California is About to Get Boring

Bruce Norris, who previously predicted California’s housing crash in 2006, now suggests the market is entering a slower phase rather than another dramatic downturn.

Market Cycle Analysis

Norris presented historical data showing different market downturns produce varying outcomes. The recent cycle featured excessive foreclosures, but previous corrections like 1981-84 and 1989-96 showed less dramatic value declines.

Strategic Recommendations During Market Transitions

As markets mature from distressed conditions, investors face challenges. High-quality properties become expensive, forcing investors to either accept lower-tier properties or explore new geographic areas. “In a hot market, the deals you find are often flawed inventory and they sell anyway. In the bottom of the 9th inning, they don’t sell.”

1031 Exchange Opportunities

Norris highlighted 1031 exchanges as effective tools for upgrading portfolios. Investors can replace properties with deferred maintenance, distant locations, or management challenges. Beyond upgrading quality, exchanges allow trading low cap-rate properties (common in appreciated markets like California) for higher-yielding alternatives.

The Shift to Cash Flow Focus

As appreciation slows, returns must come from consistent rental income rather than price growth. Appreciation is “sexy, risky and fun. Cash flow is consistent, conservative and…boring.”

Geographic Opportunities

Norris favors Florida, where affluent retirees create steady population growth and tenant demand. Conatus prefers Texas, where business migration drives employment and housing demand. Both states lack personal income taxes — a significant advantage over California.

Takeaways

Professional single-family rental investing emphasizes consistent yield through cash flow (~60% of returns). Market normalization removes advantages from undifferentiated investors, benefiting those with sophisticated sourcing, pricing analytics, and execution systems.