BluefoxToday blog : July 2008

The ink on the new housing rescue bill isn't dry yet, but Washington is already leaning hard on regulators and mortgage bankers to get their full attention focused on it and act as soon as it goes into effect on October 1, 2008. If all goes as planned, it would help some 400,000 homeowners refinance their existing costly home loans into more affordable FHA programs. 400,000 seems to be a large figure. In light of that, RealtyTrac just released a report according to which almost 740,000 homes were mailed foreclosure-related notices in the second quarter of this year alone and now, all of a sudden, the 400,000 doesn't look all that much. Yet, it should give the market some sense of stability and that's probably what it is designed to do anyway.

Lenders must be now busily figuring out how to approach the bill's intentions and honestly, its success is very dependent on their readiness to go along with it. Their reluctance comes from the fact that they are asked to take a loss on the principal balance of potentially failing loans which then would be refinanced by FHA. Normally banks don't go that route. That's a no-no. But right now they just might do quite a few of these refinances because the real estate markets in many areas are losing value anyway.

For instance, Las Vegas properties have lost a good chunk of value recently and using the rescue bill's provisions might actually save the lenders money on loans they have here. If they let homes go into foreclosure in Las Vegas and then sell them in the slow marketplace would in all likelihood cost them much more than if they would write off a smaller portion right now and let FHA do the rest. The same goes for other hard-hit areas like Arizona, California and Florida. Therefore, the banks are probably going to concentrate, at least to start with, on these states. It still boils down to a business decision, so doing refinances in the these four states will mean minimizing their losses.

The regions where values have held up better are likely to see a much more tepid approach. In most cases it probably becomes a toss-up between using the bill's terms and foreclosure. Either way the loss amount is about the same, so it's anyone's pick.  

There is a feel that the bill's aim is to guide the battered areas out of the weeds as soon as is practical and hope that the better-off real estate markets can more or less do it on their own.

Southern Nevada Water Authority, or SNWA, has a massive job on its hands. Years ago when Las Vegas was still a miniature from what it is today the Authority's task was simple. Snowmelt from the Rockies steadily supplied water to Lake Mead and that was plenty to keep the valley moving right along. In the last decade or two the city has grown by leaps and bounds and with that phenomenal expansion water has become a major issue.

Lately SNWA has been introducing a variety of different programs to encourage conservation and one of them is the Landscape Awards competition. Its aim is to raise awareness in the community of water-smart yard designs, basically referring to desert landscaping, and the effort is drawing more and more support each year. This time in the Single-family Residential Landscape Design by a Professional grouping Doug Pool's home in Summerlin took in the top award, aided by Schilling Horticulture Group. Pool's objective was to use only native Mojave Desert plants in his front yard and the result was so impressive that it won. 

Water Smart Landscape Rebate program is also making waves in the valley. It urges homeowners to convert their existing grass yards into desert landscaping and since it was initiated in 1999 almos 13 million square feet of turf in Summerlin alone has been scraped up and replaced with desert materials and plants. Summerlin is in the forefront of another trend, too, namely that since 2003 it was the first master-planned community in Southern Nevada requiring the observance of water conservation directives for all new homes built there.

These are important steps for the area. Certainly more needs to be done in the future as the city's needs grow. Right now, though, the prevailing mortgage, real estate and employment turmoil is hurting many in the pocketbook and probably slowing down homeowners' enthusiasm to spend money on anything extra, like installing desert landscaping. But the desire to help out will return.

Washington has been hard at work for a while on this huge housing rescue legislation - it'll provide $300 billion to distressed homeowners who face a possible foreclosure - and it passed the House this week. Once it gets the blessings of the Senate and the White House, it'll become law, which it is expected to do soon. Besides coming to the aid of financially-hurting homeowners, it'll also extend a helping hand to the ailing mortgage heavyweights Fannie Mae and Freddie Mac, something they both badly need.

The bill includes a lot of rules about all sorts of things, as it should so everything is as clear as possible. One area that caught my eye is the cost to the borrower.

