BluefoxToday blog : February 2009

The recent real estate boom created quite a few imbalances in several marketplaces. One of them was the owning vs. renting question. When property values kept soaring to new heights, many would-be buyers simply couldn't qualify for a mortgage any more or just didn't want to pay for it even if they had the means. Renting had become so much less damaging to the budget that people chose to do that instead.

The red-hot housing market reached its peak around 2006 when after-tax home loan payments could go as high as 66% more than what rents were then, as was reported by Green Street Advisors, a real estate consultant in California. For many it was hard to justify dealing with such a large gap, so they became renters. A totally understandable decision.

But, as it so happened, the real estate market tanked badly and threw prices into a free-fall. That has steadily brought down mortgage payments and at the same time gradually narrowed the wide discrepancy with rents. Green Street Advisors say that by the end of 2008 in the 50 largest metropolitan areas the gap had closed to about 24%, on average. In Las Vegas and Los Angeles, for instance, where prices have been butchered, the ratio actually is under an 18-year average.

For a while it looked like high home values would shrink homeownership across large sections of the country, but in a stunning reversal it's again becoming achievable and in fact making financial sense to many consumers. In select areas, Southern Nevada could be one of them, mortgage payments might now actually be less than rents for comparable space.  Market forces, in essence, are organically creating demand and that's what it now sorely needs

That would be nice. But will it actually happen any time soon? Hard to say.

Lawrence Yun, the chief economist for the National Association for Realtors, or NAR, thinks it is just around the corner. In his opinion it could kick off in the latter half of this year. He was in town to speak to the group's Rocky Mountain Regional Conference and said that Southern Nevada will be in the forefront of the upcoming turnaround.

Prices here have plunged to levels that make home buying very affordable again, like it was early in the decade. Mortgage interest rates remain low, drawing borrowers to fill loan applications and buying homes. These are the two principal reasons to the currently strong resale market in Sin City, and have obviously favorably impressed Mr. Yun.

There is, though, a major hurdle that needs to be successfully cleared before a genuine recovery can start rolling across the Las Vegas housing scene. It's the foreclosure concern. If REOs, or bank-owned properties, keep flooding the MLS, they'll push any recovery further into the future. They'll feed the already high inventory that needs to be reduced to a level that makes market sense. Right now the existing home sales basically cancel out whatever new foreclosures get listed for sale. When they outnumber by a large margin and consistently the REOs, a lasting turnaround is imminent.

Las Vegas was knocked down early in this national mortgage and real estate mess and it could well be one of the first victims to be able stand up again and start doing something useful. Drawing on that theory, Mr. Yun's assessment might be right on target.

That's good news. One of the main barriers to getting the residential real estate market to change direction is the lack of demand. Well, there is some demand, it's true, thanks to very low mortgage interest rates and affordable prices. But they alone won't cut it because the underwriting guidelines remain rather strict and keep many qualified borrowers from getting a home loan. And then there is the poor economy.

But help is on the way. A revised Fannie Mae policy is going to give the demand function a nice shot in the arm. The change involves how many mortgages the agency will buy from one borrower. The limit used to be four, whittled down there when the current downward housing spiral started to gallop full steam.

Fannie Mae is updating the policy for the better to let investors and second home buyers now acquire five to ten financed properties, as long as they meet quite tough eligibility and underwriting requirements. A borrower cannot have any lates, or delinquencies, in the last 12 months on any of his existing mortgages, for instance. No bankruptcy or foreclosure in the last seven years. Also, reserve requirements apply to the subject property and other financed investment homes. There are others, but this clearly shows that the moderation is mostly relevant to experienced and well-heeled investors. The change is scheduled to go into effect March 1, 2009.

Regardless of its limits, the update will give the still-struggling demand side a much-needed kick. That's were the solution to the recovery of the housing market lies. It's another step in the right direction to make mortgage funds more available to qualified borrowers. The investor community is already active here in Las Vegas, and is undoubtedly so across the country, and is essential in helping absorb some of the high housing inventory. Now it has even more reason to do just that.

Besides, this is also psychologically valuable. People will notice that the strict mortgage requirements are beginning to ease up, which leads them to believe that the marketplace is taking its first meaningful measure or two to restore order. And, predictably, more is likely to follow.

This is an all-time low for any month. Only 284 new houses were closed in January in Las Vegas, as was reported by Home Builders Research. That adds up to an annual total of 3,408 for 2009, assuming the market continues at the same pace to the end of the year. When this figure is compared with the almost 40,000 homes sold at the market's peak in 2005, the difference is dramatic. It simply and coldly points out how far out of control it got on the upside thanks to rampant speculation, easy mortgage money and unrealistic expectations.

Yet, there is something good that can be said about that low January sales number. The supply of homes in Las Vegas valley is still high, whether new or resales. This will certainly help correct some of the imbalance on the new sector's turf, so long as the builders will accept the painful fact that their product has limited demand in this economic climate and will subsequently scale back construction even more. The sooner they acknowledge that the sooner the market will find a sustainable equilibrium.

