Patrick Stone has some 40 years of experience in the title and mortgage industries in his back pocket. But before real estate, he was an oyster diver.
This week, Stone, executive chairman and founder of title insurer Williston Financial Group (WFG), hopped on a call with Inman to talk about his stint shucking mollusks, his thoughts on the money pouring into real estate tech, and to preview his comments at the upcoming Inman Connect Las Vegas event — where he’ll be speaking during the general session Wednesday morning.
His talk is called “The Housing Market You Want Is Here Now, You Just Haven’t Noticed.”
What follows is a version of that conversation that has been lightly edited for length and clarity.
Inman: I came across an oral history interview that you gave and it mentioned jobs you held before real estate. One of them was oyster diver.
Stone: Yes, indeed. I dropped out of grad school. I spent a lot of time in Mexico, went down there and lived in a little village and did oyster diving every day and made about $2 a day. It cost me about $1 and a half a day to live. Why I ever gave that up I don’t know. (laughs)
How did you come across that job?
In 1968, when they had the Olympics there, the central government was putting all this money into Mexico City to get ready for the Olympics. And of course, the outlying states and locales were bitching because the government was spending all the money in Mexico City, so what the government did is it funded potable water in a bunch of different locations. And this was one of [the villages]. That’s why I ended up there because it had potable water, but no tourists or anything.
I had a little palapa and the locals, they went oyster diving every day and then they would shuck the oysters and they’d sell them to a refrigerated truck that came down from Tepic, which is the capital of the state of Nayarit. We would dive and we’d get oysters and we’d shuck them and sell them and get our buck and a half or $2 equivalent in pesos. That would pay for food and a palapa.
It wasn’t really a job. It was just a way of enjoying the sun … and being healthy and just enjoying life. I woke up one day and decided I didn’t have very much money and I probably needed to get on with my life. So I came back to the States. But I did that for almost six months.
So around what year was this?
That was in 1975.
How did you end up getting into real estate?
Well, I was looking for a job and I saw an advertisement for a title examiner trainee. I had no idea what it was. But I needed a job and so I went and became a title examiner trainee. To be honest with you, it was more a function of my curiosity than anything else because it just seemed like a very static business that was done in a very traditional manner — I’m talking about title insurance — and so I just kept trying to figure out better ways to do things.
I got my real estate license and I developed residential property, developed a lot of different things, bought and sold a lot of industrial property. [I’ve] been very involved in the title insurance industry, had a major investment in a mortgage company. So I’ve always liked real estate and just let my curiosity roam.
A lot of people might hear “title” and “mortgage” and not think that it’s terribly exciting, but is there something about it that you find exciting?
I’ve always been interested in how to make things work better. This is an industry that you deal with a lot of problems. In this company, in our owned operations — between our lenders, services, direct operations and default services and all that — we probably do 12,000 to 15,000 transactions a month. There are 50 to 100 of them that are completely off the grid.
They’re very unique, they’re very different. They require problem resolution, they require some thought, they require you to try to figure out ways to do things where people haven’t done them before and do so in a way that you protect the clients and get the transaction closed.
So, it’s a pretty static industry, but there’s enough variation in real estate state to state as you go around the country and the different types of real estate that there’s always something happening that keeps me awake.
Did you take anything from oyster diving that you brought into real estate?
Do you know what you’re going to talk about at Connect yet?
I spoke in New York in January and I talked about how I was more optimistic than everybody else because I saw the affordability gap closing. I explained to the people there … that you’re actually starting to see wage and salary growth and we’re actually seeing a fairly significant slowdown in house price appreciation. So the affordability gap is going to close.
Well, it’s actually starting to close now. So I’ll probably elaborate on that point a little bit and then talk a little bit about the historic norms in the real estate market because 90 percent of the people there haven’t been in the business over 10 years and they don’t know what a normal market looks like. And we’re probably headed back towards one.
