With so many great questions after our first show, Aaron Norris and Sean O’Toole are back to answer the question: How will the recession impact real estate in 2020? And, how will government recession intervention impact real estate?
Sean goes into more detail on the three things he warned real estate professionals about in 2016 and we review how well his predictions held up. Hint, shockingly well! Sean also gives more insights into the options the Fed has at their disposal to handle the recession because of Covid-19. Will the Fed print money, try austerity, raise taxes? Will this cause see inflation, deflation? And, what should real estate professionals be focused on right now to grow their business? So much to cover in this week’s show.
Have questions or feedback? Each show is posted on the Data Driven Real Estate Podcast #2 in our community. This is where you’ll catch pre-show research and continue the dialogue online after the show. This week, we’ve posted the charts mentioned in the show.
- 00:38 Why Sean stopped speaking at real estate clubs in 2016
- 02:41 What is a debt-driven economy?
- 05:23 The bubble journey to zero percent interest rates and impacts on the economy
- 08:25 What is a black swan?
- 10:45 How automation impacts the wages and the economy
- 11:21 Will and should manufacturing jobs ever return to America?
- 12:38 US Manufacturing output is at record highs but employment lower than 1940s?!
- 13:18 Why the Main Street real estate industry must focus on efficiency and automation
- 14:30 In low-growth markets, what is the only way a real estate professional survives?
- 15:58 Why Sean disagreed with Schwarzenegger and his important piece of advice in 2016
- 18:00 Will the Fed deploy negative interest rates in United States?
- 21:33 Will the Fed choose austerity in the United States?
- 22:05 Will debt restructuring be the likely path the Fed chooses?
- 23:12 Will states be forced to raise taxes to offset pandemic losses?
- 23:51 the state of Nevada is considering an income tax?!
- 24:17 The number one response the US government will use to address Covid-19
- 26:03 If we pump all that cash, will the US have inflation and what does that mean for the real estate market?
- 34:06 Unique ways that Covid-19 will impact real estate supply and demand
- 35:07 Real estate demand in vacation rental markets might double?!
- 36:16 Divorce a driving demand for real estate in the year ahead
- 36:53 Cash is trash in 2020 and the issues that reflation causes in some markets
- 39:52The people getting hit hardest because of Covid-19 with 40% experiencing job loss
- 42:44 Will student housing be impacted by Covid-19?
- 43:22 We’ll never solve affordable housing by building affordable housing? Say what, Sean?
- 45:29 Will we see a wave of foreclosures?
- 46:33 The five D’s of foreclosures
- 48:41 When Covid-related foreclosures hit the market?
- 53:09 How some markets might see a 10-20% real estate price decrease
- 55:17 Worried about any other black swans in 2020?
Aaron Norris [00:00:02] Welcome to the Data Driven Real Estate Podcast. A podcast for real estate professionals dedicated to driving business success using data. I’m Aaron Norris. And, with us once again, is co-host Sean O’Toole.
Sean O’Toole [00:00:14] Thanks, this is going to be another good one, I hope. We got a lot of questions after the last one. Hopefully, we can answer some of those.
Aaron Norris [00:00:22] Yeah. You know, everybody wanted to talk about how you disappeared in 2016, why you stopped talking and really wanted to have a little bit more insight because of the pandemic. A lot of people are very worried about the strategies of owning rentals right now. Just where is the economy going to go? So why did you stop speaking in 2016? I guess that’s a good place to start.
Sean O’Toole [00:00:42] Yeah. Jump right in, huh? So, you know, after the foreclosure crisis ended up on 60 Minutes and ended up talking a lot about foreclosures and housing. Housing affordability. You know where the market was headed. And all the rest, kind of like your dad got a really good reputation for letting everybody know to get out in 2006. I mean, one of the things that I said was foreclosures are going to slow down faster than we think. And a lot of people were surprised to hear that in 2009, 2010. But I saw some regulatory changes that turned out to play out. So fast forward to 2016, I’ve been talking economics for a solid eight years. And I realized that for like about three years I was saying the same thing and that things weren’t really changing. And I didn’t think they were going to change until we had another event, as it were. So, you know, I basically did kind of my last rounds with the real estate investment clubs and Realtor associations and brokerage offices and mortgage companies and kind of laid out what I thought was going to happen from there. And I had three primary takeaways.
Aaron Norris [00:02:12] You did. So let’s go through those, because I. I last heard you speak at the Coachella Valley Real Estate Investors Association. Hi, Janet. Larry, I actually had we had dinner a couple weeks ago and I was telling them this and. You had three takeaways. Yeah. Let’s just, I guess, start there.
Sean O’Toole [00:02:32] Yeah. So the first one. Right. Is that, you know, we’re having increasing debt and debt was gonna be a drag on growth overall. And, you know, it’s a long story can start back in the 1970s. And but just on that one. Right. In the 1970s, we had this period of really high inflation. We got to really high-interest rates and we kind of deflated. When you have periods of inflation. Right. The dollar become less valuable. So does the debt. The debt gets kind of compressed in these periods of high inflation. So we had very little debt, very high-interest rates. And from the 70s to today, if you kind of look at interest rates, they’re in this kind of trajectory. It’s not a perfectly straight line. It’s going down, down, down. And as that line goes down, right, we can take on more debt for essentially the same payment. So you can think about that at the household level, right. My income may not go up, but if the interest rate goes down, I can take on some more debt. Right. And same thing for corporations. As rates go down, they can take on more debt, stock buybacks, whatever. Right. And same thing for the government. And I really believe that’s what’s fueled our economy now for 50 years or 40 years since the late 1970s, 40 years. So, you know, I’m a tech guy, so I’d love to say that it was tech that fueled the economy. But if you look at the line of increase of debt and the line of increase of GDP, those two are far more correlated.
Aaron Norris [00:04:14] If you’re not on YouTube, I will put the chart up that he’s talking about, because it is very interesting to sort of see the lions just sort of cross. Dad likes to tell the story. Is he got into real estate investing and full time in 1980 time the market perfectly and got in at 17.5% interest rate. He refied his owner-occupancy home so he could be a full-time real estate investor. So you look at the chart of interest rates and it was literally probably the worst day on record. But when you say, just the inflation piece in the and the devaluation of debt. So you’re saying, you know, one year it’s 15 percent and then it goes to 16. If you were the owner of the debt at 15 percent and then it went up to 16. Nobody’s going to want your 15 year note.
