BluefoxToday blog : March 2007

How serious is it? It might actually be less of a problem than previously believed. A Federal Reserve Governor estimates that ARMs, in the eye of the storm, make up only about 8% of the entire home loan market. Relatively small number. Here's a bigger number. In some calculations the lenders could suffer $300 billion or more in losses. But, that's minor when we remember that the recent tech bust ate up around $9 trillion in corporate equity. So, is it more hype than anything else?

It could possibly still get uglier, yes, but nevertheless I'm beginning to consider it merely a correction. As long as it affects only 8% of the whole market, that's all it is. An adjustment. The most aggressive lenders of the past will be either bought out or eliminated through bankruptcy. And the rest will redraw their underwriting guidelines and accept the fact that there are dire perils should you get too hungry.

How did it become such a huge issue? The media and some interest groups certainly jumped on the story with guns blazing and molded it into a major event. That has enticed the politicos in Washington to hold hearings to earn points for their careers. I guess what also fanned the flame was all the earlier talk about the real estate bubble and the mortgage report was easy to tie into that. More or less a continuation of the same. Trouble in the real estate market.

It was argued in a recent newspaper article that land is in short supply in Las Vegas for residential development. With current construction pace it will last only another six years. A rather short time. Because of that, BLM ought to auction off more of it, which call it resists. The alleged shortage appears to be a public relations move by the home building community, goes the counter argument. There is plenty of dirt left here for housing development.   

After all, Summerlin master-planned community presently has about 100,000 residents and when completed sometime around 2025, it's expected to double that number. Inspirada in Henderson is just getting started on 2,000 acres and when finished will provide housing for about 25,000 people. There are many other projects to support the counter argument. And what about the well over 20,000 MLS listings currently looking for qualified buyers? Plenty of empty houses. Moreover, as Geoff Schumacher points out in his commentary, the valley is dotted with hundreds of vacant parcels of all sizes. So, it looks like there is land beyond the six years. Timely  discussion.

Let's take the story a bit further. Whether there is enough land or not, it has become very expensive over the years. With that house prices have been pushed up quite a bit and now the scenario turns to a large extent into an affordability issue. Which is one of the reasons for the current slump. That's why some developers are taking their projects to Coyote Springs 60 miles north of town and to Northern Arizona that should experience brisk construction activity once the new bypass bridge over Colorado River is finished. If we run out of land here in the valley, there's always the next valley.

I've written before about the subprime jolt and who some of the culprits are. The real estate investor, better yet the flipper, is one. He feasted early in the cycle on the rapid increase in home prices by acquiring property and then unloading it in a matter of days or weeks for a nice gain. Then he did it again, bidding the prices ever higher, until it all tanked. Has that happened before?

The Feds are another one. Several Federal agencies are charged with supervising the mortgage market and for some unexplainable reason none reacted forcefully enough when the murky clouds began gathering on the horizon. Now it's too late. The Congress is presently holding hearings on this. Let's just say that they should avoid applying overwhelming measures to correct the mess. That would just make it worse. 

Now to the main attraction of this blog. The homeowner. A recent survey discovers that a surprisingly large portion of homeowners don't know what type of a mortgage they have. The exact percentage is 34. That's a lot. A mortgage is to most people the single largest debt they'll ever sign for. Shouldn't they take it more seriously than that? It's a major financial obligation. What is it? Ignorance?

It's true that the home loan market today is quite complex. There are so many different products out there that even a seasoned lender has his hands full in trying to figure out what's going on. The benefit of that diverse product selection, though, is that now the borrower can pretty much get a custom-made loan that meets his particular needs. Years ago it was only a 30-year fixed and that's it. And, there are some fast-talking loan salesmen around who won't take a no for an answer. Some also misrepresent program features just make it happen.

