Posted on: April 12, 2021

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! 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.

In this episode, Bruce will discuss predicting market crashes. He will also talk about how to protect and position yourself to win in these very turbulent times.

Are we on the verge of a market crash? Learn how to predict that and more in this episode. Don’t fail to listen from start to finish.

Key Takeaways

  • Bruce’s story on starting his real estate business
  • Where affordability is now in California for him
  • On affordability and real estate wellbeing
  • Why he decided to move to Florida from California
  • On the law taxing wealth in California
  • On putting sense to urgency in terms of real estate

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Episode Transcription

Speaker 1:
Hey guys, welcome to part one of a smoking hot two-part series, Market Cycles: How to Profit in Real Estate In Any Market. Today Lauren talks with veteran real estate investor and market forecaster, Bruce Norris of The Norris Group, who he himself has done over 2000 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. So, are we on the verge of a real estate market crash? Well, you’re going to learn all of that today, as well as how to protect and position yourself to win in these very turbulent times. Enjoy.

Lauren Hardy:
What’s up Rhino Tribe, this is Lauren Hardy, and you are listening to the Wholesaling Inc Podcast. Today I have a huge, amazing expert on the economy. I am so excited to have Bruce Norris on today. Bruce is somebody that I really look up to. When I first got started I would go to every REA that Bruce spoke at. He taught me everything there is to know about market cycles. I think you, Bruce, for the fact that I have not really lost money at all, actually, since I’ve been an investor because you taught me how to understand market cycles. Let’s welcome Bruce to the show.

Bruce Norris:
Lauren, thank you very much. Appreciate that.

Lauren Hardy:
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, but then I’m going to just ask you all the things.

Bruce Norris:
Okay.

Lauren Hardy:
Tell everybody, where did you start with real estate? Give us a little background on your story.

Bruce Norris:
In 1980 I got to start to work for a company that was flipping houses. I didn’t know anything about real estate, I just very successful for the company very quickly because I got the concept that we had cash and they had equity and our stuff was cooler than theirs, and I could just convey that so 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, about 15 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 seven, and the only reason I would ever remember that number is two days later in Riverside I bought a house for 13 three. And it just dawned on me, what the heck happened? Because in 1989 it was like 2005, prices exploded and you could do nothing wrong. Everything you touched one up and you pat yourself on the back and think you’re a real estate genius. And then all of a sudden in 1990 I had a bad experience where I built about six, I think, six custom homes that didn’t sell and I had to fix that. And so 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, and then it went to the investor world and I was the only offer in America on that property. And it would rent for $500 and I bought it for 13 three. When you’re the only bid you kind of go, “Oh, am I making a mistake or it’s just everyone’s afraid?” I wanted to stop guessing and so I went into the library. Now, today it’s so much easier but back then it wasn’t. I pulled up microfilm. If there was the word, real estate prices in any article, I read every article from 1970 to 1995.
And 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. And so I started thinking, “Well, maybe it’s not possible but I’m going to try.” And so I started going into libraries and writing down data, sets of data. And I didn’t know what mattered so I would go into the library and find history of affordability for California and I literally would write down every year from 19 whatever to the current time.
I did that over and over and over again, a year and a half I compiled all these data and all those charts and I went to Maui on a vacation. And what I did, I didn’t know how to overlay anything on a computer so I literally printed them all out and I put them on the floor. And what I did is I had two boom cycles and two bust cycles and I had yardsticks. And I literally 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. And I found out the charts that mattered, and I wrote a report in California, the end of ’96, California Comeback: Why Prices Will Double in the Next Eight Years.
Now, at the time I gave that, of course it was at the end of a down cycle so no one had done well in California real estate for six years and to say prices would double certainly seemed to be ridiculous. But 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, they went beyond where I thought and there’s a marker that I have when it’s supposed to end and in 2005 we flew by that. And that was a bit of concern for me. I thought, “Okay, we’re now aggressively going beyond that.”
So I interviewed a lender at that time, about 2006. And I asked her in front of a pretty large audience, “Stated income loans, where do you get the stated income number?” And with batting an eye in front of hundreds of people she said, “Oh, we just make it up.” And I thought, “Oh, that’s really not good.” That was the end of the interview. And I wrote the California Crash because I realized why we were there, that it was all built on baloney.
And so can you imagine the mood of real estate right now after the year we’ve had? Like in Southern California everything’s gone up, everything’s gone up in Florida where I am now. Can you imagine sitting in front of an audience in 2006 and matter of fact debating in front of the national or the California builders association, that within a couple of years prices will descend by 50% and you better get the heck out of here. Well, that was received poorly because that’s not where they were. But what I understand about charts is it tells you where you’re inevitably going to go to, and that’s how I invest.
And so I sold a ton on a properties in 2006 or five, actually, it was a little bit early, and then I waited. And then the stuff in California went on sale, I mean a ridiculous sale. Stuff in Moreno Valley, which is Riverside County that used to sell for 365 you could buy for 65, 80% off.

