrong. Everything you touched one up. You pat yourself on the back and think you’re a real estate genius. All of a sudden, in 1990, I had a bad experience where I built about six custom homes that didn’t sell and I had to fix that. That was my first inkling that it doesn’t always work but that one deal bothered me because it was on a VA list. It was listed for $15,000. Everybody that had a VA loan capability got a chance to buy it first and no one did. It went to the investor world and I was the only offer in America on that property. It would rent for $500. I bought it for $13,300.
When you’re the only bid, you go, “Am I making a mistake? Is everyone afraid?” I wanted to stop guessing. I went into the library. Nowadays, it’s so much easier but back then, it wasn’t. I pulled up microfilm. I read every article from 1970 to 1995. What I was looking for was somebody that would tell me the future. In other words, somebody predicted in 1980 it was going to do this and it never happened. No one ever did that. I started thinking, “Maybe it’s not possible but I’m going to try.”
I started going into libraries and writing down sets of data. I didn’t know what mattered. I would go into the library and find history of affordability for California. I would write down every year from ’19 to the current time. I did that over and over again. For a year and a half, I compiled all these data and all those charts. I went to Maui on vacation. I didn’t know how to overlay anything on a computer so I printed them all out and I put them on the floor. What I did is I had two boom cycles and two bust cycles. I had yardsticks. I played with the charts to see if I could see what I called an initial event. In other words, when this domino falls, other dominoes fall either in a positive way or a negative way. I found out the charts that mattered. I wrote a report in California. At the end of ’96, California comes back why prices will double in the next eight years.
Certainty doesn’t trump anything. Certainty gets trumped by uncertainty and fear.
At the time I gave that, it was at the end of a down cycle. No one had done well in California real estate for six years and to say prices would double certainly seem to be ridiculous. People were happy to have me speak because it was positive but people never believed it and then they tripled. What was interesting about that is they went beyond where I thought. There’s a marker that I have when it’s supposed to end. In 2005, we flew by that. That was a bit of concern for me. I thought, “We’re aggressively going beyond that.”
I interviewed a lender in 2006. I asked her in front of a pretty large audience, “Stated income loans, where do you get the stated income number?” Without batting an eye in front of hundreds of people, she said, “We just make it up.” I thought, “That’s not good.” That was the end of the interview. I wrote the California Crash because I realized why we were there, that it was all built on baloney. Can you imagine the mood of real estate after the year we’ve had? In Southern California, everything’s gone up and in Florida, where I am.
Can you imagine sitting in front of an audience in 2006, as a matter of fact, debating in front of the California Builders Association that within a couple of years, prices will descend by 50% and you better get out of here? That was received very poorly because that’s not where they were. What I understand about the chart is it tells you where you’re inevitably going to and that’s how I invest. I sold a ton of properties in 2006 or 2005. It was a little bit early and then I waited. The stuff in California went on a ridiculous sale. Stuff in Moreno Valley, which is Riverside County that used to sell for $365,000, you could buy for $65,000, 80% off. That’s what happened.
What was fun about that is sometimes you’ll hear people speaking always on the negative side and a couple of times in their life, they’re correct but they never switch hats and say, “It could get better.” You have other people that are always like pastures are green and they never go the other way. One thing I’m happy about is I don’t draw an opinion without evidence. That’s what I like to do. I like to look at the evidence and say, “This is inevitable.” If I believe that then I’ll write it.
At that time, when you’re talking in 2005, 2006, I was still in college. I graduated in 2008. I recall right when I graduated, we are in the pits and throe of a recession with getting a job, start waiting tables at night. That’s where I was. I bought my first home in 2011 in the City of Orange for $395,000. I sold it in 2020 because my antennas were going up. I felt that in 2020 we were on borrowed time. I can understand what you’re saying. I was like, “I’m selling this thing.” I sold it for $707,000.
The craziest thing was when my house was on the market for a sale, I was in an Uber coming home at night and the Uber driver was like, “I used to live in this neighborhood. I sold my property in 2005 for $705,000.” I was like, “You won’t believe this. My house is for sale. I’ve got it listed for $705,000.” I think I initially listed it for $705,000. I was like, “We are literally back to where we were.” It’s a borrowed time. I would have never believed. I can’t look back at that neighborhood because prices still have gone up since 2020. I wanted to ask you, you mentioned an initial event. You figured out what was the initial event that causes the downturn. What is that?
It can be different things. That’s what’s been fun about this journey is that I never assume what I learned before is the same. Every time I do a report, I challenge everything I’ve ever concluded.
