The lay of the land in L.A. is this -- mortgage rates are rising. The percentage of people who live here and can afford a home is dropping. And survey after survey, for months, even years, indicate that Southern California home prices are overvalued.
To professors and think-tank types, these factors mean a correction hangs over the real estate market here like the sword of Damocles. But to the Donald -- yes, that one -- that’s just some egghead noise that doesn’t begin to muss his shiny head of hair. From where Trump is sitting, whether it’s his fake boardroom on NBC’s hit show “The Apprentice” or one of his multimillion-dollar properties, the billionaire tycoon doesn’t foresee home prices dropping anytime soon. In fact, he believes they’ll continue to ascend, much like his gleaming Trump Tower.
Mr. “You’re Fired” is jetting into town to put his mouth where the money is, the still red-hot Southern California housing market. Next weekend, he’s the headliner in a two-day real estate seminar at the Los Angeles Convention Center whose ad slogan is, in case you missed it on bus benches, billboards, newspaper ads, and in radio and television spots: “One weekend can make you a millionaire.”
Of course, the businessman-turned-TV celebrity won’t have to wait an entire weekend to become a millionaire yet again. He’s collecting a cool million plus expenses for 60 minutes of Trump talk before an anticipated crowd of 25,000, who for all practical purposes, constitutes another generation of Golden State prospectors. Trump apparently is prepared to force himself to discuss his amazing financial wizardry and as a bonus will also reveal how to use revenge as motivation. (It’s unclear whether Omarosa and Audrey will be allowed to hear this portion.)
The big show, which will also feature appearances by "#1 Peak Performance Success Coach” Tony Robbins and hip-hop entrepreneur Russell Simmons, is being staged by the Learning Annex. Not surprisingly, the New York-based company famous for its multi-city seminars, workshops and classes such as cardio striptease and tarot card reading is touting the upcoming real estate expo less like a hard-nosed business event than a Gen-X and boomer-friendly rave.
“This thing is a monster,” said Trump, who will pocket $2 million more for similar appearances in Chicago and New York later this year.
“It’s a mega-event,” added Bill Zanker, founder and president of the Learning Annex. “L.A. is responding like wild. Everybody in L.A. is talking about real estate. It’s the new aphrodisiac.”
Moments later, Zanker said the event would be “the new type of rock concert.”
The slate of classes will cover more than 70 topics, including: “The Lazy Way to Create Real Estate Wealth,” “How to ‘Quick Turn’ Real Estate in Los Angeles With No Money, Credit or Risk,” and “How to Get Free Money From the Government for Real Estate.”
Got the concept? Work a little, make a lot -- very quickly. More than a few are skeptical of the get-rich-quick aura swirling around the event.
“The implications for these seminars is that there is an easy way to play the game. Just follow these few rules and you too can become an instant millionaire,” said William Poorvu, author of “The Real Estate Game” and a professor emeritus at the Harvard Business School in Cambridge, Mass. “My view of the game is very different. To succeed requires hard work, persistence and experience.”
Brother, you have come to the wrong town.
To be sure, there are signs aplenty that even in booming Southern California, where the real estate market has taken on the feel of a Texas Hold ‘Em tournament, problems could be ahead. Although historically still relatively low, short-term interest rates have nevertheless been raised by a quarter point for the last seven sessions of the Federal Reserve. Most indicators point to a continued trend upward -- just how fast and how high is anybody’s guess.
In the same way that low interest rates have fueled escalating state home prices -- 17% in 2003, 22% in 2004 -- higher ones could deflate them just as rapidly, experts say. Meanwhile, a real estate survey in the May issue of Consumer Reports reaffirmed what many others have been saying for a while: not a lot of bang for your buck in Southern California real estate. The survey, based on the local historical relationship between price and income, found Orange County was 59% overvalued. The Los Angeles-Long Beach market checked in at a mere 41%.
“Most of the failures I have seen in this field come from those who don’t understand that this is a cyclical industry,” said Poorvu. “One with 10-year cycles and five-year memories.”
More troubling to experts, however, is the unprecedented use of “interest-only loans.” According to a Los Angeles Times story earlier this month, the new type of home loan, which allows buyers to defer for at least three years paying principle, is one of the main engines behind soaring home prices. In 2001, fewer than 2% of homes were purchased with the “buy now, pay later” loans. Last year, 48% of homes were bought with them.
As long as prices rise, homeowners with interest-only loans needn’t worry, say experts. But if they stall or, worse, decline, the next move for these unfortunate homeowners might be the poor house.
A practice called “flipping,” which is drawing comparisons to the bursting of the tech-stock bubble years ago, has real estate experts worried about widespread housing speculation. The method calls for investors to hold a house or condo for a short period and then sell it for a quick profit.
“It still makes sense to buy when you can get such a low mortgage rate and if you plan to hold it 10 or 15 years,” said Poorvu. “But if you’re planning to sell within 30 days or six months, you’re just shooting craps.”
To which Trump responds: So what else is new? The doomsaying experts, Trump happily notes, have been mistaken before -- as they are now.
“The same people have been saying those same things for the past five years,” Trump said during a telephone interview. “And they’ve missed out on making a lot of money.”
Like many boosters of real estate, Trump cites a huge demand for housing coupled with a very limited supply, particularly in built-out Los Angeles. Further, as long as two key factors remain in check, home prices “will have no choice but to go up.”
Yes, interest rates are on the rise, he acknowledges, but still they are very low. Even if they go up three full percentage points from current levels, the real estate market will still be strong.
Secondly, a weak dollar means U.S. real estate is an attractive investment opportunity for many foreigners. That’s not going to change in the near future, he maintained.
“People love California. Foreigners like buying in Los Angeles and New York City. They know and visit those areas,” Trump said. “It’s a great investment for them.”
Nevertheless, the real estate conference will address the high-flying market, and whether it’s too high. But even if things go bad, as they did for Trump in the ‘90s, and as they have recently for Trump’s Trump Hotels & Casino Resorts Inc., recovery is possible. The real estate developer received a $500-million loan earlier this month that allowed the company to get out of bankruptcy.
“It’s a great company,” said Trump. “I restructured the debt of the company, reduced the debt load.... It’s a very, very strong company.
“Remember, too, it’s less than 1% of my net worth,” he added.
Next weekend’s attendees want to strike it rich, of course, but some are seeking direction over what to do next in this market. Lisa Smith, a 40-year-old administrative assistant from San Diego, is planning to sell her house soon after her daughter leaves for college. She doesn’t need that much house now -- and she’s enjoyed a lot of appreciation since she bought it 15 years ago.
“I know the real estate market is out of control and I know I’m not going to walk out a millionaire,” said Smith. “I just want some tips and tricks what to do with money when I sell.”
Others are looking to avoid past mistakes by following the Trump template. Nick Light, a record company executive from the Valley, is still kicking himself for selling a house he bought in Encino several years ago.
“If I’d have been smarter and waited, I would have tripled my money,” said Light, 38. “Hey, Donald is doing it right. Everybody can disagree with him all they want.
“He’s worth a billion. I’d love to fail like that.”