BluefoxToday blog : March 2009

Southern Nevada housing market has recently been through plenty of agony. Despite low mortgage interest rates sales of single-family houses, condominiums and townhomes have been slow, especially in the middle and upper ends of the price scale. Sinking values have attracted first-time buyers and real estate investors to rummage through the bulging inventory in the lower end of the marketplace and grab property, often foreclosures, at huge discounts. Sin City's housing supply is still way too high and needs to come down further to give the market a chance for recovery.

One group that has been moderately active in the past on the Las Vegas real estate scene is the Canadians and they are now returning to take a look at what's going on. Prices have receded all the way to the early-decade levels, making them very competitive with those in Phoenix where Canadians have historically bought more vacation homes than here. Lower pricing in Arizona has long been the main attraction for them, but it appears the gap is fast closing.

It's also argued that Phoenix has cheaper golf than Las Vegas. If Phoenix indeed has a small edge on green fees, Southern Nevada can smoothly overcome that by a decent entertainment menu, and then some. In addition, here it's possible to talk in the thick of night with the ghosts of Sinatra, Elvis, Howard Hughes, Bugsy and the rest of them.

Mortgage money for Canadians in Nevada is still available, despite the unpleasant fact that the marketplace is having a terrible time. As expected, the requirements have tightened up quite a bit from those they were used to a few years ago. Good credit, decent income and a sizable down payment is a solid starting point. Right now only second, or vacation, homes can be financed, leaving serious investors to eagerly wait for the time when they also will be invited to the table.

Many different initiatives have been introduced over the past several months to revive the still-reeling real estate market, a key ingredient to our economy's well-being. Mortgage rates are near record lows thanks largely to Fannie Mae, Freddie Mac and the government continuing to buy mortgage-backed securities on the secondary market. Home prices have come down to match those we had before the recent boom got going. But obviously more is needed.

One sector that would have a nice favorable impact on the demand side, without costing the taxpayer a dime, is the immigrants. For instance, every year 85,000 H1B visas are approved for foreigners with advanced education and skills. That's one thing. When the new application period kicked off in 2008, 163,000 of them where turned in during the first five days alone. Clearly, there still is a great interest around the world to come to America and it should be properly harvested. They would bring to the real estate market a buying group that generally is well-qualified to purchase a home.

The most-affected areas, like the Las Vegas valley, California, Florida and Arizona, would probably be the main beneficiaries of this influx of buyer demand. These states have been in the forefront of population growth in the past among Americans and would predictably attract many foreigners in the same way. The upcoming recovery needs to include these four states to be successful and long-lasting.

Relaxation of requirements for permanent residence status and other work permits should be included in the grand plan to revive our stagnant real estate market and through it the entire economy. It can be achieved on the cheap, too, by just adjusting the existing laws. No funding needed.

On the heels of the latest stimulus package, or whatever it was called this time, Fannie Mae and Freddie Mac have provided the home loan industry more details about their new requirements. Some of the guidelines are actually more borrower-friendly than what was initially believed. Eligible homeowners must have a mortgage that is either held by these agencies in their portfolio or is part of a mortgage bond guaranteed by them. The crucial element is that homeowners seeking to refinance through them have to have a solid payment record, for instance no lates during the last 12 months. 

Among the more flexible aspects is how the credit score, or FICO score, is handled. For a majority of applicants Fannie Mae and Freddie Mac will put aside the usually strict cutoff points, allowing more leeway to get people approved.

They will not require private mortgage insurance, or PMI, on new refinances where the equity is less than 20%. That is very helpful in many hard-hit areas because insurance firms have generally pulled out of them, making refinancing impossible. 

For homeowners with an existing second mortgage, the news is also encouraging. There is no limit how large it can be, but it has to remain on a secondary status behind the first mortgage.

Fannie Mae lets the homeowner shop any of its approved lenders and get the refi done that way. Freddie Mac is different. It requires the use of the current home loan bank or loan servicer. To find out if either one of these two owns or guarantees a particular mortgage, the loan servicer would have that information.

Also, second homes and investment properties from one to four will be eligible now. Previously they were excluded, much to small-time investors' dismay. They have to be presently in Fannie Mae or Freddie Mac portfolio and payments must be current.

These are the program highlights. They are going to be helpful in keeping more at-risk borrowers in their homes. The one rule that was not loosened up was the loan-to-value, or LTV, ratio. It remains at 105% maximum, or the loan balance cannot go over more than 5% of the property's value. That will leave out a lot of homeowners in severely-depressed states like Arizona, California, Florida and Nevada from being eligible to refinance. The prices in them have plunged out of range for many and will probably put these states on a slower road to recovery. 

