BluefoxToday blog : September 2007

While the public is eagerly debating the current state of the reeling real estate business and all the failed mortgage lenders, keen industry observers are focusing their attention on a new development. Even though it's an essential element in a home sale transaction, overall it receives very little notice. We are talking about the appraisal.

You are starting to hear stories from different areas of the country where appraisals are coming in high from the price buyer and seller have agreed on. How is that? If you recall, not too long ago appraisals typically couldn't keep up with the value increases and subsequently turned up low. And everybody was complaining because many deals were now in jeopardy.

One reason is that the high inventory of homes available for sale forces sellers to cut their price to attract buyers. And to top that off, buyers are aware of the situation and do their best to negotiate the price even lower. All this maneuvering can reach quite a bit below actual and reasonable value and of course works against the seller. Well, isn't that what the buyer's market is all about?

Appraisers normally use local recorded price data and tax assessments to figure out their numbers. But the blown-up prices of the recent past, hidden concessions and flat-out fraud have distorted the information they consider. Therefore the so-called comps, or comparables, can be off target, usually on the high side, and mislead whoever reads them.

Also, the marketplace today can be shifting rather quickly in many cities, towns and even subdivisions and the appraisal field simply can't keep up with it. One way to find out more about property values is to look for sources beyond the recorded data, like talking with agents about listings and particular neighborhood developments.

How would you like to be a seller who sold for much less than the appraisal?

Roughly ten years ago Turnberry Associates jetted into town and bought some land in the north end of the Strip, on Paradise by the Las Vegas Convention Center. It had already carved itself a stellar reputation as a luxury condominium developer over in the Miami area, so valley observers knew what they were up to. The locals were quick to point out, though, that they had chosen a poor location for the project.

Despite the friendly advice the firm built the Turnberry Place on the parcel, an enclave of four 38-story towers with a total of 720 units. As word spread, it soon turned into a favorite among the luxury condo-affording crowd back in Florida and elsewhere in the country, even abroad. Consequently, they had no trouble with sales. With that it became the undisputed catalyst for the present boom in luxury condo development around the valley. To read the entire article, please click on the link in this paragraph.

The general perception out there is that Sin City is a one-industry town. It's easy to see why when all you see from here are pictures and video footage of the Strip at night and those huge hotels and gambling halls and Cirque du Soleil shows. The Las Vegas Convention & Visitors Authority, or LVCVA, is the principal marketing arm for the city and is undoubtedly doing a wonderful job for the resort sector.

Tourism and gaming certainly is a major player in the local economy, but is it as big as everyone thinks it is? If you look at the percentage of the work force the hotels and casinos employ, which is 18, it isn't that dominant now. Ten years ago the number was much higher at 28%. These stats, by the way, were provided by Las Vegas analyst Jeremy Aguero. It's fair to say that 30 some years ago Vegas probably was a one-industry town, but today it's far from that, and it's better off that way.

The resort business itself is also diversifying. MGM Mirage recently made a bold move and sold half of the CityCenter project to Dubai World. The holding company for Dubai also bought a bunch of MGM Mirage's stock and is MGM Mirage's partner in a future mega resort development on the Strip. Another new entry is the Elad Group based in Israel that has plans to build a luxury resort on the New Frontier site. The anchor building of that is supposed be a copy of New York's Plaza Hotel. Clearly, foreign investments are making inroads into the Southern Nevada economy.

While others are making investments here, local resort companies are eyeing casino projects abroad. Currently one of the favorite locations is Macao where Las Vegas Sands just opened the Venetian Macao and Steve Wynn has a presence there, too. Not to be left far behind, Harrah's Entertainment is also looking into the Asian market. Besides that corner of the world, they are now thinking about taking the Strip-type resort to Europe, South America, the Middle East, Russia and India. Likely to other places, too.

By diversifying its business base, Las Vegas is moving rapidly into the main stream of the American economy and will be from now on affected by its shifts, for better or for worse. On the other hand, these resort operators who are expanding abroad are insulating themselves to some degree from major economic disruptions that can happen here.

Although the Fed's recent key interest rate cut has only a marginal effect on mortgage interest rates, it does signal the financial community that the government is now carefully monitoring the worrisome housing developments. It provides more liquidity to the overall system for one and also assures the banks that Washington seems to be willing to step in if really needed. It's clear that the marketplace is unable to alone navigate these hurricane-force winds.

