BluefoxToday blog : April 2009

That's music to a lot of ears. The widely-known index that measures consumer attitudes and buying intentions jumped 12.3 points in April, representing the best showing for it since November. Despite that, it would be premature to pop any corks yet and let it flow. The banking sector continues to wallow in deep trouble and the job market has seen much better days.

Still, it is a sign that sun is beginning to shine through gaps in the dark clouds overhead. The mood from the steady drumbeat of mortgage foreclosures to layoffs to corporate trouble is seemingly shifting, although cautiously, toward the belief that tomorrow has more to offer than today. This could actually be the onset of the eventual turnaround.

The real estate market that is largely responsible for the meltdown is bubbling with energy in many areas. Vegas home sales are improving, numerous California cities are witnessing steady increases, South Florida has attracted scores of first-time buyers and investors and Arizona, too, is joining in on the activity. There are other areas showing similar advances.

It's easy to see why. Mortgage interest rates are very appealing, so long as the applicant meets the still strict guidelines. And probably even more enticing are the prices that are reaching levels not seen for a long time. Southern Nevada values, for instance, have now dropped to where they were very early in the decade. Those days Sin City was considered home buyers heaven and it's turning into one again.

Housing dragged the economy into this and now it's slowly picking itself up off the mat and apparently has enough legs to gradually move forward. True, there remain serious imbalances in residential real estate that will take a while to cure, so any path to recovery will be at least mildly turbulent. But perhaps the first seeds for it have been sown.

It just might happen. Both the House and Senate presented bills in March that would set up a brand new agency responsible for keeping a keen eye on all sorts of consumer credit, including home loans. It would ensure everyday financial products would be safe for consumers to use, as a broad term. If such an outfit is created sometime down the road it would be called Financial Products Safety Commission.

It is understandable that policy makers in Washington are highly concerned about soaring mortgage delinquencies and foreclosures and sinking real estate values. The housing industry, after all, is a key player in the entire economy and when it catches the cold, or perhaps better said a life-threatening pneumonia, like now, then the economy gets very sick, too. However, to add another layer of federal regulatory oversight might not be the answer at all.

As has been argued here a few times before, the current financial industry regulatory system is simply bloated, comprising of almost a dozen agencies with varying, often over-lapping responsibilities. To put in another one would almost certainly be overkill. The present set-up failed to arrest the roaring mortgage and real estate fiascoes because of lax oversight from those who were tasked to do that. The existing regulations aren't perfect, but would've been adequate to slow down the avalanche.

One area Washington might want to look at instead is how mortgage-backed securities will be handled in the future. One of the root causes to this meltdown originated with them and their lack of meaningful regulation. It seems that to this day it still isn't fully understood how scores of them were first chopped up and then bundled for resell. Those who now hold chunks of them do know, to their utter dismay, that they are pretty much worthless. If these issues weren't as enticing to potential investors as they were made to be, they wouldn't have bought them as much. That lack of strong demand then would have slowed down the whole buying frenzy of mortgage-backed securities, and prevented the wreckage we are in now.

About the new agency. It appears that Congress does have its plate full right now with other burning issues, so its creation is in its very early stages. If it ever happens.  

The numbers are still too high. Southern Nevada existing home inventory, according to the local MLS, continues to hover up there where no one wants to see it. It has been over 20,000 for months. Much of it has to do with the high mortgage foreclosure rates here that seem to be marching along unabated, month after month.

Bottom line is, demand is still too weak. Low home loan interest rates have been a big help and the various government incentives are also weighing positively in. But that's not enough. To change the real estate market dynamics in Las Vegas more qualified buyers are needed.

Call in the vulture funds. The name actually is a bit harsh, for these are just investors, or groups of them, who are taking advantage of favorable business conditions. Anyhow, more of them are coming to Las Vegas now to scout opportunities and providing additional purchasing power.

In most cases they close deals with cash, so no long waits to get mortgage applications processed. And they often scoop up a nice package of residences, not just one or two, making serious dents into the inventory in a short period of time. Many of them are set to rent out the acquired properties for multiple years and then sell them ideally for handsome profit. This way vacant homes in distressed neighborhoods get new occupants and are then generally looked after properly.   

Of course, these real estate investors are in the habit of tendering rock bottom offers that can yank down community price structures, at least initially. Still, it's better to have real ownership with long-term interest than a bank REO status, as lenders have the reputation of being weak in maintaining foreclosed homes. And most of all, they do create demand and that's what Southern Nevada's housing right now sorely needs.

After having endured a long stretch of dismal news, home builders are now feeling more optimistic about the state of the real estate market. The National Association of Home Builders, or NAHB, and Wells Fargo together periodically compile an industry survey called The Housing Market Index. It's based on how builders feel about single-family home sales, their outlook for sales six months out and the number of prospective buyers.

Looking at the latest index in April from purely numbers point of view, it jumped over 50%, climbing to 14 from a meager 9, the old mark. When the survey was started in 1985, the baseline was set at 50. From then on it has generally fluctuated between 20 and 70. When the current mortgage and housing market meltdown came roaring it, it sunk mercilessly to single digits and is now trying to get out of there.