So you’re going to talk about the affordability gap closing. Do you see that happening everywhere or just in certain markets?
It’s like everything else in real estate. We have all these national averages that are totally irrelevant because every market is different. But in most markets, the affordability gap is starting to close, in some markets noticeably so. In some markets, not quite so quickly. But you’re starting to see it close fairly dramatically in a lot of places.
Appreciation will slow down under 4 percent this year, probably be somewhere around 3.7 [percent] for the year maybe. Maybe a little higher, a little lower, hard to say at this point, but it’ll be under 4 [percent]. And you’re going to see wage and salary growth at 3.2 percent this year.
So you’re going to have a situation where people who have been saving money, are working and are feeling more confident are going to be feeling like they can not only afford to buy, but it’s the right time to buy. So I think you’ll get back to a more normal market. You’ll see more first-time buyers and I think it will be good for the next five, six, seven years. We’ll see.
Do you think that inventory will increase?
Well, I think one thing that we haven’t had … when you have a normal market, you have builders building subdivisions with starter homes. This year’s the first year in about nine years that we’re actually seeing major builders start to build subdivisions of starter homes. Lennar’s building them. We haven’t seen that in a long time. [When] you start having starter homes and homes in the affordability range being built, then you’re going to take care of that.
Plus, in a normal market you start seeing a move-up market, which we really haven’t seen much of that at all. I’m a little bit more confident. In a year it’ll be back pretty close to normal. It’ll take a year to work out. But we’re seeing it underway already.
What do you mean when you say “normal”?
Well, a normal market is you have roughly 40 percent of all purchases are first-time buyers. You have a significant move-up market. [People] used to stay in a home six, seven years, now they’re staying in a home 10 years. So you’ll see that come back down.
You’re also going to see older people stay in a standalone home longer, and some of them are going to actually start moving down, which we haven’t seen in a while. So I think you’re going to have a market where you have more first-time buyers, more new homes at all price ranges, not just the upper end, and then move-up buyers. So I think it gets to be a little bit more sustainable, a little bit more robust and a little bit less, I don’t want to say, emotional, but we’ve certainly been on pins and needles for a long time.
This has been a very artificial market. One of the ways that’s manifested itself is that you had a preponderance of higher-end homes, which just really distorted statistics and people’s perception. People that buy homes or were inclined to buy homes were people with money and what kind of homes did they buy? They bought higher-end homes, didn’t they? And that sort of distorted the statistics and the perception of the market.
What kinds of takeaways do you think you want the attendees to come away with from your talk?
That they’re in the right business. They are in a business in which people will need their skill set if they’re willing to put the time and effort into learning their market, learning a little bit about the economics of their market, understanding the products in their market, so they can advise people in a knowledgeable manner that are looking for a home.
And I think they should be relatively optimistic. The biggest problem is when demand falters, and right now it looks like demand is going to be good for the next six, seven years. You’ve got a lot of household formation. I think things are good and if people put the time and effort into learning their business and learning their market that they’re operating in, they will do real well.
So thinking of the real estate industry itself, there’s a lot of upheaval right now. There’s iBuyers, there’s commission lawsuits, there’s all kinds of things going on. What do you see as a state of the industry right now?
I see an industry and an economy that is getting towards the end of an economic cycle and with that, you have a lot of dollars chasing fewer and fewer and fewer ideas. And you see it in every economic cycle, you see tremendous amounts of investable capital being deployed on new ideas to the point sometimes where you go ‘That doesn’t make any sense at all.’
If you look at the iBuyer market, is it a functional market? Yes. Is it a huge market? No, it’s not. And it’s not going to be. It’s a convenience thing for people who want to sell their home quickly, or people that are moving and need to sell their home quickly. For the average person it’s going to be questionable. They’re going to look at the discount and they’re going to say, ‘I don’t know. I don’t think I’m that interested in that.’
You see a lot of funding coming into things like iBuyers and coming into technology. The amount of money coming into technology in this industry is, pardon me, but it’s stupid, and it’s being done by people who don’t even understand the industry.