Sean O’Toole [00:05:00] So they will, but they’ll want a discount to make it 16 percent rate. So that’s where the debt itself is getting deflated. Right. In that situation, we haven’t had for a very long time. That was the 1970s.
Aaron Norris [00:05:14] Right. OK. So we’ve been building an economy based on cheap money over the last 40 years. I can definitely see that come in.
Sean O’Toole [00:05:22] We’re getting closer and closer to where we can get cheaper. We’re zero from seven, 16 to 15 to 14. Right. Lots of room there. But now we’re pretty close to zero. And so that was a big part of my thinking after 2008 is like, holy moly, how do we rescue things now if we can’t just go cheaper interest rates and create bubbles? And you know, where we really saw this was this kind of bubble crisis cycle that started in 2000 with the housing crisis. And with the dot com premises. So we had the dot com bubble in 2000. Right. Followed by the World Trade Center and that. But a lot of stuff going on right then. And so we had this major crisis as major drop and especially tech stocks, telecom stocks, etc.. Unemployment, lots of impacts. And we kind of rescued the economy by blowing up the housing bubble. Right. That was fully backed and supported by the Fed. In fact, cheered on by the Fed. Right. And so we used this housing bubble to save us from the dot com bubble. And then the housing bubble kind of collapsed under its own weight. And we then the Fed bought mortgage-backed securities and put in a lot of stimulus into it. And we put a lot of stimulus into the economy and the rest. Right. And so we kind of, you know, bought ourselves out of that housing crisis. Really, you see the lines of kind of all debt, student loan debt being the fastest growing corporate debt. Government debt, you know, even mortgage debt is kind of come back. Despite everything that went on during that time, you know, debt just skyrocketed after 2008. Right. And that’s kind of how we rescued ourselves from that crisis. And so my second big conclusion after debt will be a drag on growth. We’re gonna see slower growth. Harder to achieve growth. Right. Is that the next time something goes wrong? The Fed’s going to act even more aggressively. And I joked at the time, my cartoon was Janet Yellen standing behind the “Honey, I Shrunk the Kids” shrink ray. And whatever the problem it is, she’s going to shrink it. And I had a whole bunch of different possible things, black swans, as they were, that could go wrong. Right? We could have another bubble blow up burst, but we could also have other things. Right. Cybersecurity incidents, terrorism incidents. You know, lots of things can cause these dislocations.
Aaron Norris [00:08:25] How do you define Black Swans is somebody hasn’t read the book. How do you define it?
Sean O’Toole [00:08:29] Yeah, so a black swan is a there are these things that happen that are unexpected. But unexpected things always happen. So we should expect them, right? So, you know, 9/11 was a black swan. The Internet actually was a black swan. Right. So, you know, think about a year. If you’re selling modems and the Internet comes along at or wouldn’t you know, maybe modems is the wrong example, but. Right. Like things get display straight. The Internet’s certainly been a black swan for cable TV, for telephones, for lots of things. It’s these things they’re not necessarily bad, but there’s these things that come along that cause unexpected change and consequence. You know that often we can be quite negative, at least some. What’s interesting, though, is one of the ones that I had on my show was pandemic. I had the guys in the full hazmat suits and all the rest was one of my possible things. And, you know, that is one of the ones that, you know, I felt at the time could be one of these things that could happen.
Aaron Norris [00:09:56] We can say is very random because I don’t know, I’m forty-three, I don’t recall anything like this ever happening. So for you to pick that one out is very interesting.
Sean O’Toole [00:10:06] Well, it’s hardly like I picked it. Right. I mean Bill Gates, back in 2016 I think, he’d already done his talk, and lots of people were talking about, it’s only a matter of time until we have one. The fact that we weren’t prepared for this is disgusting. Right. It’s just it’s awful. It was going to happen. It was just a matter of when.
Aaron Norris [00:10:31] And the fact that globally it’s happening, anyway.
Sean O’Toole [00:10:34] So we’ll come back to what’s going to happen. Let’s keep going. So I said something else is going to happen and the Fed that is going to step in. So that was my second thing. And then its third big thing that I thought was important for everybody in the real estate community to understand is that automation is accelerating. Right. So productivity and wages went up kind of in lockstep into the 60s. And then they separated and wages went flat and productivity continued to go up. Right. And that happened basically with the introduction of business application software. And as automation is continued, that’s continuing. Right. Anybody who thinks we’re gonna bring jobs back to America. you know, manufacturing jobs, the rest, we’re not bringing manufacturing back. But it’s not going to bring jobs back in the way that it was in, you know, the good old days. Right. China is going to have as much of a problem with workforce disruption from automation in progress as we are ready. So it’s you know, that’s not a war we should even be fighting or talking about. It’s not the future, I think dissembling stuff is not our future.
Aaron Norris [00:11:57] You had something in the presentation saying that we had only lost a certain percentage due to exporting it. It really had a lot more of the loss of jobs, it was because strictly because of automation. So I think there is that narrative that, oh, we’re gonna bring those jobs back and we’re going to get those union paying manufacturing when automation and robotics at this point, those are never coming back.
Sean O’Toole [00:12:18] Right. Yeah. Now, I think I’m just looking for that. Twenty-five percent of manufacturing job losses due to globalization. The other 75 percent is due to technology and automation.
Aaron Norris [00:12:33] And I will go back there as well because I have a lot more concerns.
Sean O’Toole [00:12:38] Here’s the bigger one that people don’t realize. U.S. manufacturing output is at an all-time high. U.S. manufacturing employment is lower than it was in the 1940s.
Aaron Norris [00:12:53] 1940s?
Sean O’Toole [00:12:57] Yes, it’s not that we’ve lost manufacturing. We’ve lost some of this high labor, cheap labor, manufacturing jobs. We probably don’t want to do anyways. But our actual manufacturing output is higher than ever. So anyways, there’s a lot of bad information and bad data around all of that. But I think it’s important for the real estate community because we are seeing Opendoor and ibuyers like Zillow and all this disruption, and I think that even in real estate, which is not one of the most forefront in the technology and automation industries. Right. Most at the forefront, I think it’s important for those of us in the industry to be thinking about how do we work more efficiently, how do we do that better? So those were my big three things, right? Growth is going to be tough. We’re going to have something else come up and we’re probably going to have things be pretty stable until that happens. Right?. And when it does happen, that is going to come out with their shrink ray. And automation is accelerating. And if you want to be successful, you should get on that bandwagon rather than fighting it.