It’s not the same initial event. It’s not the same data point that when affordability hits this, we’re in a recession.
That’s pretty consistent in California.
For California, it’s affordability. You look at that number. Tell us a little bit about where affordability is.
It’s the 28%. Historically, we hit 17% at the bottom. What I mean is at the price peak. When that’s repetitive, I have to think about that. What’s magic about 17%? If you’re in an honest lending environment, it will be the peak of mood. Everybody is excited about what they’ve owned. In 2005, when you hit it, everybody was going crazy for real estate. If it had been an honest lending market, it would have ended there because people don’t get a yes answer from a lender often enough to put buying pressure on the inventory. Since we didn’t follow the rules of qualifying people, that’s why it flew right on by affordability at 17% went to 11%. We paid for that dearly but typically, in 1980, it’s 17%. In ’89, the peak of the market, it’s 17%. In the first quarter of 2005, it’s 17%. We’re at 28%.
Here’s a good question and this had baffled me. We wrote a report in 2019 saying, “You have to be careful because these are the best set of charts I’ve ever seen.” You put this set of charts in the ’80s, ’90s and the early 2000s, we go up 15% a year. We have no foreclosure competition. We have reasonably low inventory. We have a great job market. All the charts you want to see for yahoo to prices, we went up to 3%. My thinking was, “If you can’t go up with this set of charts or you get a negative chart, I think it’s going to cause a negative result at a very different level this time.” It turned out not to be true. What changed?
You have to look at this stuff and go, “It was great because it disproves something that I never believed but it was said over and over again.” The volume of sales never picked up. For the last decades, we’ve been selling about 400,000 houses plus or minus a very small percentage in California. That’s not normal. Normal is when prices rise. Your sales go up for consecutive years to where it gets to a much higher level. The answer has always been, “There wasn’t enough inventory to do that.” I knew that wasn’t true. What are you going to say? 2020 has proved that and here’s how it happened.
In 2020, after Coronavirus became an issue, 45% of the listings got pulled from the MLS. Inventory went down by 45%. I figured out that there are two urgent groups that collided. The first group says, “I don’t want anybody walking through my house. The heck with it. I’m not going to sell it.” They get a chance to refi their mortgage at under 3%. They have a mortgage that starts with a 2% so maybe they’re not going anywhere. Inventory gets pulled off. The other urgent groups said, “I got to have one. My boss told me I don’t have to stay where I’m at. I don’t have to come to work. I can stay at home so I’m going to find a new home and maybe I’m going to go to a place that has more space.”
Don’t draw an opinion without evidence.
How did we get a 120% increase in sales off of 55% of the inventory? It’s because urgency trumped everything. That put the, “I have to do,” behind a buy. I did the same thing in Florida, to be honest with you. When I decided to move here, I gave me and my wife three days to buy a house. That’s why we were here. We had help and contacts. We said, “This is what we want.” Think about that. If you’re not familiar with the state to any great extent, shopping for your residents over a 90-mile stretch in three days is a challenge but that’s what we did. Once we found it, we weren’t bargain hunting. We were writing a check. That’s what the buyer did in California. They said, “I have to have it.”
I did an interview with Northern California. If you go up to Northern California, that market is crazy. If you check the price in San Jose in 2005 at the peak of the market then, it is at least 100% higher, maybe more. It had a little downturn and then it exploded. They marked their days on the market inside of a week in an area, maybe two weeks sometimes but they have no inventory and huge demand. There are price wars for everything.
Our buyers are still hungry for deals. I’m a wholesaler and my market is I have a few Midwest markets. I have no problem selling deals. I thought that I would have a problem but no, buyers are hungry.
That makes perfect sense and that’s when you get surprised. Why I’m so careful? I guess I’d be careful anyway because of who I am. I’m careful in making decisions because I’m investing my own money. That’s what I do. I try to go, “Where does Bruce Norris’s money want to go?” If I’m convicted of that then I share it. That’s how this whole thing started. I was a little bit surprised by 2020. What was more certain, 2019 or 2020?
Certainty doesn’t trump anything. Certainty gets trumped by uncertainty and fear. That’s what we learned. That’s interesting. We have some bonus of a low-interest rate but to me, that doesn’t need to think because that translates to me into affordability. A 28% is still affordable. If that was 4% in that affordability, historically, you’d still have plenty of upsides. It stays more buoyant because of interest rates being so cheap. I look at affordability, not interest rates. This is why I love charts.
