AIPIS 34 - Real Estate Market Update with Stuart Vener

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Welcome to the AIPIS show for accredited income property investment specialist and those who desire to be. This is your host Jason Hartman where we talk about increasing your income, your productivity and just generally having a better life while serving your clients better with America's most historically proven asset class income property. We have a great interview for you today and we will be back with that in less than 60 seconds.

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It's my pleasure to welcome Stuart Venner to the show. He is the former President and CEO of Richmond Corporation and former director and CFO of Transcontinental Development Corporation. He's got some good insights on the housing market and the economy in general. And I'm looking forward to having him on the show today. Stuart, welcome. How are you?

Thank you. It's great to be here.

Well, it's our pleasure. So a lot is going on. Most people out there are touting a recovery. I've been saying for the last couple of years that the recovery is fake, just induced by inflation and fake money printing. But we still got inventory hangovers that may be of concern. What are your thoughts?

I think you're exactly right there. Right now you're going to have realtors telling you and hyping the market and telling you how great the housing market is and that there's a shortage of houses. And true, there is a shortage of inventory available right now. Because what's happening is these banks are selling these foreclosed properties in bulk to investors. And these are the same investors that created the housing crisis that we're just emerging from. The same ones that made all the money with the spurious and bad loans and now they're taking these bill gain profits and paying cash for houses at bargain basement prices and turning them into rentals.

Well, okay, so wait, let me just interject there. They may be the same people that have the investor mindset, but at least now, Stuart, I mean, they're not buying them with funny money loans and fog Amir get a loan, nothing down, 5% down. You said they're buying them with cash. So, I mean, isn't that a big insulator?

Well, what it's doing is though, it's taking the houses that were available should be available for the first time. Buyers, they're having a hard time finding them.

Okay, but if we want to play that game, then we have to pick who gets to buy the house and then we subvert the free market. And I don't know, that's a whole other kind of discussion, but I'm happy to go into it with you and hear what you have to say about it. It just seems like that could be problematic.

Well, what's happening is you're seeing numbers that housing sales are up, but sales to investors are up. The people that need homes to live in are becoming renters. And that's for a lot of reasons. Shortage of inventory and overtight underwriting guidelines and government regulation of mortgages, which is another issue, too.

Yeah, well, so what are your thoughts on the direction we're going in? I mean, are we going to hit a certain point where this withheld inventory sort of drops into the market some People said it was because of the election last November.

No, the direction that really worries me is this overprinting of money. And you'll have people tell you that this is the best time to buy property because of interest rates being historically low. But that could be very dangerous if you're buying for cash. That's another story. But most people are financing their purchases. And when you're financing a mortgage, a mortgage is a commodity today, just like the house is a commodity since the Clinton days when they kind of ended the savings and loan industry. Pretty much all mortgages today are private, are bonds and they're packaged as bonds and sold on Wall street, whether it be Fannie Mae or Freddie Mac or private investors. But the mortgages on your house are a commodity that's tied to the bond market. Now it's a fact that when interest rates go up, the value of the bond decreases. That's a economic fact.

Yeah, that's just how the bond market works. I understand.

Okay, so what you're seeing now is at interest rates that are near zero and being marketed to what, 3% to people, interest at some point has to go up probably in another year, maybe two, but you're going to see interest. The only direction it can go is up. So then what happens to the collateral, which is the mortgage securities that's backing it, that's going to go down. And I think you could very possibly see a drop in price value and drop in the housing value.

Okay, well, let's dive into that. It's an interesting perspective. So the value of the bonds, the mortgage backed securities, the bond oriented securities, so they will go down in value, which would naturally happen if you've got other bond mortgage bonds, for example, paying a higher return, people are going to buy those rather than lower price, lower return bonds. So the value goes down and money looks for the highest return, obviously. So that causes these old bonds to go down in value. No question about that. But how does that relate to the housing market? Just because in general, investors that hold these mortgage bonds lose money and so they can't invest in the housing market or where's your tie in there?

The mortgage bonds are based on a loan to value of the property. So if all of a sudden the collateral drops 50% price of the house has to go in the same direction.

Well, why is that? The mortgage, the bond can go down in value, but the person who owns the home can still be doing great with that low 30 year fixed rate mortgage. And that doesn't mean the price of the house went down Yet.

Yeah, but how is he going to be able to sell that house and then trade up when he's going to have to pay double the interest?

Oh, you mean to the next buyer? Well, yeah, okay, that's a good question. But you know, we've been through this.

Before and mortgages are typically refinanced bond. The mortgages might be written for 30 years, but they typically held what, maybe five, six, seven years.

Although I think that the mortgages being originated the last few years will be held for a long time because there's. The rates are so low.

Exactly. So these artificially low interest rates I think are going to have a bad impact in the long run on housing. And not to matter, not to mention the fact that what it's doing to the whole economy of this country, we're buying up a trillion dollars a year of mortgage backed securities and printing money.

Yeah, I agree with you there. That's a house of cards.

