This article was posted on Sunday, May 13, 2012

Once upon a time, California was business friendly and people migrated here for a better life. Builders could count on lines of buyers ready and able to purchase anything with a front door. Buyers could count on lenders to cooperate with increasingly easy-to-qualify-for loan products, allowing prices to graduate ever upwards. This excitement led to many normal people becoming real estate speculators, buying as many properties as they could get their hands on ¦ once upon a time.

‘s now 2012. Multiple offers are again very common. If you have a reasonably priced property, it gets hit with more offers than bait at a trout farm. TNG Properties buys and sells houses. We understand the ease of selling a property right now. It seems like the old days of endless demand are just around the corner. However, I’m also a fan of charts and probabilities. Let me assure you this buyer demand is made up of very different participants than normal. The pent-up retail buyer demand on the sidelines is a fantasy that would be exposed by additional inventory. Will that inventory ever show up? That’s a good question. I think it hasn’t shown up since 2008 because lenders found out just how weak the demand was. The median price in California fell from about $600,000 to below $250,000 in just 18 months. Now you have a sub-4% interest rate, a price still 50% below the peak, yet no price increases ¦ hmmm!

The reason it would be mathematically impossible to have pent-up retail buyer demand is they are either credit damaged, upside down on their current loan or fearfully huddled in the corner waiting. In California, 50% of buyers purchase either short sales or REOs. That means the owner of the property leaves the closing credit incapable of buying a house without time passing to allow for credit improvement. The REO is owed, of course, by a bank. However, the original owner has the worst of all credit dings: a foreclosure. It will probably be three years ” maybe two ” before they can get a new loan.

The person selling via a short sale is, most likely, very far behind in their payments. When they close their sale escrow, they too are going to sit on the sidelines for a while.

Another huge group of current owners are upside down and going nowhere. The current lending environment would be very unlikely to give this owner a new loan even if they were current. The fear is that the buyer will get the new house and dump the old one once they don’t need their credit to be spotless. This is not an insignificant percentage.

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This is a chart showing the owners in Hesperia, a boom town during the go-go years of 2002-2006. There was lots of land, so builders built up a storm and lenders cooperated with zero down, stated-income loans. Fast forward to 2012 and you have the present situation.

Source:  The Norris Group and

This chart points out how much people owe in relationship to the value of their house. In Hesperia, the largest group is homeowners who owe more than twice what their house is worth. The next group down owes 120-200%, and so on. The bottom line is that over 76% of owners in Hesperia are stuck. They probably aren’t going anywhere unless they lose their house through foreclosure or sell via a short sale. 76% of the former buyers in Hesperia can’t buy another house right now. Over 75% of the closings produce a credit-damaged former owner who will have to wait a few years until their credit improves.

If you are a listing agent in Hesperia, you probably think there are pent up buyers on the sidelines because you have demand for your listing. If you take a closer look, these buyers aren’t the normal occupant-owners; they are an all-cash buyer called an investor.

This is a chart showing the decline of first time occupant buyers. Normally in a downturn, 50% of the inventory is purchased by first time buyers.

This chart shows the percentage of all-cash transactions. ‘s easy to see that the volume of houses that were once purchased by first time buyers are now being bought for cash by investors. Why all cash? Because in their wisdom, the people who make policy decisions for available loan programs view the investor as a high risk borrower and have made it very difficult to get a loan.

Let me recount a conversation I just had with a lender who has bugged me for months to refinance my residence. Having decided to buy and hold more property, I called this lender and told her I might be interested in getting some financing for about 10 homes I’ll be buying in the next year. She got excited. Then, she asked if I had any current loans. I said no; everything I own is free and clear. She asked if I own more than 10 properties. I do. I’m sorry, I can’t do a loan for you, was her reply. I remarked how strange that seems, and she promised to check with her manager, but said she was pretty sure she couldn’t do anything for me. This woman, who has left me messages virtually every day for the past 30 days, is now nowhere to be found.

It seems like common sense to me that she has to be wrong, but the point I want to make is still valid: Investors scare lenders. These lenders are confused about who the investor of 2012 is and who the speculator of 2006 was. The investor of 2012 writes an all-cash check for a property and rents it out. They sometimes refinance it with private money (The Norris Group does that by the way) and then go buy some more.

The speculator of 2006 didn’t need to have a dime, a job or any cash flow to borrow all the money they wanted. These are two very different types of people, yet the lenders seem to have grouped them together like conjoined twins. That means these investors have to be all-cash buyers. This system can work as long as the inventory doesn’t build. However, if these lenders ever decided to foreclose on the long list of people who haven’t made a payment in over two years, they will soon find out there is a limit to how much cash investors have.

One of the solutions they are about to unfold is selling a lot of properties in bulk to huge buyers. The details of this are just coming out, but it seems to be a very bad decision to me. California not only has one of the largest percentages of problem properties, but without a doubt it has the biggest numerically. Already in place, across every city, is a group of ready and able listing agents called REO Brokers. They have been working their fannies off (no pun intended) waiting for the day when the volume of properties they have long been promised would finally emerge. This would add to the revenue generated for brokers, lenders, escrow, title and construction crews. If they cut lose with the volume of properties and simultaneously allowed mom and pop investors to obtain financing, you’d have the best solution to this huge problem.

Instead, what you are about to do benefits only a huge company and avoids helping the team that deserves the business. If you sell several thousand homes to one buyer, you set up a dangerous situation down the line. If you sell five houses each to a thousand investors, they won’t all get together and sell all of those homes all at one time. However, I’m sure that once the designated time these buyers have to hold onto the properties is past, they may well flood the market with these houses.

Thanks for taking the time to read my article. Now, I’ve got to see if I can get a loan somewhere.

Bruce Norris is an active investor, hard-money lender and real estate educator. A talk show host in his hometown of Riverside, Calif., Norris is a frequently quoted in financial publications and a speaker at investor club meetings throughout California. His latest study, The California Crash, was released in January 2006 and provides the statistics that substantiate his predictions. More information about Bruce Norris, his research and his investment seminars are available at

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