BluefoxToday blog : September 2008

The Department of Housing and Urban Development, or HUD, has received a grant package that totals almost $4 billion to aid cities and states embroiled in mortgage foreclosures. These funds actually were put aside for this purpose in the recently passed Housing and Economic Recovery Act.

The effort has a fitting name, The Neighborhood Stabilization Program, and its aim is to let local and state governments use the available money under certain guidelines. They can tear down or restore abandoned homes and buy land temporarily to stabilize deteriorating areas and then promote redevelopment.

Possibly the more pro-active aspect of it is that they can also provide low- and moderate-income home buyers closing cost and down payment relief. If many of the foreclosed homes can be sold to owner-occupants, there would be less need for the local authorities to get involved in rehab and land purchase activity. That would be the easiest and fastest way to turn around areas with many foreclosed houses. The bulk of this grant money, therefore, ought to be directed to this particular segment.

HUD will use need-based criteria how to allocate the funds. Every state will receive something but areas hardest hit will receive the most. Foreclosure rates, mortgage defaults and subprime exposure understandably dominate the selection process. Las Vegas, North Las Vegas and Henderson, Southern Nevada in short, are then in a position to get a rather generous share for reasons well-known to anyone who follows the local real estate market. If the grants coming here are used wisely, they could also help steady the declining property values throughout the valley. Who wouldn't want that?

Many areas in the nation are in the grip of a serious real estate price erosion and that presents all sorts of problems. Homeowners have seen their built-up equity being eaten up by it and in other cases it results in foreclosures when borrowers can't refinance out of their unattractive existing home loans because they have no equity. It also is rapidly becoming a challenge to lenders who have recently issued mortgages with low down payments.

Let's take a look at an example. Las Vegas single-family home prices have lost about 30% in the last twelve months, therefore averaging around 2.5% a month. In June a home buyer took out an FHA loan with 3% down, the current minimum, and using simple math it's easy to say that now in September, three months later, the house has lost 7.5% of its value and is already upside down. FHA did collect a hefty upfront insurance premium and receives an annual fee as well, but in case the homeowner defaulted is it enough to cover the damage that would have accrued, let's say, during a 8-month period of ownership here in Southern Nevada? Not likely.

FHA has in the last year drastically increased its market share nationwide to about 30% largely due to its low down payment feature. The once famous subprime mortgage product has been beaten into extinction and FHA has gladly stepped into the void to claim some of its past glory. Yet, as home values continue to deteriorate in several key regions, it's putting itself in harm's way. If the downward trend soon comes to a halt and begins to climb, amen. It probably will come out of this correction cycle without major damage, but should the slide go on another several months, look out.

What about conventional home loan lenders? Perhaps they are in a slightly better position thanks to their requirement of higher down payments, but they, too, are walking on the edge. Using the same numbers from the above Las Vegas example and a 10% down payment, in six months the house would be upside down roughly 5%. Just like that. 

Steady price erosion has to be taken very seriously.

The existing single-family house sales in Southern Nevada in August were 2,545 which is a slight drop from July at 2,592, reported GLVAR, the Greater Las Vegas Association of Realtors. This number actually breaks a string of increases dating back six or seven consecutive months. When a comparison is made to August of 2007 at a paltry 1,316, it represents, however, a serious leap higher, 93.4% in all that can be called a significant improvement. Resales, although still heavily flavored by foreclosures, do remain healthy and need to stay that way to help this weakened market turn around.

Another positive statistic GLVAR released, and is based on its MLS figures, is the inventory level of single-family houses. It has been edging higher for months and now it finally experienced a much-awaited drop to 22,710, an acceptable 3% decrease from July and down a nice 6.7% from August of last year. It continues to be historically high but at least it's now on a downward slope. The preference throughout Southern Nevada is that it stays on that course for the duration and give the coming recovery some needed punch.

The area that keeps everyone on their toes is the price. The median price decreased again, this time 4.5% from July and a painfully large correction of 30% from last year. It sank to $210,000 in August and if it maintains this pace before the year is over it'll punch below the $200,000 barrier. If that happens the price structure in Las Vegas will be back to roughly were it was in the early years of the decade. Good value? Definitely. Costly to the homeowner? Yes.

For a while it looked like the two main players in the secondary mortgage market just might be able to somehow successfully navigate the rough seas they were caught in the middle of. But it wasn't to be. When large investors, among them many foreign central banks, began unloading bonds issued by Fannie and Freddie because they were fast losing value, the writing was on the wall. That trend seemingly convinced Washington that it was time to act decisively and a rather swift takeover was engineered over the past weekend.

Thus far the effect of the major move has been positive. The financial markets world over are now breathing a sigh of relief knowing that the U.S. government was willing, actually forced to do so to prevent a worse calamity, to jump in to bail out these two key home loan market participants.

For these two organizations, the Treasury is now taking the role of a go-to source of funds if need be. It also assumed an intriguing, and a wider, position to bolster the weak mortgage industry. The Treasury is committed to buying new mortgage-backed securities issued by Fannie Mae and Freddie Mac. The extent of that is as of now unknown, but is clearly designed to provide additional liquidity to the marketplace that has recently seen waning interest from once steady investors. This step is perhaps one of the more critical ones of the entire takeover. Healthy demand for these mortgage securities tends to push interest rates down and that in turn will spur would-be home buyers, and refinance candidates, into action and the next thing down the pipe is the residential real estate markets begins to stir in the right direction.