The Assistant Secretary of the Housing and Urban Development, or HUD, spoke in the same supportive tone the other day. She is part of an obviously broader effort to spread the message that the credit markets are being observed with a keen eye. And sometimes that is what is necessary to calm everybody down. Let the players in the field know that despite their past indiscretions the big brother won't allow the system to fall to pieces.

The HUD Assistant also gave her full support to the subprime mortgage. It's very true that it plays an important role in the housing industry by boosting home ownership. "Subprime mortgages democratize credit," she said and will keep its place in the program mix. That'll be just fine.

Another point she made was that the government will do more to advance financial literacy. That would of course help everyone, including home buyers, but the core problem with the subprime fiasco appears to be lack of personal responsibility. How do you teach that?

It's that time again. The 2007 Summerlin Arts Festival, ably put together by La Strada dell'Arte and Celebration of the Arts, will be held this weekend to the delight of all art enthusiasts. The exact dates and times are September 29 and 30 from 10am to 5pm on both days and location is Summerlin Centre Community Park. Be there, they say.

The outdoor event expects to have about 120 amateur and professional artists show and sell their creations. Besides all this art, the festival also offers plenty of live entertainment. Among them is the Academy of Nevada Ballet Theatre which performs each day a couple of times. A chef from the Le Gordon Bleu College of Culinary Arts Las Vegas will hold ice and pumpkin carving demonstrations, obviously a fun event.

The Grand Canal Shoppes at the Venetian will send over a group of roving entertainers, although there is no word as to what exactly that includes. It's a surprise, I guess. Sixtiesmania and jazz musician David Van Such provide the live portion of the music program. And if you get hungry or thirsty while cruising the grounds, food and beverages will be on hand for purchase.

It is shaping up to be an entertaining weekend over the Summerlin way. More info at summerlin.com.

This financial product has been around for a while, since 1989 to be exact, but its impact on the home loan scene has really been minimal. So far at least. One reason seems to be the lack of public awareness, meaning the marketing side has been lackluster. The other thing is that those who know that it's there are uncertain how it works and even have some reservations about its benefits. So, let's go over some of the more important features right now.

The starting point is that it's for seniors who are 62 or older.

• The title stays with the homeowner.
• There can be an existing mortgage on the home.
• The money is tax-free.
• The money is paid out either in a lump sum, monthly payments, line of credit or a combination of these three.
• The money can be spent on anything; home renovations, medical bills, pay off credit cards, travel etc.
• There are no income or credit qualifications.
• Homeowner remains responsible for taxes and hazard insurance.
• Closing costs are similar to the ones with a purchase mortgage.
• Typically costs can be financed with the reverse mortgage.

One concern among seniors is that they could at some point owe more than what the home is worth. It can not happen. Reverse mortgage is a so-called non-recourse loan, meaning that the lender is prohibited from going after anyone or an estate for repayment.

A reverse mortgage makes sense if you plan on staying in your current home, say, more than three years. Home equity loan would be better if you intend to move out sooner than that. Also, many seniors have a lot of equity that just sits there and if they worry about making ends meet, tapping into the equity could be the solution. It would preserve your financial security.

Knowledgeable users of the program enjoy drawing down the accumulated equity while continuing to live in their homes and best of all, there are no monthly payments to tangle with.

Since the product was introduced in 1989, about 300,000 of them have been taken out. By one estimate there will be around 16 million by the year 2010. That's a big leap.

According to the latest forecast by Moody's Economy.com, the nation's home price picture is going to be rather smudgy in the coming years. The study it conducted analyzed the high and low ends of real estate values in the targeted markets, a total of 379 of the largest ones. Only the median prices in the single-family category were used.

The survey came up with an above 10% drop in 86 of the cities, which is bad enough, and over a 1% slide in 290 other markets. That's just about all of the areas the study covered. When they averaged out the decline, it came to 7.7%, a nice uptick from 6.6% that they published in June. Evidently we're heading in the wrong direction.

As expected the hardest hit cities are in the Sun Belt where prices typically raced higher than anywhere else during those rocket-like years. They have tons of foreclosures and plenty of unsold new homes that continue to flood already large inventories. Stockton, CA, heads the parade with an estimated slide of 25% and right on its heels come two Florida markets, Palm Bay/Melbourne and Sarasota/Bradenton. Reno/Sparks is a surprise entry in fourth place, a market I thought had more going for it than that. Las Vegas comes in at number 10, a supportable position.

