BluefoxToday blog : November 2008

Little by little more plans are being announced regarding new commercial and residential real estate projects to be built throughout Southern Nevada. These are for the most part the first steps in the long process but show that a few developers are coming out of hibernation to prepare for the moment when they can actually start going vertical. They are anxious to get cracking as soon as the market conditions allow it.

Triple Five Nevada is among the front runners in this. Its plan calls for a good-sized mall to go in the Centennial Hills area in the northwest corner of the valley. The project was actually supposed to break ground this fall but for well-known reasons it has been delayed at least until early summer. Should it take off then it could open by the end of 2010. Besides the standard mall configuration of big-box retailers, restaurants and smaller stores in multiple buildings, the preliminary draft also includes two condominium towers.

The residential component makes the project intriguing. The city is nowadays awash in condos that aren't moving well at all. How long it takes to absorb the existing inventory is tough to estimate but bringing more condominiums on the market in the near future might be a bit premature. If the price points are in the middle and lower end of the scale they could have a reasonable chance. For the reason of a saturated market Triple Five Nevada is in fact thinking about adding a hotel to the project and that way reduce the condominium segment. This might make the most sense right now.

When the development was first announced some time ago it was called the Great Mall of Las Vegas. Lately, though, it has carried the name Streets of Montecito. Either name appears to be fine for good many northwest residents as long as they get their own mall fairly soon.

The weak economy is forcing many Southern Nevada resort operators to revisit their master plans. Not too long ago the trend was to acquire land on the Strip and almost anywhere else in town with idea of building more hotel rooms, casinos and luxury condominiums because the traffic seemed to be there. Now the focus has shifted rather dramatically away from further expansion to just being able to survive this nasty downturn.

MGM Mirage wants to do just that by seeking to unload some or all of the raw land it owns here. It has several choice Strip lots to offer, in addition to multiple parcels elsewhere in the valley and in the entire state. These sales proceeds would go a long way in shoring up its depleted bottom line and in turn help in the completion of the massive CityCenter project that has encountered some financing issues. Actually, that seems to be the main reason to the exercise.

How much will the land sales bring? Right now potential buyers might be scarce because to get funding today for something like that is nearly impossible. Some developers could have the cash but then they wouldn't want to pay anything close to market price. Applied Analysis, a Las Vegas research firm, advises that median undeveloped land price was $524,725 per acre at the end of September, around 74% decrease from a year earlier. MGM Mirage could get its money back on some of the land if it was acquired several years ago, but any recent purchases would likely result in a loss. Still, just to generate some cash might be all they want.

Who would be interested in buying land here now? The Strip certainly doesn't need any more luxury high-rise condos. There are hundreds, if not thousands, of unsold and vacant units on and off the Strip that are difficult to market in this economy. Besides, no developer would find money for construction even if he wanted to take on a gamble. The same can be said about new resorts. As it is the present room count far exceeds demand and it's going to stay that way for the foreseeable future. The likely candidates would have deep pockets and long-range plans. Firms that can afford to sit on the land for some time until the market conditions improve. Selling today for a top dollar is going to be a challenge.

It's becoming the fad of the year that major industry lobbyists are sent to march up the long, stone steps of the U.S. Capitol and ask for federal help for their flagging businesses. The belief seems to be that Congress is the cradle of group therapy that will cure their ills by handing out taxpayer money and somehow that will turn their fortunes around. The mortgage lenders have been there, the insurance lobby has been there, the banks, the car manufacturers, the list is long.

Now it's the home builders.

They did get a modest tax credit package passed in the spring but it didn't do much good at all. Now they are aiming higher. Their current proposal, which is called "Fix Housing First", seeks a home buyer tax credit of 10% of the property's value that would face a limit of $22,000. Moreover, their wish list has a 30-year fixed rate, government-backed conforming mortgage product subsidized so that the rate drops to 3% for the first six months in 2009 and 4% for the rest of the year. The National Association of Home Builders, or NAHB, figures the interest rate initiative alone would cost around $143 billion to the government.

It's true that housing is a key component in our huge economy. When it develops a serious flu like now the whole economy starts coughing and its joints aching and making noises. In the big picture, though, their plan totally ignores the impact the dramatic rise in foreclosures is having on home values. The main focus ought to be there now, slow down and reverse the foreclosure epidemic. And with that stabilize the price levels.

What happens on the resale side is also indirectly affecting how home builders can set prices for their product lines. A good example of that is Las Vegas where existing homes in the lower end of the price scale are presently selling rather well because foreclosures have forced values way down where buyers can afford them. New homes cannot compete with that and are largely sitting vacant in builder lots.

Basically, the NAHB proposal is trying to artificially create demand for an overpriced product at the taxpayer's expense. In this scenario money would be taken out of the taxpayer's pocket one day and handed back to him the next in the shape of a mortgage interest rate subsidy and a tax credit when he purchases a new house. Think about it. Who makes money off of that?

The better way, it seems, for home builders to cure their industry woes is to halt building more homes. In other words, bring more balance to supply and demand.

Bank of America went ahead and bought the failing Countrywide earlier this year because it wanted to widen its market share in mortgages and the price was so attractive. It also knew that Countrywide had a lot of bad paper in its books otherwise it wouldn't be having so much trouble. But it figured it could with time sort it all out.

Then Countrywide was charged by 15 states for predatory lending practices and earlier this fall Bank of America, on behalf of its subsidiary, reached a settlement on the charges. Accordingly, it would modify up to 400,000 Countrywide home loans by cutting back on the principal balance, dropping interest rates and doing refinances, thus hoping to help borrowers stay in their homes. This action was quickly considered a solid boost for the battered real estate market and deservedly attracted a lot of media attention.