Lauren Hardy:
Aw.

Bruce Norris:
But that’s what happened. And I guess what was fun about that is sometimes you’ll hear people speak and it’s 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.” And then you have other people that are always pastures are green and they never go the other way. So that’s one thing I’m really happy about, is I don’t draw an opinion without evidence and that’s what I like to do. I like to look at the evidence and say, “This is inevitable.” I mean, and if I believe that then I’ll write it.

Lauren Hardy:
Right at that time you’re talking 2005, 2006, I was still in college. I graduated 2008. I recall right when I graduated it was like we are in the pits and throw of a recession, but getting a job, start waiting tables at night, so that’s where I was. I bought my first home in 2011 in the City of Orange…

Bruce Norris:
Good.

Lauren Hardy:
… $395,000, and I sold it last year because my intent is we’re going up. And I felt that last year we were on borrowed time so I can understand what you’re saying and I was like, “I’m selling this thing.” And I sold it for 707. 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. Yeah, I sold my property in 2005 for 705.” And I was like, “You won’t believe this, my house is for sale. I’ve got it listed for 705.” It was, I think I initially listed for 705. I was like, “Oh my God, we are literally back to where we were.” We are at again, borrowed time, I would’ve never believed. I actually can’t look back at that neighborhood right now because prices still have gone up since last year. I wanted to ask you, you’ve mentioned an initial event, so you figured out what was the initial event that causes the downturn, what is that?

Bruce Norris:
Well, it can be different things now. That’s what’s been fun about this journey, is that I never assume what I learned before is the same. So every time I do a report I literally challenge everything I’ve ever concluded.

Lauren Hardy:
Okay. So it’s not the same initial event, it’s not the same data point that when affordability hits this, boom, we’re in a recession, not that, yeah?

Bruce Norris:
That’s pretty consistent in California.

Lauren Hardy:
Okay, so for California it’s affordability, you look at that number. Tell us a little bit about where affordability is now and…

Bruce Norris:
It’s to 28%. Historically we hit 17 at a bottom, and what I mean is at the price peak. And so when that’s repetitive, I have to think about that. Okay, what’s magic about 17%. If you’re in an honest lending environment it’ll be the peak of mood. Everybody is excited about what they’ve owned. Like 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 yet a yes answer from a lender often enough to put buying pressure on the inventory. But since we didn’t follow the rules of actually qualifying people that’s why it flew right on by affordability at 17 one to 11. We paid for that dearly. But typically 1980, 17%, 89 peak peak of the market, 17%, 2005 first quarter, 17%. We’re at 28% right now.
But here’s a good question. See, and this is really what baffled me. In 2000, 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 these set of charts in the ’80s and ’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, and we went up 3%. And my thinking was, “Okay, if you can’t go up with this set of charts, well, 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. So what changed?
Again, you have to look at this stuff and go… And it was great because it disproved something that I never believed but it was said over and over again. Because volume of sales never picked up really, so for the last decade we’ve been selling about 400,000 houses plus or minus a very small percentage in California. That’s not normal. Normal when prices rise your sales go up four consecutive years to where it gets to a much higher level. The answer has always been, well, there wasn’t enough inventory to do that and I knew that wasn’t true, but what are you going to say? But now 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.

Lauren Hardy:
Oh.

Bruce Norris:
Inventory went down by 45% because how I figured out is there’s two urgent groups that collided. The first group says, “You know what? I don’t want anybody walking through my house. The heck with it. I’m not going to sell it.” And then they get a chance to refi their mortgage at under 3%, so now they have a mortgage that starts with a two so maybe they’re not going anywhere. But anyway inventory gets pulled off. The other urgent groups says, “I got to have one. And my boss just 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 or whatever.” Well, how did we get 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.
When you’re shopping, now, I did the same thing in Florida to be honest with you. When I decided to move here I gave myself three days, me and my wife, three days to buy a house because that’s why we were here. Now, we had help, we had contacts, we got to see every type of… We said, “This is what we want.” And for a 90-mile stretch, so you can think about that when you’re not familiar with the state to any great extent, shopping for your residence over a 90-mile stretch in three days, that’s a challenge, but that’s what we did. But 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.” Now, if you go up to Northern California, I just did a interview with Northern California and 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.

Lauren Hardy:
Wow.