To start with, under the legislation eligible homeowners can refinance their high-cost old mortgages to new, lower-cost fixed-rate home loans insured by FHA, or Federal Housing Administration. FHA will charge each borrower 1.5% of the principal amount each year as an insurance premium. That in itself is pretty much in line with what FHA is currently doing with their standard programs.

Here comes the intriguing part that gets everyone talking. It involves profit sharing on any future price appreciation. When the home is sold or refinanced, the owner is to pay FHA a "3% exit fee" based on the remaining principal. There is more. If the owner sells or refinances within the first year, he'll have to dish out to FHA 100% of any profits. In other words, all the potential gain is gone, less the cost of sales. During the second year the owner would owe FHA 90% of any profits and the third year it would be 80% and go down 10% each year until it reaches the fifth year when the percentage is 50 and then it would remain there for the duration.

The legislation is designed to assist homeowners who find themselves on the edge and for those who qualify, it'll accomplish its mission. But as is evident from the cost scenario, FHA will seemingly collect enough premiums and potential profit margins to cover any future loan losses, which it should do so it won't become a direct taxpayer burden. The plan, however, relies heavily on the real estate market recovering nicely in the coming years. It'll probably do so, at least in the faster-growth areas and the higher premiums and profits they collect there would then be used to cover mortgage losses in the slow-growth regions. From this cost angle alone, the program is very workable.

The Meridian Luxury Suites used to be an apartment complex within an easy walking distance to the Strip and then in 2005 all the units were converted into condominiums. Condo conversions were all the rage those days in Las Vegas. That's when the real estate market here was still doing pretty good and mortgage money was plentiful and available at almost every corner with flexible terms. But today's business environment is vastly different.

Meridian has 678 condominiums in all and only around 12 are owner-occupied, according to Clark County records. The rest are owned by investors, just about all of whom are out-of-towners. When they bought in they paid prices that were going through the roof. That was in 2005. Fast-forward to summer of 2008 and now the Meridian's homeowners association president says that the values have dropped roughly 50%. That kind of value decrease can cause many of these investors to lose a few hours of sleep every night.

Most of the investors were leasing out their units long-term but they probably weren't getting enough money to cover their mortgage payments doing so and now that the anticipated steady appreciation year after year has turned into a nightmare, they had to figure out another way to generate revenue. Either that or face a possible foreclosure. Make the investment look like a real investment.

So they came up with the idea of renting out these condos short-term. Operating more or less like a hotel and with the Strip only a few steps away, it was a viable alternative. And with a decent marketing campaign it should easily generate more rental income than a long-term leasing would.

But a couple of problems erupted soon after the program got off the ground. The owner-occupants at Meridian of course don't like to see overnight renting going on around them. They have definitely made their feelings known regarding that. That's actually the smaller of the two problems. The other is that Meridian is using residential property for transient lodging and that violates county licensing regulations. It is currently permitted to execute leases that last longer than a month and that's it. Knowing that, Clark County is now reviewing Meridian's operations and weighing its options, legal and otherwise.

Meridian is presently applying to change its status to a condo hotel, although there is no word yet as to when that might be approved by the County. Since it has been in violation of the existing license agreement for months, the County may on purpose delay action on it as a form of punishment. Who knows? The soft real estate market forced the investors to turn creative, but they also skirted local regulations in doing so.

Since last summer new home sales have been gradually declining in the valley and evidently reached the bottom of the cycle around January of this year. Since then the numbers have been pretty even, but by no means something to write home about. Yet, in the absence of losing any more ground for several months the market is obviously trying to turn this thing around and get going again.

According to Home Builders Research, a Southern Nevada industry expert, a low total of 777 spanking-new single-family houses were closed in June and when that is compared to the record 3,233 sold in June of 2006, the difference is rather serious. It tells us where an over-heated real estate market can go at its peak and also how far it can drop during the necessary correction.