The increase is substantial and welcome news. To many in the industry it signals that a housing market bottom may have been reached, or at least is imminent. That may be a bit premature, though.

The poor employment picture continues to keep many would-be home buyers on the sidelines. Mortgage funding is widely available, but qualification requirements are still strict, dampening the hopes of scores of borrowers. Existing homes, like in Las Vegas most of them bank REOs, are often priced much lower, leaving similar-sized new homes at a distinct disadvantage. 

It could be that the upbeat index is a reflection of participants predicting the historically strong spring and summer buying season will this time bring along better sales figures. They also could be counting on Washington stimulus efforts slowly starting to bear fruit. Time will tell.

It's not easy but Sin City is doing all it can to turn the tide on the bad hand it has been dealt over the past few years regarding the housing market. It has steadily occupied high rankings on many mortgage- and real estate-related lists that no one really wants to be on. But now Vegas is on one that is going make it look a little better. And give everyone in the valley real hope as far as the future of the housing market goes.

The Top 10 Bargain Markets list is out and Las Vegas is third on it. FHFA, or Federal Housing Finance Agency, that gathers housing data on 292 metropolitan areas is behind the report. And it's easy to see why Vegas ranks so high. Mortgage foreclosures are the big thing, casting its long shadow over the entire sandy landscape. Despite their early resistance banks are now pricing REOs, or real estate owned, wherever they have to in order to sell them. That has brought values all the way down to the levels of around 2002. That's when a solid 3-bed, 2-bath single-family home in a nice neighborhood could be purchased for well under $200,000.

Is that going to help the limping housing scene in Southern Nevada recover? It sure is. In a small way it's already started. First-time buyers and investors are busily going through the huge amount of inventory at the lower end of the scale and picking up bargains in the process. That is a good sign. At least one end of the market is gathering steam. The important thing is that it begins somewhere, which gives consumers more confidence about the market's overall viability, and then everything moves by stages into other affected segments.

By the way, the number one slot on the list went to Stockton, CA, with Naples, FL, grabbing the second spot. Fourth was Ft. Lauderdale, FL, and fifth Miami. Anyone who closely follows real estate would've guessed as much.  The once high-flying areas that over-priced themselves are now turning into bargain heavens. In essence, this is a perfect example of market forces at work.

The spring classic is served up in a matter of days. The Harrah College of Hotel Administration at UNLV and Southern Wine & Spirits of Nevada are joining forces once again to stage a grand wine tasting event for the fermented grape juice aficionados and winemakers alike. The sip fest is actually celebrating its 35^th anniversary this year, having become a great local hospitality-related tradition.

The best part, well maybe the second best part then, is that this is actually a money raising event, the proceeds going to the UNLV hotel college to fund scholarships. In addition, it is a three-credit class under the food & beverage program requiring students to manage and organize the sprawling event. Two birds, money and invaluable experience, with one stone isn't too bad.

The grand tasting is at Paris Las Vegas on Saturday, April 18, from 2 - 5:30 p.m. Tickets in advance are $100 each and at the door $125. Last year around 6,000 wine enthusiasts descended on the scene, emptying a cool 2,900 bottles from over 750 wineries, poured on site by 125 suppliers. That just to give everyone an idea what it is all about. How big it has grown.

The whole affair really starts already on Thursday, April 16, with something called Bubble-Licious held at the Palms Pool and Bungalows. Then the next day, Friday, April 17, there is another tongue-twister AussSome and Then Some at the District at Green Valley Ranch. Both are some sort of wine tasters that have branched out from the main deal. More info on the entire weekend package is available at UNLVino.com. Enjoy.

Couple of important notes. Must be 21 and sober to enter. And for the safety of all wine sippers, Designated Driver will be present at all those above events.

The spring real estate season kicked off nicely last month, with resales again showing strong numbers. That has been the direction of this segment of the market for a good stretch now.  

All in all, 2,980 single-family houses were closed then that translates to a serious jump of 30% from February, as was reported by Greater Las Vegas Association of Realtors, or GLVAR. The figure is double of that from March of 2008. As has been the pattern recently, distressed sales dominated the statistics and most of them were in the lower end of the market where first-time buyers and investors excitedly grab affordably-priced property.

Nothing seems to be in the way of continuous price erosion, though. This time the median value fell another 4.2% from the month before, down to $149,000, shattering in the process a sort of a benchmark of $150,000. When the previous standard of $200,000 was busted months ago people in the Las Vegas valley were gasping for air. It's anyone's guess what they are doing now. It's a 38.7% downward correction from a year ago. Spiritedly-priced foreclosures and short sales are the unmistakable factors pressuring prices down a steep slope.

The MLS inventory grew a little from February, going up to 22,812, but is just about at the same level as it was last year. Yet, everyone in the housing business in Vegas wants see it start losing steam. The sound sales numbers, however, just don't seem to be enough to bring it down. Again, more mortgage foreclosures are obviously still entering the Southern Nevada marketplace, quickly displacing homes that are sold.  