Bruce Norris:
Yeah. So it had a little downturn and then it exploded. They mark their days on market insight like of a week in an area, maybe two weeks sometimes, but they have no inventory and huge demand and so there’s price wars for everything.

Lauren Hardy:
Yeah. That’s crazy. Aren’t you had, our buyers are still hungry for deals. I’m a wholesaler and my market is, I have a few Midwest markets, and no problem selling deals right now. I thought that I would actually have a problem but no, buyers are hungry.

Bruce Norris:
See, 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, but I’m careful in making decisions because I’m investing my own money, that’s what I do. I try to go, “Okay, well, where’s Bruce Norris’ money want to go?” And 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?

Lauren Hardy:
Oh, 2019.

Bruce Norris:
By far. So certainty doesn’t trump anything, certainty gets trumped by uncertainty and fear, that’s what we just learned. That’s really interesting. Now, we had some bonus of a low interest rate but you know what? To me that doesn’t mean to think because that translates to me into affordability. If it’s affordable, and 28% is still affordable, if that was 4% in that affordability historically you’d still have plenty of upside. It stays more buoyant because of interest rates being so cheap. But I look at affordability not interest rates. And I’d say, again, this is why I love charts. I used to stand in front of an audience and say, “Okay, is it likely that every time interest rates go up there’s some negative impact on real estate prices?” Of course that makes perfect sense when you say it, doesn’t it?

Lauren Hardy:
You would think.

Bruce Norris:
You would think. See, that’s why I like charts. All you have to do is get two charts, get a pricing chart and get an interest rate chart. And you’ll find that interest rates doubled from 1974 to 1980 and real estate median price in California went from 34 grand to over 102, it tripled when interest rates doubled.

Lauren Hardy:
Is the psychology behind that, that people think that the interest rates are going to keep going up so I better buy now?

Bruce Norris:
That’s a great point. Well, that was connected to a lot of inflation. So yeah, you had inflation of interest rate but you had inflation of wages too. And so that affordability kept on getting a bump, getting a bump, getting a bump. So yeah, real estate did phenomenally well, there were other reasons for that rise in price, but it’s one of the things is that people were… They draw conclusions in saying, “This has got to be right.” And 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. So interest rates in 2009 were less than a third of what they were in 1980. And what was our market like? It crashed. The price went down like a rock and we had to pay people $8,000 bonus to buy a house that was less than half of what it was a few years ago.
So you saw affordability was over 50%. When you think, “Okay, well, high affordability,” California Association of Realtors has this saying, “Affordability is equal to real estate wellbeing.” Now, that’s a really interesting comment because most people think of real estate wellbeing as when their stuff goes up. But CAR just said that when real estate affordability is high, that equals wellbeing, well, then you never felt better than 2009. But that was the highest affordability that it ever was. And yet 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.

Lauren Hardy:
Right, right. There’d be no sense. You talked about ending events. So we are in a time where it’s almost like we’re looking for that ending event and be on borrowed time. Are we in a 2005 where we’re wondering, “How long is this song going to keep playing. When is it going off?”

Bruce Norris:
Well, it’s the affordability number going low, that’s the ending number.

Lauren Hardy:
Okay. Right now we’re at 28. If you see that, and that’s in California to give contracts, this is a national platform but…

Bruce Norris:
Well, you got to tell people, and this is being honest, does it work everywhere the same way? No. There’s plenty of states that never challenged that number, Florida being one of them. Florida had a crash in 2009 but it had nothing to do with, oh, the affordability was right at a breaking point, no 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 a really 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, and I had written the crash report. And he came up to me, he was just like, “I’m so scared for what you just said.” And so 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.
And how he paid for that is he talked other people into buying stuff like he was buying. So 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 it was just that’s the first time he’d ever heard anything like that. I took him serious and I met with him. I looked at his portfolio and I said, “You want my honest opinion?” I said, “You got six months. Sell this thing and you’ll walk away a multimillionaire. Sell it in 12 months and you’ll be zero.”

Lauren Hardy:
Wow.

Bruce Norris:
And 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, by the way, the upside is gradual. And so I can tell you what I feel is signs for me and I like migration and that’s why I’m in Florida as opposed to California.

Lauren Hardy:
Yeah. Why did you move to Florida?

