Bruce Norris is joined this week by John Karevoll. John was born in Minneapolis in 1951. His family moved to Norway where he was raised, educated, and married. He worked as a journalist in Oslo for ten years and joined a Scandinavian business publication in New York in 1983. In 1987 he was pulled into the world of data, mining large databases for trends. He has worked for TRW, CDB Infotek, Axiom, and others. His relationship with San Diego-based DataQuick Information Systems goes back to 1989. The statistics he generates are used by public agencies, lending institutions, title companies, and others.
Bruce has benefited from DataQuick’s information as much as anybody since he pays attention to it. Bruce wondered what it is DataQuick provides for their customer base and who their customer base is. John said DataQuick is a public records database repository based in San Diego. Anything that is a matter of public record when it comes to real estate is in the database. It is a nationwide database that has all the sales information that is a matter of public record as well as names, dates, loan amounts, sales amounts, refies, and all kinds of data. It is a huge computer in San Diego that has everything in it; and DataQuick has over the past 30 years sold access to the database. This access is sold to banks, tittle companies, real estate agents, and appraisers. It is also sold in a variety of ways, including microfiche and online access. DataQuick’s core business is providing access for all the transactional information.
Additionally, over the years DataQuick has generated products that are focused on specific participants in the real estate market. They have products for banks in which they can show them their market share for specific areas. They also have products for title companies, appraisers, and real estate agents. By and large, DataQuick’s main focus is making sure the data is as current and accurate as it can be and that their coverage is good. The main part of the business is much bigger than what John does; he sits up on the mountains in Running Springs where he has a wide open hose to the data. He opens a spigot every night, downloads things, and generates statistics. These statistics are the ones that make it into the newspapers and are sold to banks, title companies, and builders.
John has been doing this for them since 1989, and Bruce wondered how long DataQuick has been collecting their data. John said they started back in 1979. Back in the ‘70s and ‘80s it was really not cost efficient to maintain a database like this. It was really too expensive to maintain the computer power you needed back then to archive everything. Now John said he has every single home sale in the country on his hard drive and on some backups in Running Springs. If you go back thirty years, that was incredibly expensive. John said he remembered when he started working with DataQuick they were saying they had to let a lot of data go so that they had room for other things coming in. It was a huge issue because they let good information just scroll off and go down the drain. It was incredibly bothersome to John because he likes a good history. Bruce and John are really sensitive to letting history go since this is what you end up being able to most accurately predict. You can see what is going to happen if you look at enough information backward.
John remembered when they had to let seven years’ worth of NOD data go. This was heartbreaking for John, but they needed to ramp up and use that space for something else. NODs and foreclosures were literally and completely uninteresting back in the late ‘90s and going into the 2000 era. There was just nobody who was interested at all in anything that had to do with foreclosure activity. They had a steady state of price increases, and there was nothing out there that they could use for the archive data. This does not happen anymore, but it did back then.
Bruce thinks the way real estate in general was used prior to 1970 was very different than after that because prices did not accelerate until the mid-70s and following. When you triple prices in California within a five-year period, you generate a lot of interest as an investor. Prior to 1970, it was really an occupancy inventory rather than an investment vehicle. The information just didn’t exist. Bruce and others have gone out to research this, including UCLA who, 15 years ago, assigned 3-4 students to go out and read the classified ads. This did not last long since the ads ran back to decades prior and students just got tired of reading them.
Bruce went back to Washington D.C. with Sean O’Toole, and they went to the archives to look at interest rates from 1850 onward. Interest rates were most likely “back of the book” until the 1930s. During this time, it became common to finance the way we recognize home financing now. It was different, but at the same time in many ways the same. Prior to this, you did not have access to a mortgage. It was short and half of the purchase price, and it ended pretty quickly.
John also analyzes what he sees. He joined the party in 1989 at the peak of the market. Bruce asked him what point it was he started realizing it had reached a peak and was heading the other direction. Brue asked John if he ever writes it down when he sees that something is going to go down for a while. John responded saying this is where it gets fussy and interesting at the same time. Both Bruce and John get asked to predict analyze, and pontificate data. John really likes to be right about things, although he has been wrong here and there. His strength is knowing in great detail what is occurring in the market as well as what went on the prior year. John’s only real attempts at forecasting would be to say that if current trends stay in place, then it will look a certain way down the line. However, he does not forecast, although he watches the forecasts. Most of the forecasts out there use DataQuick in one way or another, so he does watch what they do with their data.