But the well-intentioned plan is now facing a serious challenge. B of A only has around 12% of the 400,000 home loans in its own portfolio with which it can do whatever it wants. The rest were packaged every which way and sold on the secondary market. In about 75% of these it has a so called "delegated authority" provision that was written in investor contracts supposedly allowing it quite a bit of freedom to modify. How exactly that works is now in dispute.

The investors in mortgage-backed securities issued by Countrywide believe that Bank of America is trying to settle the predatory lending charges on their backs. On the other hand, B of A feels its program will benefit both the investors and the homeowners. Go figure who is right. The investors are now talking with a law firm about this and it's a good bet that legal action is forth-coming. Unless, that is, the proposed workout terms are adjusted more towards their position.

It's possible that B of A's Countrywide acquisition gives it another headache it wasn't counting on that can drag on for a while and cost money. Perhaps lots of it. In a worst case scenario the borrowers involved here who really need the help might end up getting no assistance at all from this particular initiative. 

Overall, it has been a tough year for Clark County, Nevada, home of Las Vegas, when it comes to residential real estate. One of the bright spots has been the availability of mortgage money at affordable rates that has kept matters on some sort of a path toward a distant normalcy. Wherever that might be. The solution to that largely rests on how soon the marketplace can first arrest and then reverse the persistently high foreclosures here.

The statistics just released by Foreclosures.com for October appear to offer a ray of hope for Southern Nevada. Real estate owned, or REO, in Clark County fell to 2,653 from 3,563 in September, a nice well over 20% drop. Lenders are clearly in an aggressive mood to move unwanted property off their portfolios. What's more, preforeclosure filings also decreased, although more subtly, to 6,420 from 6,565 in September. Stats like these are eye candy to keen housing observers.

These are month to month figures and can be a touch ambiguous. As it has been for the last ten months, preforeclosures have gone up one month and then slumped the next month, in a true roller-coaster fashion. And the general pattern has been gradually upward until July of 2008 when an unofficial ceiling, hopefully, at around 6,500 was reached on the curve. If it won't go any higher and actually starts drifting lower in the coming months would make everybody a few degrees more optimistic.

The numbers year over year, however, in Las Vegas are still very scary. Preforeclosures shot up some 69% and REOs an altogether unwholesome 157.6%. In other words, there is a bunch of work to be done yet but perhaps the beginning of a new trend is emerging.

The recent mortgage and real estate troubles have sparked all sorts of efforts by the federal government to update existing rules and regulations governing housing transactions. In all honesty there certainly is some room for that, but there also were many other reasons to this ugly mess. In the spirit of doing something the Department of Housing and Urban Development, or HUD, burned the midnight oil for months and now it has released a new set of rules.  

Actually, what it did was to some degree revise RESPA, or Real Estate Settlement Procedures Act, that has been the benchmark for home purchase transactions since the 1970's. The purpose here is to give borrowers clearer information about the loans they are signing for. If that process can be simplified it works better for everyone; buyers, mortgage consultants, real estate agents, title. Everyone.

One of the main achievements of this revision is the new and improved three-page good faith estimate, the famous GFE. It supposedly puts in plain words interest rates, lender fees, possible prepayment penalties and potential monthly payment increases in case of Adjustable Rate Mortgages, or ARMs. It'll also curb to 10% that some fees can go up from the original quote. Mortgage brokers and lenders are advised to begin using these new forms by January 1, 2010.

Any time a prevailing practice can be improved is a good thing. The intention of HUD is commendable, no question about it. There is one big flaw in this undertaking, though. HUD has no legal authority to enforce these new rules. There is no legislation backing them up. HUD merely counts on federal and state regulators to demand adherence from the institutions they oversee. Well, this appears to be more wishful thinking than anything else. What is likely to happen is that some states pursue this directive with more punch than others. Consumers in states with a lax attitude toward this will see very little progress in the information they get during the lengthy mortgage application process.

Silver State's residential real estate was wounded badly in the bubble that burst so spectacularly some time ago. Of course it's not alone in it but that's scant relief. Sales at least in Las Vegas have slowed to a crawl, although especially resales have picked up lately, prices have headed south and the inventory is still high. Now another statistic is published to inform how deeply the housing mess has affected the state.

Nevada tops the list that ranks states by how many homes each has upside down, meaning the existing mortgage balance is higher than the property is worth. This marvel is also called being under water. The figures were provided by First American CoreLogic that estimates that 48% of single-family houses here are caught in this menacing vise. An unpleasantly high number. The comparable national number is 18%.

Some homeowners are more upside down than others. When one can be so by $20,000, another across the street could be on the hook by $150,000. It's the latter that makes people really think what to do about it, if anything. To wait for the market to narrow that discrepancy can take a long while. Unfortunate life-changing events can come into play, an illness, job loss, a move, and force a household's hand that requires a sale. But who has that sort of money, $150,000 to be exact in this example, to take to the closing table to make up for being that much under water? 

This First American estimate likely mirrors conditions in population-heavy Las Vegas more than the rest of the state. It's of course news the city could do without. One thing is worth remembering, however. Real estate speculators were all over the valley during the boom and those who joined in too late are now owners of vacant investment properties they can't sell or rent. Therefore, although it's hard to be accurate, it could be that up to half of these under-water houses are owned by them. What are they likely to do is easy to guess?