The big issue is the price. And it has already been troubling them for months. The median new home sales price in January was $233,000, a drop of over 15% from last year, says SalesTraq. That's one thing. Then take the median resale price of $155,000, so reported by Home Builders Research, and the whole picture becomes quite clear why new homes don't sell. They just are nowhere near being competitive with the existing segment.

So, why are builders still constructing homes at an unrealistic price range? If they can't sell them, why build at all? The reasons probably are many and justifiable to them, but the January sales total has to make them reconsider what they will do from here on out.  

Can it be true? In this reeling housing market that makes mortgage approvals a major mental and physical exercise and closed real estate transactions an endurance test it was hard to believe what the Review-Journal headline actually said. But there it was, loud and clear. "Foreclosures in Las Vegas drop in January."

Southern Nevada residents are nowadays used to reading headlines that talk about how they are climbing, or surging, not dropping. Anything that suggests upward movement. The statement is accurate, though. Foreclosures.com is behind the statistic disclosing that LV numbers decreased about 20% in January from December, or from 3,283 to 2,609. Very nice improvement indeed after so many months of adverse results.

This may not be a permanent trend, however. Not yet anyway. A major factor behind the decline seems to be the moratorium Fannie Mae, Freddie Mac and several major banks have instituted on new foreclosure filings. The idea behind that is to give homeowners more time to find a solution to their dire situation. That's a reasonable approach but it has also softened the stats.

The surprise headline, however, could easily have unintended, positive consequences for the consumer here. For anyone living in the Las Vegas area. And even beyond. The word drop is associated with the word foreclosure for the first time in a long while and it has to mean that maybe there are better days ahead. That there is reason to believe that things will eventually turn around.

Secondly, the media has been bursting for months with all sorts of rescue this and rescue that material and so far there is very little to show that any of that is working. Except now, it appears. The public sees that Washington is taking action, using Fannie Mae and Freddie Mac in this case, and has also managed to prod several banks into seeking creative and useful solutions. The awareness that the mortgage problem is being urgently tackled can assist the consumer to begin healing the lost confidence he has recently developed for the housing market.

The problem is deep and it'll take quite some time to fully fix. Yet, these small things can and will help restore optimism in that it is very much doable.

It has been long time coming. The present housing and mortgage convulsion has been tough on everybody, spare none. Mortgage borrowers find it hard to get approved, thanks to ever-tightening underwriting guidelines. Tenants living in rental homes are being evicted when the landlord gets foreclosed on. The most drama, though, has been endured by homeowners who have been watching helplessly as their property values are on a steady slide south. Some areas, like Las Vegas, numerous California communities and much of Florida, have been hammered while others have suffered smaller declines.

During the recent past many home sellers have been slow in accepting the unpleasant fact that they can't get for the house anything close to what it was worth three-four years ago. They were in denial, as they say.

But now they are coming around in increasing numbers to face the cold truth. Zillow.com ran a study in the fourth quarter of 2008 called Q4 Homeowner Confidence Survey. According to it 57% now think that the price of their home dropped in 2008, when as recently as in the second quarter only 38% believed so. The significance is that they are starting to buy into the value loss and as a result will price listings more realistically than before. In a small way this will help move inventory faster and play a positive role in the current real estate correction process. Anything to push it along is good.

The study does mark an improvement, but there is still further to go before everybody is on board. Zillow's Q4 Real Estate Market Reports states that 76% of homes in the country experienced  a value decrease in 2008. So, there is a gap that needs to be closed. Obviously the reality is beginning to sink in, although there still are holdovers that just won't let go.  

The same pattern keeps more or less repeating itself when it comes to monthly Las Vegas real estate numbers. In essence, there are some good news and then some less than good news. One way of putting is that the market is simply trying to find its bearings.

As usual, GLVAR, or Greater Las Vegas Association of Realtors, is providing a detailed look at what happened in January in the local housing sector. Altogether 2,224 single-family houses were closed, amounting to a stellar 126% leap from the year ago figure. That trend has been evident for quite some time now and it does instill some optimism that the battered market is working diligently to right itself. As a caution, the sales are about 11% less than in December, so the slight decline is worth taking note of. Perhaps it's temporary, with people just taking the frigid month, believe me Las Vegas can be cold in January, off from looking at houses or are waiting to see what the Obama administration will do about providing home buyer assistance.

The inventory of property in the MLS changed very little, actually inching lower by 0.8% to 21,935. By Las Vegas standards it's still high and signifies the difficulties the market has in order to start bringing it down to a more sensible level.

And then comes the dreaded portion of the report to all homeowners in Southern Nevada. The median price of homes stays on the slippery surface, sliding further to $160,000, representing a 36% decline from January 2008. Not only that, but it's over 8% lower than in December, which is a much higher number than in previous months. This is largely brought on by foreclosures entering the market and banks getting rid of them speedily at almost any price buyers are willing to pay.