Aaron Norris [00:14:18] So got it. And then 2016. What were some of the things that maybe strategies that you were talking to investors or about doing to make sure they were taking advantage of the market?
Sean O’Toole [00:14:30] Yes. In a market that’s not growing. Right. So based on growth slowing, there’s really just one way to win, which is to take business from your competition. It is what it is. There’s a certain level of business, a certain level of transactions. If you’re a Realtor in California, there are four hundred thousand transactions that happen a year. If you want more of them, you’ve got to take them from somebody else. It’s just it’s that simple. And, you know, so tough for competition and focusing on the competition, focusing on how to use them back to the automation to have an advantage over the competition. I think we’re really important things. And the bigger picture, I said, you know. Be prepared. Don’t get caught. Like many of you got caught in 2008. Right. We will have another dislocation. I don’t know what it will be, but we will have. Something’s going to happen. Terrorist attack. Cybersecurity event. Major utility outages. There’s so many possibilities. And don’t you know, you can live in fear of those things, or you can say: You know what? Somebody you know, who wasn’t it? Schwarzenegger was like, you shouldn’t have a plan B, right? If you have a plan B, that’s all you’ll ever accomplish. You just got to go for your plan A. I’m all for a plan A, but I believe in safety nets like on all good with the safety net. Right. And, you know, so that was my kind of advice, was, you know, hey, swing for the fences. Go climb that big rock. But wear the safety harness. Right. So that if something does not rock comes loose, something happens. You know, you’re not dead. So basically, you’re saying it’s going to be a pretty stable market. It’s not going to be a high growth market. Go steal from your competition business from your competition. Do better than them. Focus on automation and just know something’s going to happen at some point.
Aaron Norris [00:16:48] OK. So we’re back four years later. Let’s dissect those three things that you were talking about. I mean, just the leverage piece alone. What’s happened over the last five years? You look at the student debt. What’s interesting is when you look at the chart and I’ll make sure on YouTube that we show this is that, you know, the breakdown of the debt that’s exploded. What’s interesting is that the mortgage debt finally started to uptick. But you see that the GDP growth is no longer attached at all to the leverage. That’s concerning.
Sean O’Toole [00:17:21] Yeah. You know, so you have debt and GDP kind of all going up together. And then suddenly most debt just goes straight up and GDP is kind of still, it is what it is. It is down a little after 2008. And that’s been kind of steadily ticking along as it’s always just ticking along, yeah, for sure.
Aaron Norris [00:17:42] You know, you’ve got some European countries looking at negative interest, having deployed negative interest rates in it. You know, I haven’t looked at any housing pricing charts for those areas because it’s still less than a year old, I think, for the markets that I was looking at. But do you think that’ll happen here in the U.S.?
Sean O’Toole [00:18:00] Yes, a native interest rates. That’s a good one. I don’t think it’ll happen. You know, our next black swan is here. Right. Covid. So, you know, if there was a time to hit negative rate rates. Right. And probably be right now, and I don’t know. It looks like we may avoid it this time. They’ve poured the gas on it enough other places that they haven’t done that with rates. And I understand there’s some contagion possibilities with pushing rates down. So you have to say you have a lot of funds in money markets. And if you push rates down too much, people will pull their money out of there. And that could cause a run on bank which causes other problems. And so they’ve got to play with all the pieces of the puzzle. I’m not an expert in this. Right. But, you know, they’ve been buying corporate bonds this time, which they didn’t do after 2008. That’s big. That’s new. You know, you’ve got all these other things that have been going on. But I think, you know, just to take one little step back. Right. So the next black swan came. It’s Covid. And massively deflationary. So if you think about the economy, like suddenly every boat is leaky and sinking, right. Like it is just a very deflation, bad hit, people are staying at home. They’re not spending as much. Bars, restaurants. Right. It’s awful. And so, you know, when something like that happens, you have to have some response. You don’t have to, but you should have some response or some strategy. You know, as monetary and fiscal policy, the Fed and Congress basically should have some strategy. What how are we going to address this? And there’s just really four options. So one option is austerity, right? Just don’t do anything. We don’t we’re not going, we’re going to tighten our belts. We’re going to live with it. Right. And we’re just going to suffer this deflation.
Aaron Norris [00:20:30] Now, Greece. Greece tried to do that. It didn’t feel like that worked out so well.
Sean O’Toole [00:20:34] Yeah, Iran did it somewhat successfully. So it depends on the degree and stuff. Right. I think. I think a year ago would’ve been a good time to think about some or two years ago or three years ago, I would have a good time to think about a little austerity. Economy’s cooking along pretty good, right? We could tighten our belts a little bit without very much pain. Right.
Aaron Norris [00:20:58] So sexy to run for political office. I’m the austerity candidate.
Sean O’Toole [00:21:04] Which is why all democracies fail. Right. Because we don’t vote for doing the right thing. We vote for doing something. And, you know, so. So we’re gonna face that at some point in time. So austerity is really hard. Especially when you’ve already got this huge deflationary first, not provide some sort of support into that, it’s super hard. Not suggesting it’s what we should be doing at all. I don’t think it’s a bad thing to do a little bit of the good times, balanced the budget, get things right, kind of even build some reserves. State governments, you actually have to have a balanced budget. You can’t print money. So if you’re in a state government listening like the next time, there’s a big boom. Right. Don’t blame Prop 13 when it goes bust. Understand you squandered all the money in between. OK. Awkward. So austerity, the next one is, you know, debt restructuring and defaults. Right. So you have this major downturn and you let people restructure their debt. You let them default or you just have defaults and you kind of let that go. You pull a lot of debt out of the economy that allows people to start spending again because they don’t have to pay repay debt. Right. It gets the economy going again. And you can get things done. So the tough one there is. You’re really picking winners and losers. Holders of debt, which tend to be fairly powerful folks like are losing and losing bad debt. You know, borrowers, you know, are kind of getting a free pass. They may lose their asset or whatever. But, you know, perhaps they’re getting a free pass. Perhaps they’re, you know, they get some sort of penalty. But still, it’s ugly. Tough, tough thing and picks winners and losers and can create a lot of strife. So not a great one. The next one is wealth redistribution. So you basically tax those that have money and give it to those that don’t.