Still, as was mentioned before, this is a huge debt to most homeowners. More than a car loan, more than a wide screen TV loan. It's serious. In my view, they do bear partial responsibility in this subprime setback. By doing business with lenders with questionable morals. By agreeing to take on loans they didn't fully understand. Basically, this is what it boils down to, by not doing the necessary research before even looking at a house or thinking about a refinance. I think the lawyers call this due diligence.

Although home price increases nowadays are leveling off, the unbelievable surge in the recent past has left many homeowner candidates out of the picture. Valley incomes have a way to go before catching up to that real estate escalation. With the median household income less than $50,000 and employing the NAR Housing Affordability Index, southern Nevadafares rather poorly using this criteria, according to Keith Schwer from UNLV's Center for Business and Economic Research.

It appears that resale houses are offered at a lower cost when compared with new homes, but upon looking at the price difference closer, builder incentives, which often are attractive indeed, narrow the gap considerably. In many cases to a level where there is no difference at all. So what are you to do? It's an issue between a mature neighborhood closer to town with wide streets or a new area away in the suburbs and the pros and cons associated with each. What are your preferences?

That's about the price of a home. Financing is equally important. ARMs and interest-only programs feature lower monthly payments than 30-year fixed mortgages, but there are disadvantages to take into account. ARMs usually adjust upward after a period and interest-only loans do not reduce the principal balance. A 40-year mortgage also has a lower payment, but the other side is that the interest rate is higher and equity build-up is slower. A mortgage really is a planning instrument and should be integrated into your overall financial objectives. It is prudent to carefully weigh which program fits your situation the best.

The subprime market lenders that in the past helped many purchase a home are experiencing powerful turbulence right now and their underwriting guidelines are tightening as we speak to stop the bleeding. This is bound to cause additional difficulties for the market segment.

Las Vegas luxury condominium market is obviously maturing. Maturing in a different way I would say. When Turnberry Place first opened a few years ago, the average age of a buyer was 62. The owner was independently wealthy and often retired. That's the market the developer carefully catered to. At Turnberry Towers today the average age of a buyer is in the 40's. See what I mean by maturing in a different way. The age is going down, but the market is said to be developing. Maturing.

Why is the age going down? The market at the very upper end of the price scale is limited. Rather narrow. For Turnberry to keep selling luxury condos, it had to build a product that appeals to a wider audience. So they designed the homes in Turnberry Towers smaller. Instead of putting 300 units into a hypothetical structure, they now can fit 400 of them in it. With the smaller size they can also drop the price to attract a larger base and still meet their financial goals. In addition, the amenities and features in Turnberry Towers are more accommodating toward a younger market.

Is that good for Vegas? I'd say so. As it stands now, lot of the high-rise condo windows are dark in the evening because they are second homes or investment properties. It appears that with the younger ownership there are going to be more owner-occupied units and these residential buildings can start competing with the resort towers in lit-up windows.

Let's talk about it some more. There are multiple Federal regulators tasked to oversee the mortgage marketplace, from the Federal Reserve to the Office of the Comptroller of Currency to the Federal Deposit Insurance Corporation and others. In essence, a whole group of them with a specific area to monitor. What were they doing in the last several years? Not enough, it seems. To their defense I must say that some have sounded the alarm, warning about the lax underwriting guidelines and the Option ARM product, for instance, but did so without any larger following. Only now is Congress getting involved when the dark cloud is moving ominously closer. The important thing at this point is that the regulators refrain from overreacting. Adjustments must be made and pronto, but is has to be step by step with industry input. You don't want to suddenly jerk the home loan market to the other extreme and pulverize it.

Secondly, any bank that originates mortgages usually bundles them and then sells that bundle in the secondary market. There they are securitized and sold on, mostly to institutional investors. These people are considered professional who certainly understand risk and how to evaluate it. Or do they? They are highly trained to do just that. Well, why then did they buy mortgage-backed bonds with stated income and Option ARM loans in the portfolio?  They wanted to make more money because the yields were nice and to get promotions. The usual. When the cat's away, the mice will play.