Looking at the median price of all new homes in Las Vegas, that includes single-family houses, condominiums and townhouses, it came in at $269,900 for June that translates into a 16.7% decrease from a year ago. The percentage loss of value is actually a bit lower than for resale homes which show about a 22% drop. Home Builders Research says the median price for a resale home in June was $218,000 and that represents a big actual-dollar gap between these two categories. It comes to roughly $50,000, a noteworthy separation.

That difference seems to clearly explain why resale homes have been selling over the past several months at a much faster pace than the new products. The figure is in fact more than double that. Homeowners and banks with REOs in their books have been aggressive in pricing and the results are obvious while home builders are now hard-pressed to turn a profit even at the current price structure. They don't have the same flexibility to tinker with what to ask for.

The positive sign here is that developers took out 884 new-home building permits in June, a fourth straight hike, although the total for first half of the year is still way down from last year.

Homeowner's associations, or HOAs, have at times been berated by angry residents who feel they've been wronged by the rules that are part of the deal in certain communities. Or perhaps not the rules themselves but how someone in the HOA management interprets them. Anyhow, it's important to know what the usual CCRs, or covenants, conditions and restrictions, mean before a purchase is made in an HOA neighborhood.

According to the Real Estate Division Nevada has about 3,000 associations that include some 450,000 condos, townhomes and single-family houses. Most of them are of course here in the Las Vegas metropolitan area.

The CCRs can vary widely but normally cover matters like where your car can be parked, the color of the home and even when trash can be placed on the curb. They generally won't allow basketball hoops in the driveway or someone fixing his car for three months in front of the garage. Things like that. In a way they protect the neighborhood from the few who like to do things out of the ordinary and drive home values down with their behavior. For that, the homeowners have to forego the complete freedom to do whatever they want to.

HOA dues can also bounce from a mere $30 a month to several hundred dollars a month. It largely depends on what services are included in them. Maintenance of swimming pools, clubhouses, spas and extensive lawns and landscaping within a community costs money and the dues are higher. Often with condominiums and townhomes the building insurance is worked into the dues and they can also cover water and utilities. Those who like to use the pool and workout facility regularly see good use for their monthly assessment, but the ones who don't do that are mostly wasting their money. 

It pays to get an adequate picture of what an HOA entails in a given community before buying there. Those who want paint their house pink ought for sure to stay away from one of these places.

The revered Fed is taking steps to streamline how lenders go about making higher-priced home loans, higher-priced by the way is another way to say subprime, to borrowers. These guidelines are intended for the entire spectrum of mortgage lenders and not just for those under the Fed's regulatory umbrella. As of right now, they'll go into effect on October 1, 2009 to give everybody time to adjust.

One of the better rules is the one where the lender must verify that the borrower's income and assets do indeed meet the repayment needs of a particular product he applied for. The repayment ability is arrived at by taking into account the highest scheduled payment amount during the first seven years. What this leads to is that when the subprime mortgage loan does return to the marketplace in full force again, it's going look a lot different from its recently abused counterpart. This is the government's plan to try to keep the consumer away from a potential financial meltdown. 

Another good one is the required establishment of an escrow account for property taxes and hazard insurance which then are payable along with the monthly mortgage payment. In the past omitting these was used by some lenders to make the monthly payment look more appealing, lower that is, and thus give the borrower a false sense of being able to afford his obligation. This will help the homeowners who lack the discipline and bookkeeping capacity to make timely payments if they are tasked with it.

Banning the prepayment penalty on variable-rate loans that can change during the first four years is a question mark. For other loans, like the 30-year fixed, the ban can't go beyond two years and both ideas are open to criticism. The prepayment penalty actually allowed lenders to lower the interest rates on their programs, so long as the borrower agreed not to pay off the loan early. Investors, or lenders, carefully figure their yield on each loan program and if a particular loan is retired early, say in 12 months, instead of, say 4 years, the investors are going to lose money because the premature payoff cuts out their stream of anticipated income. Instituting this rule will slightly increase interest rates across the board due to the risk of an early payoff.

By the way, they are still working on how to determine which loans exactly are higher-priced.