Aaron Norris [00:23:24] Already talking a lot about that as we’re going into the election season. I expect we’ll see a lot of that.
Sean O’Toole [00:23:32] This is going to happen as part of this at the state and local level. Yeah, I expected at the federal level. But, you know, I think California went from like a four billion dollar surplus to fifty four billion dollar projected deficit. The state of Nevada is talking about adding an income tax. You know, you’ve got a lot of stuff going on there. There’s a lot of folks who, a lot of states, a lot of local governments who aren’t going to be able float those holes without picking somebody’s pocket. So we’re going to see, well, the primary form of wealth distribution is taxes, and we’re going to see some of that as a result here for sure. The final one. Number four is to print money and devalue it. Right. Pump money into the economy. And that’s what we’re doing, right? A lot of it. And everybody’s agreed, right. The Fed said we have to do it right. The Democrats have said we have to do it. The Republicans there’s been zero debate about. That’s the one out of the four that we choose. All right. We’re going to just print money like now and go for it.
Aaron Norris [00:24:47] How many T’s? That’s the only thing we’re fighting about. So I know we’re talking Trump just came out this week, said he’s looking at another trillion and they’re back later in July. So, yeah, for sure. It’s coming.
Sean O’Toole [00:24:58] And you know what? We’re so fortunate and this may sound terrible. We’re so fortunate that this crisis that hit us is a worldwide crisis because guess what? Every central bank, every government is doing the same thing. So it’s not going to put us on a significantly worse footing. Right. Everybody’s doing this for the most part. Right. Especially folks that have their own currency. Right. You know. Anyways, what’s happening to countries that don’t in this kind of a situation where, you know, we print lots of money and they still have to pay back. It’s not good. So in any case, that’s clearly what we’re going to do. And, you know, and that’s where we’re at.
Aaron Norris [00:25:48] All right. Well, you print all that money. I mean, obviously there’s a big conversation about inflation not impacting prices. If you own real estate, you’re in the real estate community that gets you excited because real estate is a basket of commodities and prices go up. I mean, is that, are we looking at inflation?
Sean O’Toole [00:26:06] Yes. So when you have this much massive stimulus, you’re going to have massive inflation, right? Which basically is the value of the dollar goes down. Two interesting things here. We already have massive deflation from Covid, right? Yes. Add this inflation and what you did, hopefully, if we do it right, is reflation. So not inflation. We just kicking things back to where they were. We reflate the economy. There’ll be a dip in between. But if they do it right, that dip will be shorter and less severe. Right. That’s reflation. So instead of having massive inflation on the other side of this, if they get it wrong and do too much, we will. If they do it wrong or do too little, we still have devaluation. Right? And if they get it right, we reflate. We get back to where we were.
Aaron Norris [00:27:07] This is going to be so interesting to watch. We talk last show about urban centers, lots of articles coming about winners and losers when it comes to people rethinking their urban existence. I was reading an article I shared with PropertyRadar today to all the employees about New York and specifically people leaving in mass, how that’s going to impact commercial real estate prices. And then just knowing because we’re in Florida and watching prices and demand. And it’s just going to be really interesting to see how people handle this and how long this lasts. Because, I mean, if this if we do not control the pandemic, I don’t think people have a choice. But like, I’m uncomfortable here. This is not sustainable. At some point, if the government doesn’t continue writing those checks. So right now, we’re in July. The government is looking at all the programs. Do we extend the pandemic unemployment? Six hundred dollars per week. It ends at the end of this month. Holy cow. What happens if in August comes and this continues to be really bad and there’s no end in sight for controlling it?
Sean O’Toole [00:28:15] So let’s be clear, Republicans, Fed, Democrats, they’ll continue to provide stimulus for as long as necessary. There’s no question in my mind about that. So, you know, they’re going to keep trying to hit reflation. You know, there’s three options just aren’t really viable options, especially for a politician. Right. So as a politician, it’s really the only thing you’re gonna do. And the bottom line part is the government’s not very good at this. So you take something like the six hundred dollar a week extra unemployment. Right. It’s awesome in terms of if you look at it, you know, kind of a wage equivalency. Right. It’s been great about keeping money in the economy and all the rest. A really good successful program from that side. But now you’re a small business. You’re allowed to reopen. You need people to come work for you to reopen. And your people are saying you’re paying me fifteen bucks an hour and I’m getting fifteen bucks an hour on top of regular unemployment to stay home and watch The Simpsons. Right. I’m not coming back to work, you know. And then the employer goes, well, if I tell the unemployment office that I offered you a job, they’re going to cut you off of unemployment. And then the employer goes if you do that. Right. Like, I’m in a bad mouth you, and I have, you know, it left it’s leaving employers in an impossible situation.
Aaron Norris [00:29:57] Right.
Sean O’Toole [00:29:58] So the government just is not very good at this. Right. They’re picking winners and losers like the intense grades. Right. So the outcomes are great. But some of the outcomes are bad. Same thing with PPP. Right. You’ve got companies that it’s been absolutely wonderful for. They were able to keep all their employees on, all the rest. You’ve got others that you know, they can’t bring people back because they’re still shut down. Maybe they’ll bring them back and be able to use that dollars in that time. But it’s not going to really offset all the income they’ve lost. Let’s not make up all the expenses they’ve had when they still had to pay for all the things to keep their business ready to come back to life. And we’re going to have a lot of businesses that aren’t going to make it. Like there was probably a better way to do that program. It’s time because we don’t have good data. They don’t have good data on the IRS and some data. But really. When you look at it all like what’s going to the owner? We don’t want to, we don’t want to write checks that the owner can still go, you know, sailing their yacht and go on fancy vacations. But we do want to give enough so that they can keep their folks employed. Right.
Aaron Norris [00:31:12] Right.
Sean O’Toole [00:31:13] We’re just not good at it. So there will be winners and losers and there will be winners and losers at all levels. And in housing.