Of course, this bold government action isn't going to fix the much-suffering housing industry overnight. Home values in many areas are still under persistent pressure and foreclosure rates appear to be climbing, so severe imbalances are still out there causing mortgage lenders and investors heartburn and other troublesome ailments. And how much is it going to cost the tax payer? We'll know years from now. Yet, it's a positive measure that'll give the marketplace something firmer to lean on.

The luxury condo tower currently under construction in front of the Venetian and Palazzo resorts was planned some years ago when the real estate market in Las Vegas was moving along very nicely. The market conditions, however, have changed quite a bit since then. The high-rise condo segment in Southern Nevada is overbuilt, demand is waning and prices predictably are softening up. The current mortgage industry woes make getting financing for purchases much harder, too.

Las Vegas Sands, developer of the condos, likely realized that going alone with the project in this less than desirable market environment was going to be tough. To bring in a world-class hotel, resort and condominium operator like Starwood Hotels & Resorts Worldwide would make it much easier, so it contracted St. Regis, a Starwood brand, to operate the tower once it's built. A separate marketing firm will be signed up to handle the sales center.

The project will carry the name The St. Regis Residences at the Venetian Palazzo, Las Vegas. It'll have 398 residences priced, at this juncture anyway, from $1,500 to $2,000 per square foot, placing them among the most expensive units in town. The St. Regis name readily brings to mind luxury and impeccable service among the wealthy across the globe and ought to be of great help in marketing the property, even in this climate. Those who are used to certain high standards trust tested brands like St. Regis.

The Venetian also houses a massive convention, meeting and event facility that is very successful and forms the backbone of its operation here. The St. Regis Residences should definitely appeal to the cultivated corporate buyer for its own officer use or as a base for an important client attending a convention. Moreover, since the condo tower sits right on the Strip many of the units offer priceless up and down views of the action below. That ought to be a big draw.

As things stand right now, the successful marketing of the residences could be accomplished without any price adjustments. By the time the project is scheduled to open in 2010, the market could be much improved.

A few years ago when the real estate boom was happily chugging along home prices in town were breaking records month after month. The predictable result was that many home buyers were beginning to be priced out. Smaller, established communities like Mesquite and Pahrump where land cost a lot less could offer affordable housing and they began growing steadily.

Besides them, developers were also drawing plans for new master-planned communities in the outlying areas, like Coyote Springs straight north from Las Vegas and White Hills in northern Arizona. Again, the key attraction with them was that housing out there would be reasonable. The city was still growing at a healthy clip, so it was entirely viable that any new development out in the distant valleys would draw an enthusiastic response.

But then the real estate market tanked and with it the mortgage segment. Demand especially for new homes in Southern Nevada has slowed dramatically and that has put many out-of-town projects on hold. Resale prices in the valley have adjusted downward remarkably, making homes here more affordable again. Specifically the lower end of the scale is now well within reach even for the first-time buyer. Because new homes in the city are now moving sluggishly, demand out in the outlying areas would be even weaker.

That must make developers with huge land holdings in the suburbs wonder when the time is ripe to proceed with building. Their original low price structure was based on Las Vegas housing being largely unaffordable, but now that the situation has amazingly turned around, that scenario no longer applies. They may have a long wait ahead of them before the real estate market here again supports their plans. People probably don't want to drive 50 miles one way with today's gas prices if they can buy a home in Vegas proper for the same money than out there in the wide open country.

For the short term at least, it seems that demand for resale homes in Las Vegas keeps increasing as prices remain weak and eventually that will start pushing values back up. There are only so many homes available within the city, so that is bound to happen as multiple offers keep pouring in. Once they go high enough sometime in the future, building in the distant hills becomes feasible again.

The real estate market is pretty tough right now in countless areas of the country. There are many reasons to it, one of which is the mortgage industry. Due to severe losses recently lenders have tightened their underwriting standards and flat out cut off many home loan programs that got them in trouble to begin with. They are also increasingly dealing with another concern and that is mortgage fraud.  

Mortgage Asset Research Institute is the main shop around gathering data on mortgage fraud and then putting together periodic reports on it. Its second quarter release shows that there was a serious 42% hike in cases from the same quarter in 2007. Even though the volume of home loan closings nowadays is way down, the scam numbers are up quite a bit.

Real estate values are very attractive right now and many people would like to buy property on the cheap. Who wouldn't? There is money to be made so long as the buyer gets his hands on a discount-priced house or condominium. But the tough credit market makes it double difficult. So to some the answer is to skirt the rules and get a mortgage at just about any cost.

The Internet has become a good source of information and advice on how to go about it. Numerous sites actually sell ready-made solutions. Phony income and employment verifications are easily available on several websites. A would-be home buyer presently showing nothing on his checking account can rent the necessary bank deposits to place on a mortgage application until the loan closes. A straw buyer uses his impeccable credentials to purchase a home and then transfers title to someone who couldn't qualify for a mortgage. The tricks of the trade are many.

In recent years the Internet has turned into the epicenter of real estate and mortgage information to the consumer, which is great, but as the recent rise in fraud figures indicates, in more ways than one.  

Lenders certainly are aware of the trend and will scrutinize applications more carefully than before, delaying approvals and closings. When the real estate market was doing so well a few moons ago it didn't really matter that much if there was some fraud involved because the solid price appreciation would smooth the way. Equity, after all, is an instrument that can solve a lot of problems. But today's game is totally different from yesterday's. Equity often is wiped out and then some. Now, for lenders, it can be a struggle between survival and ruin.