It's a fake solution. It's putting the economy on energy drinks when it should be just recovering normally, you know, inducing a lot of mal investment. No question about it. But I still, Stuart, don't really see how. Okay, so people won't be able to trade their house in the future is what you're saying. So say five years from now, mortgage rates are 8% instead of their current rates of 3% or whatever ridiculous rate someone happens to get nowadays. So the mortgage payment will be more expensive. But historically 8% is still pretty low.

Well, it's getting on the high side, but anything under 10, I guess historically would be low. That's true. But when you're going to trade up to another house, how are you going to trade up if that house is twice the price? So you're going to see, I think, a drop in value.

Right, right. Well, the question is really a drop from where? I think that's really the question we have to ask ourselves because right now we've got the highest housing affordability rate in history, ever since NAR has been tracking it. So maybe house prices can go up 50% and then the rates rise and then they come down 25%. The question is, where is that line? It all relates to the housing Affordability Index.

And that's a question nobody can give the answer to.

Right. It's very hard to know because the question is what will incomes do? And you know, we certainly both know that in real dollars, Americans haven't had a raise in decades.

Now, unless you work for the government, maybe.

Well, yes. Or unless you're self employed. Fair enough. One or the other. Either way, y. You can be an entrepreneur ripping off the government in a public employee union or you can be self employed creating actual value in the economy one way or the other. But. Yeah, yeah, very good point. Okay, well that's interesting. What about, what about inventory? I mean, can you talk a little more, speak a little more to the inventory issue and I mean shadow inventory in particular.

Yes, there is. That's just the word I was going to use. There is this huge shadow inventory of millions of houses that are either foreclosed on or in the process of being foreclosed on. Foreclosures are on an uptick again since in states like Florida and states where they've had this debacle with the robo signing, now they've got that behind them and you're seeing the foreclosures pick up again. But the banks are a little reluctant to flood the market because if you flood the market with this shadow inventory, then again that could cause depression in housing because there's still supply and demand.

Right. So they're manipulating the market in their own interest.

Rightfully so. I mean, they're money making entity.

Yeah, well, yeah, and you can't blame them. In a way they could be helping the market. But the question is a lot of the potential foreclosures will be saved. They won't actually go into foreclosure, you know, especially in a rising market like we have now, which may all be temporary, I understand that, but I think some will.

I think the ones that are being saved and helped the most are the ones that in a year from now will be in foreclosure again. They're the people that never should have had the house in the first place, unfortunately.

Do you think that's happening now? Are people currently getting houses that they shouldn't be getting now?

I think it's turned too far the other way. We have so much government regulation in industry and in business and now they've so over regulated the mortgage industry that people, good people, people that can afford the loan and should be able to get a loan, are having a very hard time getting a mortgage. There's a young man working in my office that has an FHA loan that he got a year ago at a good price, a good house. The deal was good. In fact, he could have qualified for about 20,000 more. But he chose to be conservative and get what he felt he was comfortable to afford. And he was just turned down on a 203k loan, which is a loan that where he was going to borrow another maybe $8,000 to do a roof and to repair the kitchen because the appraisal came in $2,000 short. Now no appraiser is that good. You know what I'm saying? You're looking at a couple thousand dollars. No appraiser can be that accurate, that perfect. But they're so afraid of making a mistake. And with the regulations they're so afraid of, if they don't do it just right, the loan won't be guaranteed, they'll have to buy it back. That so many good people are not able to get loans.

So you're saying that the banks have overcorrected? Right.

Well, what they're doing is they're afraid of owning the loan. You see when the banks make a loan, the banks are only servicing the loan. They make the loan for maybe a day or two and then it's sold. So the big fear they have is what happens if we have to buy the loan back? Well then the 3% loan and you're not lending the money at 20% on a credit card. But they become so over cautious and they're really under trained and they don't make common sense loans. I mean I'm not talking about making bad loans, but there are so many good loans that are being turned down and that's wrong and that's going to certainly hurt a recovery.

So do you think the banks will loosen up a little bit and not be overcorrecting? What's your opinion of the future?

I think it's not going to be an easy thing to happen because they don't have a lot of good qualified and trained personnel. And I know I was in the mortgage business for probably 20 years. I had the second largest dollar volume company in Los Angeles county, which is not a small county by any means.

Yeah, that's for sure.

And back when I was doing it, we made good loans. I don't think I ever made a bad loan. I'm not saying a loan never went bad. I didn't make bad loan. But we knew how to read a tax return. You have a self employed person come in that has a 2 inch thick tax return and the personnel that are working today, they just know how to take the bottom line, throw back some depreciation and person they don't qualify. Where there's maybe another $400,000 in income they overlooked or didn't understand how to read and you're not going to get. It's going to be hard to find qualified personnel to really process these loans. And underwrite them. That's the big problem. And then they're afraid of losing their job. If they make a mistake and this loan gets sold back to them, then they're going to lose their job. So they're being so over cautious that so many good people can't get mortgages.

So where do we go from here?

I'd like to see. I don't know where we're going to go from here. I'd like to see some common sense underwriting. I've never been a great lover of FICO scores because I think it doesn't really fit everybody. You know, I'd like to see common sense underwriting there. I'd like to see.