Aaron Norris [00:31:23] Yeah, I think some of the European countries, instead of giving that extra aid to directly to the people, it went through the businesses with the goal of just keep your people employed, even if they’re not doing anything. We want the money to go through you. To make them whole.
Sean O’Toole [00:31:39] And count that as lost income. Right. So we will make up, you know, as much lost income as you have, if you keep all your folks employed.
Aaron Norris [00:31:50] That seems like that would have been a better fit, but…
Sean O’Toole [00:31:52] Maybe minus maybe minus profits under, you know, see, you were super profitable company, we’ll make up your income minus this, you know keep your profits, maybe even keep you at break even. We’ll make up, you know, income lost below your break-even point. To keep all your folks employed. Something better. Some better way to do it.
Aaron Norris [00:32:13] I’m sure the takers of the PPP weren’t expecting public relations nightmares for taking the money. And now it’s being shared with everybody. And they’re like, oh, that’s no fun.
Sean O’Toole [00:32:23] I don’t know. They said the money was put out. There was a certain set of rules. And, you know, if you met those requirements, you should take the money. Like that was the point. What’s the stupidest frickin thing is that we still have a billion dollars plus that didn’t get used because people got afraid of the rules. The point, even if let’s just say worst case, that money went into some fat cat’s pocket. Right. He’s still going to go buy a boat. The boat by building that boat is going to employ people like it would be better to have it misallocated than not allocated.
Aaron Norris [00:33:01] Correct.
Sean O’Toole [00:33:02] That would be not to have it misallocated for sure, I’m not I’m not saying it should be misallocated. But being upset that some of it got misallocated because they rushed it out a little too quick. It’s better they rushed it out quick. Right. I can think you and I can sit here and, you know, armchair quarterback, how they maybe could have done it better and hopefully they’ll do it better next time, right?
Aaron Norris [00:33:29] They’ll have their shot when they get back. But going into election season, man, I feel like this is gonna get uncomfortable.
Sean O’Toole [00:33:36] Yeah, but they needed to do it. They needed to do something fast. They needed to get the money out there. It still was probably too slow. It’s better they did it. And we shouldn’t be taking on those companies.
Aaron Norris [00:33:46] Very true. So. Well, let’s let’s try to bring this back into the real estate market so Corelogic came out the last couple of days, talked about how they’re thinking, you know, prices may in decreased by six percent. I just think it’s so weird. The national numbers are so hard. Because I think it’s gonna be so local. I don’t know how you’re feeling about that.
Sean O’Toole [00:34:06] Yeah, I think there’s a lot of truth to it, to that, like we’re seeing quite a bit of different issues. Right. So let’s just walk through this demand and supply. Right. Because supply and demand kind of at the end of the day, end up impacting housing. And I think a lot of these things are coming up. Right. So, on the demand side, people should now work from home. And so, they’re going, well, why am I living in this dump that’s near my job when I can go live where I’ve always wanted to live and work from home? Right. Especially for all those tech companies that have said you can work from home permanently now. Right. So I’m based in Tahoe. You can see that picture. And we’re seeing multimillion-dollar houses that are set on the market for a year, get six offers.
Aaron Norris [00:35:03] Wow.
Sean O’Toole [00:35:05] Right. It’s going crazy. My guess is that full-time residency here doubles in the next year.
Aaron Norris [00:35:17] OK, well, that’s a headline. Well, look, here’s why. Part of my job is reading the news every day and some people are like, oh, you know, these secondary housing markets are going to get hosed. But basically, you just said at a very high price point, that may not happen. That’s really interesting.
Sean O’Toole [00:35:33] Well, what are the secondary housing markets? There are places where people want to live. They have that secondary house because that’s where they want to be. And their first house is their place. They don’t want to be. Anybody who is thinking the place you want to be in a work from home rule is a place that’s going to be hurt like a no, no, no. You’re you don’t have your brain on.
Aaron Norris [00:35:57] That makes you laugh because it’s such a simple response, like, well duh. That’s fantastic. I actually want to live. Yeah. All sudden we’re looking around the room like I don’t want to live with you anymore and I don’t want to live here anymore.
Sean O’Toole [00:36:12] I think those, like so household separations, I think we’re going to see a massive spike in divorce rates. Right. People have been forced together in ways that they haven’t been ever in their lives and spent more time together in the last little bit. And I think that’s going to make some folks a lot closer. And I think it’s going to have some folks go, oh, heck, no. I am done. Right. We’re separating. And so that’s going to create demand. We’re gonna see a move from dense to less dense, which is going to create demand in those less dense areas. It’s going to create supply in the dense areas. Right. I think people realize that even with a reflation, when you print this much money, it doesn’t all leak out in the right places. And, you know, some people would say right now that cash is trash because to any degree, you know, we’re still devaluing the dollar even if we just get to reflation, when you print this much money, money is not worth as much as it was before. And some people would prefer to have hard assets, right. So exotic cars don’t seem to be dropping that much in price. Right. Art doesn’t seem to be declining that much in price. Real estate, desirable real estate is we’re not seeing declines. We’re seeing increases in many cases. Right. So there’s a desire for hard assets and we’re also seeing lower interest rates. Right. So that’s also bullish for demand and pushing prices up. Now, not that it’s all good, right? Certainly, folks who own short-term rentals have been pretty massively hit. A lot of folks are starting to booking again. I think a lot of folks will survive. Some folks weren’t really smart. I have a friend that as soon as it all started happening, he started advertising at 20 plus short term rentals. He started advertising them all as an escape. New York, fully furnished. Right. I think he’s going to end up doing better with these long term escape. New York renters than he did with the short term renters. Find the answer. That’s keep cleaning up and turning it over. It doesn’t have all that stuff. Right? Right. But certainly some short term rental folks. There’s definitely a lot that really hurt. Right. And some of those aren’t going to survive. They’re going to need to sell. So, you know,.
Aaron Norris [00:38:48] It’s funny, I was on a talk, and I was speaking to Realtors, sort of a presentation on this about PropertyRadar. And then afterward, I hung on the line as they talked about the haves and wants, she was actually saying, “Orange County, getting rid of my vacation rental.” So.At the price point, a lot of times it didn’t make sense. I mean, unless you can get those high dollar amounts. But what you said is interesting because I always think of demand, too. And Price point in San Diego. Anything under a certain price goes really fast. And then in brackets, you know, you go over three million dollars, those could be hanging out for two years. So a lot of real estate investors I know have very strategically pulled out of that category over the last couple of years. They’re not doing it anymore. But it’s going to be interesting to watch. OK.