In short, there is still plenty of work to be done in Sin City housing before it can be declared normal. Reasonable.

It's pretty much basic economics that troubles the current real estate market. Too many homes for sale and not enough buyers approved for a mortgage chasing the inventory. Supply and demand are simply out of sync.

The still increasing weight of foreclosures is a big contributor to this imbalance. That is especially acute in states that have absorbed the heaviest damage from mortgages in default, namely Arizona, California, Florida and Nevada. All in all, it is now a nationwide phenomenon.

There are two distinct reasons to that. Banks, the term includes home loan servicers and investors who own mortgage-backed securities, have been incredibly reluctant to focus much attention to the growing problem, namely extending a helping hand to homeowners in distress. It plain looks like they have acted, and still do, against their own best interests.

Washington has crafted several programs in the recent past to do something about it, but the efforts have been half-baked and poorly designed. The attention has largely been on keeping Wall Street from disappearing under the foaming waves of market forces, which doesn't do anything to spur real estate demand, even if the much-criticized industry will eventually be hauled back up on deck. 

Stemming the supply of additional foreclosed homes entering the market would bring along a major correction to the current disparity. Some of that may soon be a reality. A major shift appears to be in the works from the government, proposed by the Obama administration. The fresh mammoth plan making its rounds on Capitol Hill would put added emphasis on helping struggling homeowners and it appears to have more bite to it than the earlier ones. More accountability, more direction.

Washington is going for more, though. That's good. To boost the demand side, a new bill that gives homebuyers a tax credit of $15,000, or 10% of the home's value, whichever is less, is also being debated and massaged. Details won't be known for another few days, but the aim is right.

Of course these measures alone will hardly solve the industry's problems all at once, but they would definitely give it a nice confidence shot in the arm.

The real estate market is still in a deep sleep, by many accounts. Yes, it's true that there are pockets across the land where severely-reduced home prices are attracting brave buyers and well-heeled investors to venture out to make purchase offers. That is encouraging and Las Vegas happens to be one of them. Overall, though, a solid turnaround appears to be at least a few more months away.

A January study by the National Association of Home Builders, or NAHB, tells us that the main reason prospective buyers shy away from the marketplace today is because they can't sell their existing homes. 91% of them said so. Borrowers who acquired a house during the last four years or so probably are unable to sell because they are upside down on it. That's understandable, but what proportion of the market does that represent? 20% perhaps, or it could be a little more. Or then less.

Those, the vast majority of homeowners, who bought before the bubble years have in most cases at least some equity to lean on and could possibly sell if they wanted to. They, however, choose not to. One of the key explanations seems to be that they find it difficult to qualify for a new mortgage. Underwriting guidelines are much stricter now and down payment requirements higher, for starters. Also, since values have dropped steeply, they feel they are better off waiting a few years and build as much of the lost equity back up as possible. That, though, may require a long wait as the marketplace is struggling to regain its form.

Secondly, 88% said that grave concerns about the economy and employment prevent them from buying. Although it goes against the survey numbers, this could in fact be the main reason. Many are deciding to play it safe for now and that has to be respected. 75% felt that prices will come down even further. Well, that's a tough one to predict. And 68% believe that mortgage financing is hard to secure. This category might actually play a bigger role than being fourth in importance, as was argued above.

When the economy again shows some signs of well-charted direction, as it now seems to be getting, many of the fence-sitters will undoubtedly be ready to return to the marketplace. 

It's nice to know that LV can also top lists that are complimentary. Good for the city's image. Some of the recent lists that have been less that desirable have generally been about the local real estate market and mortgage foreclosures tormenting valley citizens. This newest list is in one sense far removed from those, but also has some sort of a tie-in to the housing market here.

It's about new residents moving into Southern Nevada within certain parameters. Relocation.com conducted a study on long-distance, out-of-state moves people do to big cities. And when everything was tallied up it determined that Las Vegas is the number one destination, leaving behind such creditable challengers as Denver, Charlotte, Phoenix and Portland. It's good to be up there, although in a related report released some months ago regarding population growth it had dropped back to number 8, after being among the top three for years, as was reported by the U.S. Census Bureau. Regardless, being among the top ten is nothing to be ashamed about.

One of the factors attracting newbies here is the affordability. Real estate prices have dropped drastically in the last few years, and are still soft, so that a nice home can be purchased for under $200,000. Reasonable housing values were a huge positive factor for the area before the real estate bubble roared in and now that it has dramatically burst, it is becoming so again.

Low taxes provide another incentive. Everybody knows the weather in Las Vegas is rather agreeable throughout, well maybe the summers get a little warm to some, but it's certainly a draw. Many new residents also like the countless recreational opportunities here and none of those have anything to do with casinos. Mount Charleston and Lee Canyon are popular summer and winter destinations and Lake Mead offers water enthusiasts a chance do their thing, just mention a few of them.

The city is poised to grow steadily in the coming years, in particular when the national and local economies turn around.