Bruce Norris:
Well, here’s the main reason. We had a seminar after I experienced something. Because you now go around and speak in California, different clubs, you start hearing different laws that are passed and you’re going, “Are you kidding?” Well, one of those laws was there was a $5,000 fine in Oakland if you weren’t using your vacant lot. I mean, you already paid your property tax and now the city had the right to fine you five grand for not using it. Well, that bothered me. Then we voted against rent control and a year later we had rent control.
So I realized, okay, 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 just get surprised by them. And so we had a seminar where we had a legislative panel and they basically got asked questions about how do laws get passed? And the answer is, it depends. And it depends on the legislature, sometimes it depends on the public, sometimes, but in an emergency it can depend on the governor who can proclamate something into existence. That bothered me. That was really my impetus.
Now, 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 20 years. And that has to do with migration not just… Florida is just a very interesting case study for me because again, I normally obviously just 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 so that was all the way back at what, ’92 or something? So I’m familiar with Florida in that sense but didn’t live here.
But in 2000 I think it was in ’15, first quarter. I interviewed Doug Duncan, Chief Economist of Fannie Mae. And to prepare for that interview I read the fourth quarterly report for 2014 for Fannie Mae. And in it it said that 25% of all the Fannie Mae’s losses came from one state, Florida.

Lauren Hardy:
Oh, wow.

Bruce Norris:
Yeah, and this was 2015. And I thought, “Well, how could that be?” Because 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.

Lauren Hardy:
Wow.

Bruce Norris:
Yeah. And I picked up my phone and I called my buddy, I said, “Okay, look around for a track of lots that a building can build on, there’s got to be them.” And the next day we were in escrow and that’s where I built my lots, I mean, my houses. I’ve built out the track and have rentals. So a lot of the money that I had was already sent over to Florida and 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. I mean, but they’re talking, do you know that law?

Lauren Hardy:
I believe I do know, is that when someone inherits a property-

Bruce Norris:
No, no, no, this is on your net worth.

Lauren Hardy:
Wow, okay.

Bruce Norris:
Every year there you have a net worth tax.

Lauren Hardy:
Wow. Okay.

Bruce Norris:
In the timing report that we’re doing that starts in February, we’ll do four segments, in the second segment we’ll talk about how many billionaires there are in California. And if you decide there’s tax laws that are coming up, do you think the federal tax rate is going to go up? Probably. So let’s say that goes up to 39%. There’s 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 on social security right now, stocks being taxed that 140 grand-ish. So the, if you have an employee that if you pay 140 grand you’re paying basically seven and a half percent each for that first 140 grand after that zero. Well, they’re going to reimplement that after 400 grand.
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 seven and a half percent social security tax rate including your business. You add this up to the federal, you’re going to be taxed at over 67%.

Lauren Hardy:
Oh my goodness.

Bruce Norris:
And that’s without the wealth tax. The wealth tax says, “Okay, you’re with 10 billion, it’s a small percentage but send in several hundred million dollars a year, please.”

Lauren Hardy:
Wow.

Bruce Norris:
That’s a good way to lose migration and so that’s why I’m in Florida because I think that domino is going to tip.

Lauren Hardy:
So you think that that’s possibly one of the domino’s?

Bruce Norris:
It is the domino.

Lauren Hardy:
It is.

Bruce Norris:
I’m going to interview a guy that actually has a lot of clients as billionaires, and we’ve interviewed him before his name is Raoul Pal. What’s funny about watching him interviewing all these guys that are billionaires and they’re friends, you can just tell it. And I’m just, I want to ask him, what’s the mindset of a billionaire when somebody says, “I’m going to take your stuff every year?” And they have an alternative place to go. I think you already know the answer but I want to know.

Lauren Hardy:
Right, right.

Bruce Norris:
Because a billionaire is not going to just take their home and sell something, don’t they own a business?

Lauren Hardy:
Right. They’re going to move their entire business.

Bruce Norris:
That’s right. It it’s very short-sighted, that’s the thing. I feel like there’s a room where people say, “Okay, well, how can we collect more taxes? Well, let’s raise the rate on capital gains to 39%,” just the highest rate. Well, 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, “Well, that sounds great but that’s not going to work.

Lauren Hardy:
So what do you think… We’re in 2021, what is going to happen in California? What’s your opinion on house prices? What do you think?

Bruce Norris:
Well, I’m not afraid of them because the 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 that was so, actually it was very typical of our past but why didn’t it happen in 2019? It doesn’t surprise me that it happened except for 2019 when it didn’t I thought, “Well, 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 really good chart like it did 2019 but you’ll still have not the urgency and now that’ll be a different result.
Statistically, we should have gone up in 2019 and didn’t and 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 mean, I constantly read, I’ve got 30 books I just bought that are not going to easy reads at all, but I always try to think about what’s next and meet people that are smarter than I am in their segment.

Speaker 1:
Okay. That concludes part one of the podcast. Be sure to tune in next week where Bruce shares how anyone can make money in an overly-crowded market. And 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.

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