Sean O’Toole [00:39:33] Interesting to watch now. And this is the most depressing one, right? Like. Our worse off households have been the hardest hit. Right. That’s been the hardest hit by Covid. They’ve been hardest hit by the economy. You know, they’re just the hardest hit, I think. What is it? The Fed said 40 percent of households under forty thousand dollars a year in income have had a job loss, you know. So that is definitely going to put a lot of downward pressure on the market. And we’re going to see a lot of defaults and…It’s not all good news. I mean, we joke about some of this stuff, people getting divorced, creating demand, whatever. Not that that’s good news either, but. Right. Like, you know, look, this is this is going to be a major downturn. It’s going to be tough to recover from. It’ll be especially tough to recover from if you don’t, you know, get on top of this what’s going on with Covid pretty soon, right? We have the absolute worst statistics pretty much in the world. Pretty much everybody is doing a better job than we are. So hopefully we get to a vaccine. Hopefully, we get to people being more careful and we get this thing slowed down and we can get back to work. But until we get past that, it’s a pretty significant economic hit. Even with the stimulus and again, winners and losers, we are going to see some losers there. I don’t know how well dense real estate in San Francisco does over the next little bit here until we get past this. Lower-income neighborhoods probably get hit pretty hard. It’s not it’s definitely not all good news. I don’t think we’re going to see a downturn like we saw in 2008, though, for housing, for sure.
Aaron Norris [00:41:46] That’s good to hear. You know, this is my first full cycle, having gotten in real estate in 2005 and, you know, starting to buy real estate as rentals. It’s been an interesting journey. But I think back to that time period and being able to buy rentals in states like California for way below replacement cost is so interesting. I think part of my concern right now is going into the election season and you see some of the bills that are coming up and knowing some of the concerns that were already a problem before Covid-19. So L.A. history, as an example, just released more homelessness data. And it has. I think it increased by over 10 percent, again. And they raised billions of dollars with the HHH fund. And they’re on par to hit an affordable housing unit of five hundred thirty thousand dollars. And it’s taken them three years to get there. So they were already looking at ways to address it. And now this happens. And so a lot of the state of California is just, man, I’m worried about cities that were too reliant on one industry like schools. So was listening to the different CEOs of the California school systems come out like. Yeah. Fall is closed. So all those foreign students. They’re not coming to town, which could definitely impact a lot of real estate investors, in particular in those towns that are really reliant. It’s just scary.
Sean O’Toole [00:43:09] There’s a lot of pressure on universities to open to foreign students because if they’re not open, they’re going to send them home. So I hear that all that is is pretty, pretty interesting right now. You know, we’ll never solve affordable housing by building on affordable housing. Everything right now. That’s the fix, right? “Oh, we need to build more unaffordable housing.” Like, let’s you know, we’re going to solve homelessness by building five hundred thousand dollar housing units. We have to go to shitty housing.
Aaron Norris [00:43:47] Shitty housing?
Sean O’Toole [00:43:50] We’ve just made it, we’ve made it too expensive to build. And we’re going to continue to have especially in California. We’re going to continue to have a huge supply problem. Right. When we have layers on layers, layers of local, state, county regulations that just make it so expensive to build. We’re not going to have enough supply. I know that can be very different. This is a national audience, right? So that’s very different. If you’re in an area where there’s high supply and you’ve got things going on. Right. It’s a very different outlook for housing and housing prices in a place that maybe already had too much supply and not enough demand or demand that was moving or leaving from that area. So it is definitely regional. We should talk about. We only have a handful of minutes left. We should dive into, you know, having been the foreclosure guy on 60 Minutes back in 2008, we should probably talk about foreclosures.
Aaron Norris [00:44:58] Yeah. I mean, are you expecting. Yeah. Go for it. What are you thinking? I mean, the states like California, they’re just put the kibosh on it. So I think they’re going to extend that for the remainder of the year. And other states follow suit?
Sean O’Toole [00:45:15] Fannie and Freddie and stuff. Right. We’re seeing plenty of foreclosure moratoriums. Also eviction moratorium. So even if you buy the foreclosure, you can’t evict. It’s pretty nutty. So. So with regards to foreclosures, right. A minute ago, I said I don’t think this another housing downturn and foreclosures has a lot to do with that. So I think that’s why it’s important to touch on it. We will definitely see if the wave of foreclosures, we’ve already seen an uptick. And, you know, with some coming back online, it never went to zero. We always had a few. Right. And it’s always funny watching like the one or two or four guys a week. It’s still hot deals. And they actually bought pretty good deals and a lot of cases because nobody else was going down to stand at the courthouse steps and most things that you went down there for were postponements. So there were actually a couple of good little deals out there. But we’re starting to see a little uptick now. Because the foreclosure moratoriums were always only we’re kind of for those affected by Covid. Right. So you get some vacant properties, land, things like that. Those have been still foreclosed. But what we have been doing now since March is postponing all the normal foreclosures from the five D’s of foreclosures: death, divorce, disease, drugs, denial. And, so, all of those have been postponing now for some time. And as these moratoriums come off, not a single one of these foreclosures will be due to Covid. Right. But they’ve been postponing because it’s too easy for a homeowner in a house, go to say, well, I live caught up on my payments. If it wasn’t for Covid. Right. So as the lender here, you know that they haven’t made their payments in two years. But, you know, you’re going to wait for the moratorium to be lifted so you’re not in court arguing, you know, why maybe they couldn’t have come back up and made the payments. Right. So we know there’s going to be a wave of foreclosures as the moratorium ends. Because they’re just backed up. You know, our normal level of foreclosures every day. Those aren’t happening. So those will all come out in kind of a shock. Right. Maybe. Maybe not a day or week, but over maybe two months. We’re going to see a little wave. Our foreclosure folks are going to have, you know, some, it is quieter down at the auctions these days. And, you know, it’s important to watch because it could be, you know, whatever that they decide out, we’re going to release these five release these, whatever. And we are seeing a little bit of that now. So I do expect a wave of foreclosures not due to Covid. Now, coming back to foreclosures due to Covid, did you really need to look at your particular state and its guidelines? But we saw back in 2008, it wasn’t unusual for it to be one to two years from the time of missed payment to the time of foreclosure. Even three, four years. So think about first missed payment is March, right? The first Covid-related foreclosures, I think we’ll see in most states we’ll be, you know, probably April, May, June of twenty twenty-one. So we’re a ways away still.