Sometimes Bruce will open his mouth and say what is going to happen, and he is always being disagreed with by people a lot smarter than he is. Bruce has the smarts that others don’t have. They may have a PhD behind their name, but there are smarts when you go out there and put your own money at risk. When Bruce looks at a chart, he either feels pain or happiness. When it comes to analysis, sometimes it is a slam dunk. You just look at a graph and you know what is going to be going on the next 3-12 months. However, sometimes you don’t; and this is where it gets interesting. When it is a slam dunk, it is really not all that interesting. In today’s market, there are certain things that are just self-evident that are going on. Prices are going up right now and will continue to increase. They will incrementally go up, and possibly these increments will be bigger at some points in time and smaller at other points. However, they are just going to go up; this is what is in the cards right now.
It is beyond right now that gets interesting. In a year or two, what happens when interest rates edge up to 6 or 7%? What happens when the Fed decides to take the punch bowl away? This is where you need to go out there and do an analysis. Along those lines, the fact of the matter is that now in the internet/blogosphere world, everybody has an opinion and they are all out there. You just read one of the comment sections after a newspaper article, and you just see everybody’s opinion. Now is the time for people to be very cautious about the judgment calls they make. It is harder to make a good call now than it would have been 10-20 years ago. Around that time, the news content out there was vetted by editors, newspapers, and other people looking it over. This is not happening now. Everything is out there, so you have to really develop your own sense of judgment when you evaluate the information flow.
Bruce asked who really knows what they are saying and who is trying to invent things on the run. John said the media crisis has really had a big effect on this. John thinks of the people covering real estate 15-20 years ago, and there were only about 4-5 real stars out there and 15-20 who were really good. The rest would just rewrite press releases. This is not the case anymore. Right now there are about 1 or 2 really good ones and only 3-4 semi-good ones. They know it too. They rewrite press releases, but they also have much more to do. They have a 24 hour news cycle, a blog they have to maintain, and shoot things out on twitter.
John has been doing interviews a lot longer than Bruce, and even Bruce has been surprised when he has been interviewed by somebody he would have considered a major source and very credible, then finds out they don’t and never have owned a house. They are going to write an article on trends, but they have not experienced one themselves at all. There are so many of these people who are wet behind the ears. It’s mind-boggling out there, and John really hopes things change. John’s background is in the press, and it really makes his heart break when he sees some of the things happening. At the other end are others who do not go out with what they used to go out with originally.
Going back 15 years, there was a topic list that he had on which he maintained databases and history. He would go out to the reporters and their editors monthly and show them what it looked like would hit a bottom or a turn. John said he cannot do this anymore. They are not able to handle the information the way they did 15-20 years ago. Right now the topic list of press releases is 1/4th of what it was 10-15 years ago, and it is just the easy top of the line topics. This includes sales counts, medians, cash sales, foreclosures. However, it is nowhere near the depth of information they would have provided the papers 10-15 years ago.
When you are in the analyst business, one thing you cannot control is the giving of the punch bowl. Bruce asked John if anything he has done in the past six years surprised him. He would have seen the downturn between 1990 and 1996, and now we have the current market. People have been a lot more aggressive in this downturn. John said he missed the steep drop, although he knew there was a correction coming since everybody knew. However, this happens all the time. He did not have a clue that it was going to be as severe as it was from 2006 forward. When it comes to the market, the market has clearly overreacted. If you take a look at lenders and everybody out there, the pendulum clearly swung way back to the other side. This created not only a market that was dropping, but we also had to distinguish between a market in decline and a market that became severely dysfunctional. These two things have been playing into each other for years and are starting to come back on line right now.