Every time you go through an economic cycle, you see it. Is it bad? No. Is it horrible? Is it going to cause a lot of disruption? No. But it’s mildly amusing when you see some of the valuations that are being given to tech companies and some companies that have some viability, but not to the level that their valuations would suggest.
When you say stupid, do you think these people that are investing all this money, they’re not going to get a return on their investment?
Yeah. I’ve seen it, I think, four times in my career. I’m very involved in private equity and I’m just stunned sometimes the amount of money that gets thrown at things. I will just tell you that it’s mind-numbing how much money gets allocated without really understanding what’s going on around assumptions that are somewhat superficial.
Are there any assumptions you think are driving this money that you’d like to dispel?
No, I’m not going to go there for a lot of obvious reasons, mainly because I do business with all these people. But I will tell you this: there’s more money chasing fewer deals now than any time since maybe 2006 or 2007. I’ll give you an example.
Corporate debt is at an all-time high as a percentage of gross domestic product. I think it’s running about 47 percent of GDP right now, which is, historically, a lot of corporate debt. Now people go, ‘Well, yeah, but it’s not a problem because debt service is way low.’ That’s because interest rates are low. If interest rates stay low that is not too big a problem.
But how long do you think interest rates will stay low if we keep this damn trade war going? It won’t last forever, trust me. So there’s something to watch. And that could be a bubble that creates a problem.
The other thing is people go, ‘Well that’s a lot of triple-A, triple-B debt.’ Well, that’s because the ratings around corporate debt are getting almost as superficial as ratings were around subprime mortgages before the collapse in 2009. It’s insane how blind people are to this. So you look at corporate debt, that’s a problem. Debt service is low because interest rates are low. Interest rates go up, it will be a disaster.
So you look at that one, that bothers you a little bit. How about VC money? Remember, the dot-com boom? There was $87 billion worth of VC money during the top of the dot-com boom. There’s twice as much venture capital money in the United States now than there was during the dot-com boom. Forty percent of it is in tech in the West Coast. Hello, we’ve seen this movie! I look at this and I just shake my head and laugh.
But if there is a problem with corporate debt or if there is an issue with rates going up, will it impact all the economy? Yeah, but I don’t think [it will impact] real estate. In some ways if the corporate debt bubble bursts, it will take real estate out of the target. We’ve been front and center now for 10 years because we got blamed for the last meltdown.
So in some ways it will be almost nice to have us get off the front page. I don’t think real estate will suffer as much next time. I don’t think we’ll be the cause of the problem, nor will we be blamed for anything. So I’m not so worried about real estate. I do think real estate will be functional and good for the next few years.
What are your hopes for the next 12 months and what will you be working on?
I’m hoping we get the trade war behind us in the not-too-distant future. That will start impacting inflation and inflation will cause interest rates to go up.
One of the reasons we have low interest rates is globalization. I could show you a chart that shows you the trade deficit. And I can show you an exact offset to the trade deficit based on foreign capital investment in U.S. financial instruments. In other words, the amount of money, the surplus of money coming into this country investing in financial instruments almost exactly offset the trade deficit.
So the idea of eliminating the trade deficit is sort of superficial and stupid because we buy more than we sell, in part because you can’t measure a lot of those services, but we get the benefit of the money coming back and buying our financial instruments and keeping our rates down.
Globalization has kept the cost of goods down. You can buy a flat screen TV now cheaper than you could five years ago, right? You can buy a washing machine cheaper. Globalization’s actually kept the cost of goods down and it’s kept our interest rates down.
So if the trade war goes on for another six or nine months — Katy bar the door. We’re going to have inflation, with that rates will go up. With the amount of corporate debt out there, rates don’t go very much before it starts hurting, especially in corporate debt.
So I’m optimistic if the trade war gets resolved here in the next three to six months. If not, then I get a little bit more pessimistic.
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