Aaron Norris [00:49:01] Coordinate, maybe. Takes everybody some time to coordinate because you wonder if the federal government, the GSEs, will sort of be like, yeah, we can’t dump this all at one time? Let’s really be strategic about that.
Sean O’Toole [00:49:15] I think right there you hit the key thing. So we’re going to see a wave of these folks that have been backed up. They’re not going to see any mercy. Right. They were already far behind before. Those are going to go. I believe we’re going to see a bounce. Right. And then things will probably come back to where they were six months ago. And, you know, this kind of a level. And then I think we will see another bump. It is going to be very different than 2008. In 2008. The regulators hold banks accountable to get rid of bad assets as fast as possible. So, the bank was expected to declared default at the minimum number of days allowed in that state. The notice the notice of default, notice the trustee sale, you were looking to do everything as fast as possible and meet the statutes of that state. And then, you went through all of that. You had an opening bid. That was the amount owed on the property, which for that first wave of foreclosures in 2007 and 2008, especially 2007, the first half of 2008, it was more than the property was worth. The bank took back every single one of those properties. Right? And, you know, they every single one of them went into their inventory. Now, what happens with that inventory? Same regulations, right? They have to dispose of it as fast as possible, which means putting it on the market and dropping the price until it sells. The same time those same banks have stopped lending into those markets or made it really tough to get a loan. So you’ve got this perfect storm of lots of inventory, you know, hitting the market at the same time with no loans available. Right? And they kept lowering the price until it finally attracted the bottom feeder, a cash buyer that with, holy moly, this is a 10, 12 fifteen percent return, if I just rent it out. Of course, I’m going to buy that. Right? Those early deals, that’s the kinds of returns it was. And then you had Waypoint and Blackstone and the rest go, whoa, wait a second, if we can buy those properties at a seven percent return, right? We can bundle that together, we can get debt cheap, and then we can turn it into a REIT or whatever, and we get a pretty nice spread, even if that rent is only a seven percent return. So they jumped in the market, and now prices got support starting to come back up. Right? Regulators won’t make that mistake again. Mostly all the states kind of change their rules. Most of the states now have rules that the banks have to look at, you know, loan modifications and stuff and has to look for the most economic outcome. The regulators are way, way more about that t’s being more important to keep people in their homes than it is to, you know, foreclose and get the asset back on the streets. And then I think banks and regulators understand that it’s better to sit on the assets, rent them out themselves than it is to dump them on the market at once.
Aaron Norris [00:53:02] I agree.
Sean O’Toole [00:53:03] With all that motivated seller that can take that huge discount. Right? There isn’t going to be that that that available inventory at lower prices to see prices fall the way they did in 2008. I’m not saying we won’t see a correction. We certainly will in some markets. People will have enough equity now after prices have gone up so much that they’ll say, you know what, I want out of Timbuctoo. And I’m willing to take a 10 percent discount. I’m willing to take a 20 percent discount. And if there’s a lot of people in Timbuctoo that agreed to do that, we will see those markets come down. I think nationally, we will see, you know, we will start to see some declines. But nothing like what we saw in 2008. There will be opportunities for foreclosure investors, but nothing like 2008. Not where you can go down and pick your choice of homes that were built three years ago. Right? That are brand new and perfect inside at 50 cents on the dollar. We’re not going to see that.
Aaron Norris [00:54:18] In the debt chart, we had talked about the mortgage debt nowhere near some of the other debt levels. And now that we’re at zero, if they make the strategic move to make liquidity and debt available for these, that that is definitely a change. So that’s that’s good. I didn’t think about that, OK.
Sean O’Toole [00:54:37] The Fed’s buying mortgage-backed securities like crazy. They’re providing a lot of support to keep interest rates down and keep the housing market moving so long. This is so long as IMBs, independent mortgage. Banks don’t implode and the Fed continues to have the mortgage industry its back and keeps interest rates low. So there is some, you know, something blew up in the mortgage banking industry and rates went way up, all bets are off. But if what we’re seeing right now, credits a little tighter, but rates are a little lower, if we continue to see that, I don’t foresee we’ll see a major down.
Aaron Norris [00:55:17] Are you worried about any other black swans?
Sean O’Toole [00:55:20] Well, of course. Right. Every single other one that I had on my chart, I should pull that up. You know, still exists today. And there’s nothing that says we can’t have a black swan on top of a black swan. Right. Like 2020 is already felt like that, with the protests and riots and we’ve had, you know, all these, you know, the Covid, the locusts. There’s been a lot going on this year. Right. But, you know, I think cybersecurity, terrorism,.
Aaron Norris [00:55:53] And turmoil.
Sean O’Toole [00:55:55] I mean, that turmoil or. Automation is still impacting jobs. Right. One thing, you know that I think we’re not talking about a lot.Right. But some of the reactions to Covid may make the unemployment situation, long term unemployment situation worse. Right. If I can order from my restaurant at my seat with my phone and I don’t need a server other than somebody just to bring it out and set it on my table, but nobody has to come talk to me, what happens to wait staff? Right. It probably changes. I need a different level of staff. Just drop, put food on a on a table that I need to provide customer service to take orders. No, I’m not saying every restaurant will go that way, but some will. I think some fast-food restaurants. We’re not going to see people behind the counter anymore. Like, let us see TouchPads and hopefully some sort of cool UV self-cleaning touchpads. So, you know. Right. Always. Or we’ll use our phone. So we may accelerate a bunch of automation. Right. And even this six hundred dollar a month extra check where people don’t want to come back to work may force some employers to go, you know what? I’m going to finally we’re hearing about this in ag. Right. All this immigration stuff. I can’t bring in folks that the pieces that are used to bring folks in legally to help harvest. Well, a lot of the wineries, like their grapes, have picked, better flavor and all the rest. But. You can’t pick them. So they had to invest in machinery. Well, now they need to pay that machinery off so they can’t go back to hand-picking they’re gonna have to use that machinery going forward.