Moody's has some good news to pass around, too. It is projecting growth in areas where prices have generally remained low. Brownsville/Harlingen market in Texas, where the median single-family house is priced just below $120,000, should improve by 7.9%. Of the bigger cities at least Buffalo and Pittsburgh are on course to make gains.

For most of the country it's going to be a bumpy ride through some foamy rapids. 

Washington is in high gear again, after a long hot summer, immersed in talks about how to deal with the current mortgage dilemma. The latest round this week involved the Congress and some of the key players in the government, like the Fed chief Bernanke and Treasury Secretary Paulson.

The flavor seems to be that lawmakers are under serious pressure from the public and special interest groups to legislate a lot to help homeowners in trouble. On the other hand, the government and the lending industry favor a less interventionist approach, the basic preference being to rely more on the marketplace to nurse itself back into good health. I think we need a little bit of both.

One crucial point to come up in this week's hearings was that troubled borrowers should definitely call their lenders to discuss possible solutions to their difficulties. As it stands now, 50% of foreclosures take place with the homeowners never contacting the lenders. That is a bothersome figure and you wonder why is it so? Besides that, lately the banks have been calling delinquent borrowers to offer help and seldom do the calls get returned. Another puzzling development.

Lawmakers are also eager to increase the limits on the loans Fannie Mae and Freddie Mac, the so-called government-sponsored enterprises or GSEs, can purchase on the secondary market. Supposedly that'll ease pressure on homeowners in distress. But Bernanke urges caution on this, saying that as more mortgages will enjoy government backing, making them virtually risk-free, that in turn will erode market discipline. And he's right. Lenders would continue acting with less than proper oversight on their loan portfolios since there is very little to worry about. If such a change is enacted to improve market liquidity, Bernanke would prefer it to be only temporary.

While the decision makers over in Washington are seriously tackling the current lending issues, we in the field hope they don't overreact and make matters worse.

The Smithsonian's National Zoo and Friends of the National Zoo sponsored an Earth Day contest by asking children to come up with ideas on how to cut back on carbon monoxide emissions. A concept that has garnered a lot of publicity in recent years. The contest was appropriately called Stomp Out Carbon. When Shianne Freebairn saw it, she quickly signed up in the 11- to 14-year category, determined to make a difference.

And her entry won the national challenge. What she did was send out 10 letters to local firms that employ a fleet of vehicles during their daily operations and asked them to stop idling their cars and trucks in order to decrease emissions. Three of them replied to her inquiry and promised to work on limiting the idling time. They were FedEx, DHL and AWG Charter Services.

Her efforts won her a nice trip for four to Washington, D.C., a digital camera and a gift basket full of all sorts of eco-friendly articles. Besides doing the famous museums and monuments while out on the East coast, she also visited with her family the National Zoo where they incorporate earth-friendly materials in their exhibits.

"I think more people need to realize what's going on, and take action and help." That's Shianne's wish. I fully agree and congratulations.

Photo by jamesmcdonald

The recent headlines about the foreclosure stats compiled by the Mortgage Bankers Association, or MBA, informed the world that the amount of loans sliding into trouble is the highest ever for this survey. It was started in 1953, a few moons ago. Numbers like that will make you wonder what will come next. It's particularly hard on those affected by it. Yet, let's take a deeper look at the situation and see what it tells us.

First of all, around a third of homeowners live in houses that are debt-free. Yes, there is no mortgage to burn at the end of the day. That's good news. Among the rest two-thirds who have prime loans merely 2.6% are 30 days or more late nationally. Meaning, 97.4% of the loans granted to borrowers with a top FICO score are current on payments. Still pretty good.

When you look at the subprime segment, the figures are clearly worse. Nationwide 14.5% of homeowners are more than 30 days behind on their mortgage obligations, a substantial hike from the prime sector. Again, if you peer at it from the other angle you'll see that 85.5% are on time. Overall, it hurts, but doesn't seem to be way out of hand. Not yet anyway.

And then you have the fearsome foursome, the four states, Arizona, California, Florida and Nevada, that are comfortably ahead of the pack in delinquent home loans. They were the leaders during the boom years in price appreciation and surprisingly, in a complete reversal, they are now galloping up front with busted loans. Isn't it funny how it works. The MBA's chief economist states that without the soaring foreclosure rates in these four states the national filings would've actually shown a decrease. How about that?

So, just reading a news release on the Internet or in the paper or hearing a TV news program rush through the stats gives you a rather one-sided picture of the whole, I'm afraid.