As if there already weren't enough roadblocks to qualify for a home loan. Most of the past mortgage programs have vanished into thin air in the aftermath of this still percolating real estate meltdown. Besides, down payment requirements have increased, FICO score standards are higher, PMI firms are pulling out of markets and so it goes.

Then there is the all-important appraisal. It's hard to get an accurate one when there are very few, if any, comparables in the immediate neighborhood to use. Homes are just not selling like they once were and this is the most reliable yardstick appraisers have to assess price. That is the marketplace where buyers and sellers establish value.

Equally crucial is the sales price itself that is available for comparison. They have dropped steadily over the last few years and appear to have some more room to go. Take Las Vegas for instance. Prices may be stabilizing a little in the lower half of the housing market here, as they have sunk so low already, but the upper half still is vulnerable to wild fluctuations. The erosion percentage in Sin City in the recent past has been around 2 to 3% per month. So, reaching an appraisal figure one day can easily be challenged by the underwriter because by the closing date a month away it could be out of line by said 2 to 3%. And that can quickly cancel an otherwise well-structured home purchase. Or a legitimate refinance.

Appraisers are becoming creative, and they should, to make things work. Introducing "negative time adjustment" is one of them. Using the above Las Vegas example they first look at the figure based on the comps and then cleave off the appropriate percentage, in this case 2 to 3% per month, from it to arrive at the actual assessment. This seems to be the best way to handle the thorny issue and is often acceptable to lenders. That's pretty much it. How else can it be accurately established?  

The AVM, or automated valuation model, applies a mathematical metric to reach real estate value, but is barely used because of its inaccuracy. Studying contract prices agreed to between buyer and seller has gained little support since so many of them fail to close.

The hurdles are many and the market has to work all the angles to make things happen.

Just a week or so ago Cosmopolitan was the focus of discussions between Deutsche Bank, the current owner of the troubled resort, and MGM Mirage over the Las Vegas casino developer's potential involvement in managing it, possibly even becoming a part owner. These talks collapsed, though. But it didn't take long for a new party to emerge with a genuine interest in the project.  

Hilton Hotels Corp. is currently busy at work on plans to launch a new hotel brand called Denizen Hotels. The product is going to be conveniently modern with global appeal that is complimented with a local accent. "Each property will be smart in design, cultural in character and sensitive in service delivery," according to their website.

With that in mind, Denizen Hotels has its eye on the Cosmopolitan and would predictably rename it, hoist the Denizen name plate on the roof. At this point, the ownership structure appears to be wide open. Supposedly company executives have been working onsite for some time already and they are openly talking about their involvement. Cosmopolitan on the other hand stays tight-lipped about this scenario, although it's widely known that Deutsche Bank does want unload it whenever something reasonable can be worked out.

The under-construction project sitting between MGM Mirage's CityCenter and the Bellagio includes over 2,000 condominium hotel units in the current blueprint. If a hotel operator takes over, the condo component may be history and could be, for instance, turned into nice suites. The Las Vegas real estate market is going through a painful correction and these high-rise units would likely have very little demand. Mortgage funds are almost non-existent and buyers scarce. Scrapping them, therefore, seems to be the realistic way to go.   

For the sake of Sin City's currently somewhat battered image it would be a welcome boost to get the project finished and operated by an upscale hotelier.

Despite the traditionally slow stretch of the real estate season Southern Nevada existing homes sales showed the same workmanlike consistency they have been doing for months. Namely that the statistics are way better from the same month one year ago, as was reported by GLVAR, or the Greater Las Vegas Association of Realtors.

2,288 homes were sold last month, which adds up to a 108% leap from February of 2008. And to stay on the positive track, it amounts to a 2.9% increase from January. These are the types of numbers that eventually will lift the housing market here in Las Vegas up from the dark place. Specifically, when the month-to-month improvement turns into a more or less permanent trend, then there is a good reason to say "I'm a believer."

The other upbeat development comes from the inventory sector. It slipped to 22,142, down 1.6% from January. If it can tiptoe along this downward slope, although not breath-taking by any means, that would start altering the supply-demand dynamic in the right direction.

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Anyone can live with these types of headlines. The other kind - like those about mortgage approvals being hard to get, price declines, foreclosures - have been dominant for too long. Yes, the positive ones give consumers a dose of optimism that the housing market isn't dead after all. That it has the capacity to work thorough its imbalances and eventually start on the road to recovery.  