I used to stand in front of an audience and say, “Is it likely that every time interest rates go up, there is some negative impact on real estate prices?” That makes perfect sense when you say it, doesn’t it? You would think. That’s why I like charts. All you have to do is get two charts, get a pricing chart and an interest rate chart. You’ll find that interest rates doubled from 1974 to 1980. Real estate median price in California went from $34,000 to over $102,000. It tripled when interest rates doubled.
Is the psychology behind it that people think that the interest rates are going to keep going up so I better buy now?
That was connected to a lot of inflation. You had inflation of interest rate but you had inflation of wages too. That affordability kept on getting a bump. Real estate did phenomenally well. There were other reasons for that rise in price but it’s one of the things that people draw conclusions and think this has got to be right. All you have to do is pull out a couple of charts and check that before you say it because maybe that’s not true. Interest rates in 2009 were less than a third of what they were in 1980. What was our market like? It crashed. The price went down like a rock. We had to pay people an $8,000 bonus to buy a house that was less than half of what it was a few years ago.
Affordability was over 50%. When you think, “High affordability,” the California Association of Realtors has this saying, “Affordability is equal to real estate wellbeing.” That’s an interesting comment because most people think of real estate wellbeing as when their stuff goes up but CAR said that when real estate affordability is high, that equals wellbeing. You never felt better than 2009 because that was the highest affordability that it ever was. What they’re saying is that when it hit 1980 peak in price, ’89 and 2005, that was the least wellbeing you could have. It makes no sense to me.
You talked about ending events. It’s almost like we’re looking for that ending event and be on borrowed time. Are we in 2005 where we’re wondering, “How long is this song going to keep playing before it turns off?”
If the affordability number going low, that’s the ending number.
We’re at 28% and that’s in California to give contact. This is a national platform.
You got to tell people and this is being honest, “Does it work everywhere the same way?” No. There are plenty of states that never challenged that number with Florida being one of them. Florida had a crash in 2009 but it had nothing to do with, “The affordability was a bed of breaking point.” It was not. It fell apart because people in California were investors buying 10 and 20 houses at a pop and let them all go at the same time. That was a big part of it. I had an interesting meeting with a guy who was promoting sales of rental properties at the time. He heard me speak in front of a club and it was early ’06. I had written the crash report. He came up to me. He was like, “I’m so scared for what you said.”
Interest rates in 2009 were less than a third of what they were in 1980. What was our market like? It crashed, went down like a rock.
He showed me his portfolio. He has 63 properties that produce minus $20,000 a month in cashflow but he was worth $3 million. That was the magic of that timeframe. How he paid for that is he talked to other people into buying stuff like he was buying. He was selling them negative cashflow on the upside of this price is going to go up. When I said, “This was going to be done,” that’s the first time he had ever heard anything like that. I took him serious and I met with him. I looked at his portfolio and I said, “Do you want my honest opinion? You got six months. Sell this thing and you’ll walk away a multimillionaire. Sell it in twelve months and you’ll be zero.” He didn’t sell it. That was sad but that’s the warning light for me in California’s affordability. The upside is less important. The upside is gradual. I can tell you what I feel are signs for me. I like migration. That’s why I’m in Florida as opposed to California.
Why did you move to Florida?
Here’s the main reason. We had a seminar after I experienced something because you don’t go around and speak in California in different clubs. You start hearing different laws that are passed and you’re going, “Are you kidding?” One of those laws was there was a $5,000 fine in Oakland if you weren’t using your vacant lot. You already paid your property tax and the city had the right to fine you $5,000 for not using it. That bothered me. We voted against rent control and a year later, we had rent control. I realized, “I don’t know the rules of engagement,” and that bothered me. I want to know how rules are changed. I’d like to know if I get to see them coming or I’m going to get surprised by them.
We had a seminar where we had a legislative panel. They got asked questions about how do laws get passed. The answer is it depends. It depends on the legislature or the public sometimes but in an emergency, it can depend on the governor who can proclamate something into existence. That bothered me. That was my impetus. I had already moved a lot of properties to Florida because of what I thought was going to happen to their state over the next years. That has to do with migration. Florida is a very interesting case study for me. I had been in California. I have my best friend that lives in Orlando. I’ve put money up for building new houses and we bought a lot of houses after Hurricane Andrew. That was all the way back at ’92 or something. I’m familiar with Florida in that sense but didn’t I live here.