Southern Nevada hardly had any condominium market just a few short years ago. Especially the high-rise component was pretty much non-existent, save the Regency at Las Vegas Country Club. Then the Turnberry Place was built and it proved hugely successful and things sort of got fired up from there. Over time Vegas had created a reputation that no matter how many new hotel rooms were built, they always got filled with eager visitors. Many of the developers who wanted to come to town and follow the Turnberry recipe, apparently bought into that same idea. Just keep putting them up, condos that is, and they'll come.

They did come early on in the boom cycle, that's true, but things have slowed down considerably now. Many who did recently have aspirations to purchase a unit here are holding off as the market reports aren't that favorable any more. Demand has nearly dried up in the more expensive price points and with that comes the inevitable, prices start sinking.

The mortgage industry that is currently battling severe turbulence is very cautious today with its money. Who can blame it? Even condos that have sound contracts on them have frequently difficulty closing. Lenders are almost as a rule taking second and third looks before making any commitments and closings can stretch from two-three months to whenever. They are skeptical about appraisal values and often ask buyers to put more money down which they may or may not have. They are underwriting loans over and over again, making sure that all the bases are covered. An issue that must also be on their minds is any potential legal challenges from buyers or vendors. And what is the owner-occupant vs. investor ratio in a given high-rise.

Here's a brief statistical rundown on the closing picture. Las Vegas developments with over 50 condos in them had 2,558 escrows opened from the beginning of 2008 and of those 77% remain in escrow today. That tells us something. Looking back to 2007, a total of 3,095 condominiums in the same group were placed in escrow and out of those about a third are still languishing in escrow. The published sales numbers in many of the high-rise projects may be impressive, but when the actual closing percentage of those is scrutinized, the picture can change dramatically.

One of the recent exceptions is the Panorama Towers where the twin buildings have a closed sales percentage in the high 90s. That's rather remarkable. Cash can be a big help, too. Palms Place that started selling its 599 units earlier this year has sold over 100 of them to cash customers. That's one way to close quickly, so long as you have the money.

Las Vegas homeowners and would-be buyers are anxiously keeping an eye on the local real estate market. Homeowners want to see the price slide to finally come to halt as they've already lost a large chunk of equity during the last few years. Prospective buyers are trying to gauge when the time is ripe to make a move and purchase a home before values start climbing again.

The situation appears to be slowly turning favorable for both groups. As reported by the Greater Las Vegas Association of Realtors, or GLVAR, prices seem to be stabilizing now. In May the median single-family house price moved up a notch from the previous month and in June it slipped 4.9%, so it's bouncing along within a narrow band now. The actual median price came in at $225,000. Compared with the June of 2007 price, the drop is much wider at 26.2% and that can make anyone wonder how did that happen.

The truly positive trend that has industry observers raving is the sales volume of single-family houses. Please click on the link in the first paragraph to read the entire article.

U.S. Congress has been busy wrangling with the Housing and Economic Recovery Act for a long time and understandably so. It's a mammoth undertaking and requires lots of debate and compromises and just good old-fashioned work. The midnight oil type of stuff. It's designed to help the struggling real estate and mortgage markets in particular, but also the overall economy to get back on two solid feet.

At least one provision in it is causing heart palpitations in those who are seeking more help for homeowners facing foreclosure.

The issue in question is the tax credit that would give home buyers a credit toward their income tax obligation. To qualify for it the buyers cannot have owned a principal residence in the last three years, in essence close to being a first-time buyer. They can credit either of $8,000 or 10% of the sales price, whichever is less, against the income tax they owe on the purchase year. The credit will gradually decline for single filers at $75,000 and for married couples filing jointly at $150,000. Now here is the thing. The credit has to be paid back in the following 15 years, starting in the second year, and it's done incrementally. These are the main features of the program.

How much does this do for the current housing mess? Not much I'm afraid. The tax credit is more or less for the first-time buyer which is a relatively narrow market segment. Its impact as a demand stimulus to the present agony would be minimal. Moreover, to figure it all out on a tax return just adds more laborious paperwork to the process. Anyway, the time spent drafting this tax credit legislation might have been better spent on an initiative that would help pull the mortgage industry up from the mat.