Aaron Norris [00:57:52] Wow.
Sean O’Toole [00:57:53] So there’s a you know, there’s a lot of change still coming from this. And, you know, my favorite saying to my kids, are changes the only constant. Right? Like, you know, people don’t like cheap trade. People hate it when we change our software. And the change is the only constant. And if you’re not changing, you’re dying. And, I think right now, I’d be my one of my best to take away is embrace, embrace change. Right? Think about how you put electronic locks. Realtors think about how you put electronic locks on your doors. And, you know, a lot of you are already doing the Matterport for the virtual tours and all that stuff. Right. Like the ibuyers kind of led on that. With people list tours of houses. You know, I think everybody needs to be thinking about those kinds of things because those changes are going to come.
Aaron Norris [00:58:51] I’m a big advocate of that, of watching the technology providers because they’ve got some great ideas. And it doesn’t mean that we can’t borrow, rob, and steal the same and mimic what they’re doing. What are maybe some other opportunities? Because it’s really a conversation about getting more tech-savvy and everyone is at home quarantine. So now’s a good time. I’ve heard a lot of great conversations. Realtors only showing houses for people that are completely qualified.
Sean O’Toole [00:59:16] You can get away with that now? Right? Think about what a timesaver that is for a realtor. Like, Hey, I’d love to show you houses, but we have to qualify for straight. There’s a lot of folks that have listings are saying we’re not going to show the house until you’ve made an offer. Right? So you need to be that serious. Just looking at our Matterports and our pictures and the rest that you’re willing to make an offer to declare a price. And once you’ve made an offer, then we’ll show you the house. You couldn’t have gotten away with that a few months ago.
Aaron Norris [00:59:50] For sure. And people making decisions online, only buying houses. I’m watching that happen right now. People just like, you know, I’ll buy it. The pictures are good enough.
Sean O’Toole [00:59:59] I was already happening last year. But it’s definitely accelerating now. Like, I want to be there. That house looks nice. I can look at the aerial photos. I couldn’t see enough stuff. You did a nice 3-D tour. I’m in.
Aaron Norris [01:00:13] I mean, we interesting to watch that chart that you’ve got the real wages versus…
Sean O’Toole [01:00:19] Productivity.
Aaron Norris [01:00:20] Productivity to see if there’s another, because we’re really forcing the issue on a lot of technology on people. I work out with somebody who’s IT for a county and he’s like, I work 24 hours a day. We’ve had to go from zero to one hundred overnight. But nothing will ever be the same. So it’s gonna be really interesting to watch.
Sean O’Toole [01:00:41] We should leave it just on some big picture advice. I think we’re a little over.
Aaron Norris [01:00:45] Okay. Yeah.
Sean O’Toole [01:00:47] But, you know, I think a few things that I would say right now is you really need to be jumping back in and making stuff happen right now. And if you’re waiting for things to be back to normal, you know, change is the only constant. I don’t think we’re ever going back to the way things were pre Covid, just like we haven’t gone back to the way things were pre 9/11. Right. We’re all still taking our shoes on through security lines at airports. It’s just, it’s change. It is what it is. And I would go for it. But another safe, you know, another black swan. Covid getting worse. Lockdowns back again. You know, wear a safety harness. Right. Like, think about think about not pushing so far forward. Not overinvesting so much, right? Instead of going so leveraged on those deals you want maybe find a partner and take a little less percentage and have somebody else in there with you so that you can afford some shock if you know every tenant in your building decides to cancel rent. And you can’t evict them. That happened. So, you know, be ready for that. Have enough, you know, don’t hoard cash too much. Right. Because it’s being devalued right now. But also, don’t put all your cash out there. So you have some safety net. Right. So just get in there. Make it happen. But, have a safety net. Always be looking for opportunities. And understand there’s going to be winners or losers here. And so if you’re looking, that’s something that’s a loser. Understand for every loser, there’s going to be a winner, too. That’s just what happens in these reflections and be looking for those losers, looking for the winners and making sure you’re on the right side of that equation. And you know what? Kind of like my short term rental guy who, you know, as soon as lockdown happened, he advertised in New York for, you know, the New York escape and rented all 20 of his units. You’ve got to always hustle. Right. Like, just you got to hustle. Now is not the time to not be hustling. I know a lot of people went home and kind of, you know, Netflix and chilled. But you got to keep us all. You just got to keep going. And, you know, I think right now, during these periods of change, they are the biggest periods of opportunity. More wealth was created coming out of the Great Depression than probably any other point in history. So those things that happen, these things that happen right now, they create opportunities. You get to go hustle and find it.
Aaron Norris [01:03:56] All right. Well, I think with that, let’s wrap it up. We’re going to be putting show notes on datadrivenrealestate.com. You can ask questions there and find resource links. And if you’re on YouTube, I’ll make sure to post some notes and some links to some extra resources in there as well. And we’d love to hear your feedback in the community as well. Checking here. Maybe some people that you’d like to talk to, for us to talk to on the show, we’ve got a lot of exciting stuff coming your way. So datadrivenrealestate.com.
Sean O’Toole [01:04:24] I was going to say we really appreciate all the questions. Right. Like, so a lot of today’s podcast, we actually didn’t plan to do another one, just you and I, we were going to jump straight to guests and all these great questions. And we’re like, you know what? We should, we should get out there and talk about this stuff. And then move to guests. So then it alone. Yes. Yes, there is still secret.
Aaron Norris [01:04:45] You know what? I think we are going to have Bruce on my pops. And I always love hearing you guys talk about timing. John Burns says he’s going to come on in. You know, John Burns is such a wealth of information in the builder community and the Wall Street community can’t wait to talk to him.
Sean O’Toole [01:05:00] I loved what he did with Demographics instead of Millennials and the rest, doing it by decades. It just made all so much more sense.
Aaron Norris [01:05:08] Exactly. And then we’ve got somebody from IBM, so we’re gonna talk about the more advanced marketing topics. So just a start. I’ve got a list of about 20 that we’ll start banging away at in the next couple months over summer. So I’m excited.
Sean O’Toole [01:05:23] Me too, super excited. Thank you, Aaron.
Aaron Norris [01:05:24] All right. And so next week.