Less government regulation, but I'd like to see a fully processed loan. In other words, if a person has adequate and decent credit and pays their consumer credit and you can take a person that lost a house in a foreclosure in the last few years and much of it was really not their own fault. I mean, they've lost their job. Things happen to people. But now if people have regained good employment or have gone into business for themselves and have a track record of good earnings and pay their consumer credit and are responsible people, they should be able to get a loan. Today there's millions of people that could really afford to get a house and are good credit risks. I'm not saying you're never going to have a loan not go bad, but they're good credit risks and if you put those people into the market, you'd see a much healthier recovery.

What is your outlook on the debate? Which isn't too much of a debate nowadays because most people lean on one side. But what is your opinion on the inflation versus deflation debate?

Well, I think that inflation has to happen. When you print money like what they're doing, how can it do anything else? I don't want to see us end up like Argentina or Italy or Greece, but that's the direction we're going in this country.

So won't that same inflation raise the housing prices ultimately? Or is it different? I mean, we just talked about how there are some headwinds for housing prices and that this is not a recovery. There's inventory. There are the issues of people getting artificially low mortgage rates.

Yeah, but how is that inflation? How are people going to have the money? Spend a million dollars for a hundred thousand dollar house? I mean, that's not realistic.

Well, let me answer that. That's interesting because my outlook, just so you know, is rather pessimistic in many ways with government money printing and, you know, I agree with what you just said and so forth. But what's interesting, Stuart, is that when you hear commentators, and I understand that they have to talk in quick sound bites when they're, you know, on the news or whatever, so they don't have much time to explain things. And they may have, there may be a lot more behind it than what they're telling you, but they seem to think that the house itself is some kind of fixed commodity that people, every person, deserves. A 2,000 square foot house, for example. And I say that that's what got.

Us into this mess.

Well, exactly, it did. But, but I say that, that, that, I say that the lifestyle in America is going down. The standard of living will be lower ultimately for most people, and the housing prices as they rise, people will just settle with a lesser and lesser house. If you go to Silicon Valley, you get, you pay $900,000 for a crummy little old three bedroom, one and a half bath house. Whereas those people might have come from another city, say they came from Austin, for example, and they could afford a beautiful estate for 450, $500,000 in Austin. And so the house itself is not a fixed thing. People have to settle with whatever they can afford.

Well, I agree with you 100%. I agree with you completely there. And I think what's really created most of the problem and a lot of the problem that we have just been through is this entitlement mentality that everyone has. And people didn't want the starter home. They wanted the mansion on the Hill because they felt they deserved it, not that they worked for it. And now, as you say, it may not be attainable for them again. They may have to go back to what they probably should have got in the first place.

Yeah, no question. That was the mentality and it still is a lot of the mentality, unfortunately, especially on the left. So no question about it, it is a bad thing. The entitlement mentality is a cancer. It destroys people's lives, it destroys countries.

It could destroy our nation. It is very cancer. I believe that.

Yeah, no question about it. No question about it. Well, tell us a little bit about Wilshire Holding Group which you established, and what it's done in helping people avoid foreclosure and stuff. I'm curious about your business model.

Well, what we do, this is something I actually started in 1994 out at the North Reserve in California, which was very similar to what we've just been going through here. But we help people make a strategic exit from a house. You're not going to get a lot of help from the lenders. Even though they say that everyone's going to help you, they really aren't there to help. And I'm not saying that someone should just walk away from a loan. But if you're in a position where you can't afford to feed or clothe your family and you have some hard choices to make and your house is worth half of what you owe on it, that decision is really made. So we help them exit with the least amount of problems to help protect their credit and to help them avoid any tax consequences that could result from cancellation of debt, which does create income. That's another thing, if I have a moment to explain.

Sure.

A lot of realtors say the Mortgage Debt Forgiveness act was extended. So if you short sell your house or if the bank takes a loss in your house, if you're living in it, you're not going to pay income tax on what the lender loses. But that's really not correct. Any financial institution that writes a debt off in excess of $600 is required by federal law to send a 1099C for cancellation of debt. Now the Mortgage Debt Forgiveness act would protect one on their primary residence to the extent of their original loan or if they borrowed money on top of that for strictly home improvements. But if someone at the height of the market had refined or used the money for paying credit cards or for college fund or for a trip or for any purpose other than home improvement, that would be taxable income. And we do help people with that through Wilshire.

Tell us a little bit about your charity. Over $100 million in down payment gifts.

Well, we can't do that anymore. But we did that for many years. We helped people with getting first time homes, particularly on FHA loans. We were helping provide the down payment through the form of down payment assistance. And that was stopped under George Bush, actually 2009, January of 2009. But we did help thousands and thousands of people get these loans. And the reasoning that they stopped was they were afraid that this would create loans going bad and create a problem in the housing market. But believe me, people getting a 60, $70,000 home, this may be $3,000 a month financial assistance on a fully underwritten full doc mortgage was not what caused this housing crisis.

Yeah, very true. Well, hey, give out your website and tell people where they can learn more about you.

Well, they can go to my website, realtycrisis.com or they can call me at 87794, help me.

Fantastic. Well, Stuart Venner, thanks so much for joining us today.

Thank you. It was great being on.

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