In 2000, I think it was in the first quarter, I interviewed Doug Duncan, Chief Economist of Fannie Mae. To prepare for that interview, I read the fourth-quarter report for 2014 for Fannie Mae. In it said that 25% of all Fannie Mae’s losses came from one state, Florida. This was 2015 and I thought, “How could that be?” We’re off to the races in California and stuff. I looked at their foreclosure process and it took four years. They were still in 2011. I picked up my phone and I called my buddy. I said, “Look around for a tract of lots that are building camp on it.” The next day, we were in escrow.
That’s where I built my houses. I’ve built out the tract and had rentals. A lot of the money that I had was already sent over to Florida. The thought of moving here maybe eventually would have occurred certainly but it got fast-forwarded by my concern about wealth. There’s talk about taxing wealth in California. I didn’t know they could dream that one up. I thought that would be a federal thing but they’re talking. Do you know that law?
I believe I do know. Is it when someone inherits a property? Is that the one you’re talking about?
No. This is on your net worth. Every year, you have a net worth tax. In the timing report that we’re doing, we’ll do four segments. In the second segment, we’ll talk about how many billionaires there are in California. If you decide there are tax laws that are coming up, do you think the federal tax rate is going to go up? Probably. Let’s say that goes up to 39%. There are two additional things in California that could take the highest rate to 16.3% for the people that make the most money but there’s also an additional tax law that might change where you’re getting taxed. Social Security stops being taxed at $140,000.
If you have an employee that you pay $140,000, you’re paying 7.5% each for that first $140,000 after that zero. They’re going to reimplement that after $400,000. If you are one of the wealthy people that make a lot of money in California, you’re going to have a 39% federal tax rate, a 16.3% state tax rate and a 7.5% Social Security tax rate including your business. If you add this up to the federal, you’re going to be taxed at over 60%. That’s without the wealth tax. The wealth tax says, “You’re with $10 billion? It’s a small percentage but send in several hundred million dollars a year, please.” That’s a good way to lose migration. That’s why I’m in Florida because I think that domino is going to tip.
You think that’s possibly one of the dominoes.
It is the domino. I’m going to interview a guy that has a lot of clients as billionaires. We’ve interviewed him before. His name is Ralph Paul. What’s funny about watching him interview is he’s interviewing all these guys that are billionaires and their friends. You can tell it. I want to ask him, “What’s the mindset of a billionaire when somebody says, ‘I’m going to take your stuff every year?’ They have an alternative place to go.” I think you already know the answer but I want to know. A billionaire is not going to just take their home and sell something. Don’t they own a business?
It’s very short-sighted. That’s the thing. I feel like there’s a room where people say, “How can we collect more taxes?” Let’s raise the rate on capital gains to 39%, the highest rate. Will that raise revenue? No. People just won’t sell stuff. You’ll do it symbolically but it won’t raise a dime. Maybe that would be good to have somebody in the room go, “That sounds great but that’s not going to work.”
What do you think is going to happen in California? What’s your opinion on house prices?
I’m not afraid of them because their affordability is not in a place where it’s afraid. In other words, it’s not at a level that historically you go have a downturn. The fact that we had an upside was very typical of our past. Why didn’t it happen in 2019? It doesn’t surprise me that it happened except for 2019 when it didn’t. I thought, “It probably won’t this time,” and then it did. I would say you will have an upside to the market if you continue to have the urgent buyer and low inventory. When those two meet and affordability exists where they can get a yes answer then you can have price increases. That’s what I think.
If urgency goes away then you’ll have maybe a good chart like it did in 2019 but you’ll still have not the urgency and that will be a different result. Statistically, we should have gone up in 2019 and didn’t. I’m surprised that there wasn’t fear enough in the marketplace to stop the price increases for real estate and it happened anyway. I’m always learning. I’d constantly read. I’ve got 30 books I bought that are not going to be easy reads at all but I was trying to think about what’s next and the people that are smarter than I am in their segment.
That concludes part one of the episode. Be sure to tune in where Bruce shares how anyone can make money in an overly crowded market. He also talks about the five seller avatars and how to deal with each one of them. You won’t want to miss it. See you next time.
About Lauren Hardy
Lauren Hardy is a Virtual Investing expert and Real Estate influencer who owns multiple companies in the real estate industry including real estate investment, coaching, and software companies. She is also a Wholesaling Inc coach and co-host of the Wholesaling Inc Podcast.
Her experience in the last decade has been focused on real estate investing and creating products and services to serve the real estate investing community. If you are interested in investing in real estate virtually, house flipping, or virtual landlording, Lauren’s your girl.