The stats are clearly mixed, although the healthy sales increase does give the market some sense of optimism.

There is no question that the home loan industry needs a fresh look and some adjustments have to be made to prevent in the future what just happened to it. Easy underwriting requirements were part of the reason the real estate market ultimately tanked and dragged the entire economy into a filthy gutter. But those, the underwriting criteria, really were poor business decisions and can't be regulated.

Anyway, Congress is working on all sorts of angles now to find the right reform solutions. The House just introduced an act that has a long name and lots of ideas, some reasonable and some less so, on how to restructure the whole thing. One of them goes deep into loan officer compensation, how it played a significant role in the meltdown and that it needs urgent revision. To see this issue command such a prominent role in all of this is beyond belief. It truly prompts the reader to go over it a few more times to make sure he got it right. A real head-scratcher.

There are actually several directions the reform effort should take to arrive at more meaningful improvements than leaning on mortgage broker commission setup. One of them is to overhaul the entire financial industry regulatory regimen. Currently there must be close to a dozen or so government agencies that are tasked with keeping an eye on what's going on. Their functions often overlap, there are nasty rivalries and coordination between them is less than what it ought to be. To make the system more efficient, all its work should be gathered under one or two roofs.

That's one thing. If the present regulatory system had functioned halfway as mandated this mess would be much less severe. The current laws probably are somewhat outdated but had they been enforced properly mortgage foreclosure rates wouldn't be anywhere near where they are now. So, where was the oversight of the Fed, SEC etc? The executive and legislative oversight?

It really appears that Wall Street is writing much of the new plan, laying blame on everyone else but themselves. And using the chaotic situation to further its own agenda.   

FHA, or the Federal Housing Administration, almost vanished from the home loan scene a few years ago when conventional mortgage lenders came up with their own attractive loan programs for subprime borrowers. In 2006 FHA's market share was a paltry 2%. Then the real estate market imploded, mauling the mortgage industry in the process into a bloody pulp. As a result banks were reluctant to make home loans unless they had a government insurance against possible defaults and all of a sudden FHA was back in the saddle, becoming for many the favorite go-to-guy. In the fourth quarter of 2008 FHA's market share had jumped to about 30%, as per Inside Mortgage Finance.

The agency has played a crucial role in securing financing for first-time buyers and doing refinances for homeowners during this mortgage market meltdown. But now dark clouds are moving in. Delinquent loan statistics are climbing ominously, reaching 7.5% at the end of February, when a year ago the number stood at 6.2%. The reserve fund backtracked to around 3% of its mortgage portfolio last year, when in the fiscal year of 2007 it was a healthy 6.4%. By law it has to be 2% or better.

These numbers speak for themselves. All is not well at FHA. At the core of the problem, it seems, is the directive that FHA lenders cannot employ risk-based pricing when underwriting loans. High-risk borrowers pay the same insurance premiums as do the low-risk ones. This was actually mandated by Congress last summer, a move that didn't make much sense then to many industry experts. High-risk anything should pay a premium for being that.

It really is rather bizarre that while the country is struggling mightily with mortgage defaults and everyone ought to know by now that they were mainly caused by lax lending standards, Congress keeps on promoting the same tolerant practices. Doing that right in the middle of this unusual challenge. As if they had learned nothing from the grave experience still roiling around them.

FHA will likely soon need a government bailout to stay in business. But for how long are its services needed is anyone's guess. Once the mortgage industry recovers and begins offering subprime loans again, which is a predictable possibility, it could well be shown a path to the previous obscurity.

BPO, or broker price opinion, is a vehicle used by real estate agents to assess home values. Over the years it has become sort of a competitor to an official appraisal that mortgage lenders still rely on when underwriting loans. BPO can be a dependable gauge although it is less scientific than an appraisal. And it is much cheaper, costing around $50 each while a standard appraisal runs into the hundreds.  

With foreclosures and short sales playing now a large role in the housing market BPOs have become widely used. Mortgage lenders like them in these situations because they can be delivered quickly and are cost-effective. Besides, when a home is put on the market for sale under normal circumstances, the price is determined by the real estate agent doing the listing.  When eventually a sales contract is generated, the appraisal is then ordered by the lender to confirm that the value is actually there.

The controversy today is about BPOs allegedly undermining real home values, especially in hard-hit areas like Las Vegas, Phoenix, Miami and much of California. In the opinion of many appraisers and consumer organizations real estate agents often low-ball prices so that the property will sell promptly and when that happens they expect banks to give them more listings that will at the end turn into nice commissions. These understated transactions will then become comparables for appraisers, pushing overall price trends lower.

If this low-balling practice is true, it might actually help out in the big picture. The market is still saturated with inventory, everyone agrees on that, and the sooner it is moved the better everyone is off. Banks were earlier reluctant to bring prices down to where their foreclosed property would attract buyers, so obviously they are now changing their approach. When real estate prices and average annual incomes for a given area reach a workable balance, the marketplace becomes genuine and sustainable.

If this is the way to get there in a reasonable time frame, then be it.