Let's throw in some interesting stats. First American CoreLogic put together a bunch of numbers on home sales at ZIP codes in metropolitan areas with at least 10,000 households. Each city only got one ZIP included in the final ranking.

The best performer in this study was Fairfield, CA, where sales climbed 226% in the fourth quarter of 2008 compared with the same time period the year before. That's impressive. In fact, California dominated the top ten of the list with eight spots. Moreover, Arizona, California, Florida and Nevada, the most-ravaged states in this real estate downturn, easily ruled the entire field among the first 25 slots. Las Vegas, NV, came in 15^th for ZIP 89131 where sales grew 27% for the fourth quarter.

As expected, the number one catalyst for this encouraging sales increase is the steep drop in prices. The states that led the way to the bubble's peak are now seeing their prices plummet the most, descending toward a plateau where people feel comfortable to operate again. That's how they are showing the most gains.

Low prices have drawn cash-heavy investors and eager first-time buyers, energized by today's affordable mortgage rates, to pick and choose from listings consisting mostly of bank REOs. The main thing is that the still high inventory is being burned up, that the demand side is building at least some momentum. It is crucial to a lasting turnaround.  

The credit markets everywhere are in a pretty bad shape and the CityCenter project going up on the Strip is acutely feeling the pain. Apparently the negotiations between MGM Mirage and its partner Dubai World on one side of the table and Deutsche Bank on the other over a loan arrangement have collapsed.

The German bank was willing to lend around $1.2 billion to enable the project to complete against equity and debt shares in it, but the two sides failed to reach an agreement. The Cosmopolitan resort being constructed next door to the CityCenter and now owned by Deutsche Bank was part of the talks, evidently in a role that MGM Mirage would either become a part owner or at least manage it, and take it off the hands of the bank that doesn't have a gaming license. The prominent Las Vegas casino operator is now in talks with other parties in an effort to secure the needed financing.

CityCenter is scheduled to open later this year. Time seems to be running out on finding the funds for a full completion. One component in the massive development, the Harmon, was already postponed until late 2010, and its 200 condominiums were scrapped altogether due to poor sales. The tight mortgage market especially for condo financing in Las Vegas is a major obstacle.  

What can also happen is that one or more of the remaining towers with condominiums, the Veer, Vdara and Mandarin Oriental Las Vegas, will be delayed for obvious reasons. The exteriors probably would be finished but not much else until market conditions improve.  Should this take place, it would actually help reduce Southern Nevada's high condo inventory and bring the supply-demand equation at least somewhat closer to a balance. That's what the marketplace is striving to do now and is having a hard time getting there because new foreclosure filings seemingly continue unabated.  

It would be nice to see the CityCenter completed as planned, yet market conditions as far as one can tell might dictate otherwise.

Let's try something different. Many home loan initiatives crafted to assist homeowners in distress have been introduced over the past year or two with great fanfare and thus far none of them have done much good. Now the Obama administration will try its hand at it. Its version will be officially unveiled tomorrow, but some key details have already surfaced. One of them is the refinance proposal.

According to the plan borrowers who are current on their mortgage payments and whose paper is owned or guaranteed by Fannie Mae or Freddie Mac may be in a position to refinance to today's rates. Cashout refis are not permitted, though. And there will probably be other restrictive guidelines, as there always is, but so far so good.

The main beneficial ingredient that has trickled out so far is that the loan-to-value, or LTV, can exceed the typical 80% the agencies currently require. If the LTV tops the 80% rule, then mortgage insurance is needed and right now it is difficult to get one in many markets because of uncertainty over property values. Under this new proposal, the LTV can go all the way up to 105%. In other words, qualified homeowners who are 5% underwater, or upside down, can still get their mortgage refinanced.

The present projection is that up to 5 million borrowers with Fannie Mae or Freddie Mac loans should fall within the program guidelines and hopefully take advantage of it. Regardless, the program has true potential to help in stabilizing the wobbly housing sector that led the country into this recession.

One important segment of the market was left out of the initiative, however. It involves homes that fall outside the 105% rule. The ones that are severely upside down. People owning them are more likely to fall victim to a foreclosure, or before that, just walk away and send the keys to the bank, or as they say, do jingle mail. This is where most of the defaults come from. As it now stands, states like Arizona, California, Florida and Nevada, where prices have steadily deteriorated, will benefit less than several others from the pact.

Yet, any step forward is a good step. There are no quick fixes to anything this dramatic.