Looking at numbers today and comparing them to numbers a year ago, you see that the numbers from last year were so lopsided and dysfunctional. Any trends you see out of today’s numbers compared to a year ago or even three years ago point to a bubble. Bruce said this is a feeling rather than a statistic, and this is what is nice about statistics. If you have enough of them, you can go backwards and see that it is really not a bubble. If you take a look at even the baseline things, you see that we have not had in California anywhere an average sales month since the fall of 2006. Every single month has been below average for that calendar month since that year. Yet at the same time we have people talking about this explosion of sales, which is ridiculous. We are not even to the midpoint or the average here. If we take a look at prices right now, no matter how you do the numbers out there you see that we are just 1/3-1/4 off bottom depending on how you define the bottom or the peak. If we start looking at the underlying things, such as affordability and how much people actually pay as a percentage of their paycheck, those numbers are as low as we have ever seen them. If you take this number and realize the interest rate difference, the monthly payment that emerges is still the all-time sale. If you go out there and look at the median-priced home in Southern California and assume the regular 20% down and 30-year fixed mortgage a year ago, you see that payment was less than $1,000 per month. That was what you monthly mortgage payment was, and now it is all the way up to $1100.
When John talks about overreaction, part of this was on the sales side. Now you have overreaction on the legislation side. You have a Dodd-Frank bill that was created, and Bruce wondered how restrictive this will be in curtailing what would happen normally. John said he does not know if Dodd-Frank will be as big an influence as some of the other policies that are made out there. Right now what we really have to watch out for are these overly cautious lenders. The only way this will really be rectified will be by an influx of new lending institutions. Right now there are too many institutions that have somehow survived the last ten years despite being managed by overly restrictive risk-management people. The bean counters who mopped up the mess did what they had to, but now is the time for a little bit more innovation and thinking.
Dodd-Frank will not address the fact that a very wealthy person might want a second home out in the Coachella Valley and finance it. Somebody who might easily qualify for that just won’t do it because those loans for a second home do not exist. They used to in an ARM, possibly with a higher down payment and interest rate. However, these are not out there anymore; so you have a lot of pent-up demand. You have a lot of empty nesters and retirees who would like to sell the family home to somebody and then move. They cannot do this right now, either because there is not enough equity in the property they want to sell or because they just wouldn’t qualify for a mortgage.
John said he is not sure Dodd Frank itself is the problem, although it is certainly out there as an issue. The real problem is that the lenders are way too cautious right now. The overlays are much more restrictive than the policies that are in place. However, with the overlays it becomes almost impossible to say yes. All the loans at one time were really quite good, and now they are the poster children for the subprime things and are just not available right now. These include low down-payment loans, negative AM, interest only, ARM, stated income. All of these things were really quite useful back when it came online. In the late 90s Diotek came out with the 125 loans. Now would be a good time for these to come online again. Unfortunately, they would not work within the framework and would have to be a lending institution working outside of the framework of what the current lenders are working within.
Bruce just started looking at reports since he is studying to write another one himself. One of the reports he just scanned was from FHA, and in the comments section it said that when we look back to 2010-2012, we will see those years had the safest body of work ever created. This is where the pendulum swung. We go back and look at so-called vintage when it comes to foreclosures. We start asking when the bad loans were made, who made the bad loans, and we are still looking. We had the third quarter of 2006 as the vintage year. Even today after four years, those loans made during that period are the ones that are the worst and still being foreclosed on at the highest rate. What is really interesting about this is that FHA was not much of a participant during that year, but they got the downturn because of it. Therefore, when they participated in 2007-2009, they were trying to catch a falling knife.
John has been hearing a lot of people say that a lot of these things happened because the government decided that everybody was going to receive a loan. This was absolutely not true. John went to an MBA conference up in San Francisco to the Moscone Center, and one whole day of the conference was a lot of panel discussions on how we get the government, including Fannie, Freddie, and FHA to come on board to this new world of mortgage finance. We ask why we cannot get them to loosen up the way we have and participate in today’s mortgage environment. Barney Frank, the author of Dodd Frank, is on recording trying to do just this and make sure Fannie and Freddie get more aggressive. Now he realizes this was a terrible mistake in which he conveniently forgot he participated. Although they participated, they were late to the party when it came to this. Over the last three months they decided to crank it up a little.
Regarding the FICO scores, another big difference is that the FHA during those years had half of their loans with FICO scores under 620. In 2011, it was 3%, so they have definitely reined it in. Oddly enough, they reined it in during the time the monthly payment was less than rent. Looking at all these loans, it is interesting to see how many loans have gone bad but have failed to see the loans where people stuck it out and they have not gone bad. There were a lot of people who did this, including first-time buyers, minorities, and others who barely got in by the skin of their teeth. These people have been hanging on by their fingernails since then. The question is if they have hung on this long, then what are the odds of them not making a payment. Bruce thinks all of the worst is behind us.
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