BluefoxToday blog : June 2009

Even though it looks like the slumping real estate market is showing some signs of improvement, like here in Las Vegas bank REOs in the lower half of the marketplace are selling briskly, there remain steep hurdles to overcome before it can be declared healthy again. Mortgage funding is hard to come by, many homeowners are upside down and unemployment is high, just to mention some of the obvious problems.

But if the focus is shifted over into the near future, then there is some reason to be optimistic about what's to come. Here is why. Harvard University's Joint Center for Housing Studies declares in its annual State of the Nation's Housing report that once the recession begins to fade, the real estate market will recover nicely due to favorable demographic developments.

According to the report so called echo boomers, the roughly 75 million citizens born between 1979 and 1995, will form the backbone for it. In the next 10 years they will spawn from 12.5 million to 14.8 million new households and that naturally means increased demand for housing. Everyone can easily put their arms around this theory.

What type of housing will they be looking for is another question? The present slump and the serious value erosion it brought along with it in many areas, most notably Las Vegas and much of Arizona, California, Florida, must cause many would be home buyers to pause. If it happened now, it can recur. They are feeling the pain as their parents are faced with the effects of negative equity.

What about the availability of mortgage money? It'll predictably take lenders a few years to work their balance sheets back to sustainable health. And then what? Underwriting standards are going to be stricter from here on out and only time will tell what they will be in two or three years. That factor, too, will definitely have an effect on how much demand the echo boomers will actually generate.

Early on in this real estate meltdown the subprime mortgage drew all the attention with its high foreclosure rates. As the default numbers mercilessly accelerated in the lower half of the market the prices in this category headed in the other direction, at an increasing pace. To many optimistic housing observers, including yours truly, the overall damage would largely be contained in the lower end. The argument went that prime borrowers knew how to budget better, that they had other investments to rely on in case of trouble, that they already were familiar with what home ownership entailed, and so on.

Well, now the foreclosure curse is spreading into the prime territory, into the upper half of the market spectrum. And proving the earlier theory dead wrong. Mortgage Bankers Association sums up the current situation like this: "The foreclosure rate on prime fixed-rate loans has doubled in the last year, and, for the first time since the rapid growth of subprime lending, prime fixed-rate loans now represent the largest share of new foreclosures." There it is.

High unemployment attached to this nasty recession is clearly having a large impact on this trend. That's logical.

Perhaps an even bigger factor is the rapid erosion of home values. Let's say that a house in Las Vegas was bought for $900,000 in 2006 with a 100% mortgage, somewhere near the peak of the bubble. Since then prices have dropped at least 50% on average in Southern Nevada, but maybe only 30% so far in the higher end, so using that 30% figure this property is now upside down $270,000. A good chunk of money thrown into the wind. To many homeowners that might just be too much to take. Even if they could afford to make payments, the temptation is there not to do so. They may also calculate that for values to climb back up to their mortgage balance will take, say, 15 years, and then conclude it's not worth it. 15 years is a long time.

Moreover, if the homeowner in the above example wanted to sell the house and move out of town he couldn't do that unless he had an extra $270,000 on hand to close the deal. Anyone would think twice about that.  

Nevertheless, the cycle theory is clearly at work here. First the lower half of the housing market plunged into the abyss and is currently clawing its way out of there, it seems. The upper half hung in there longer, but is now being sucked into the same cycle of market forces and has to go through the same painful motions before seeing better days ahead.

Maybe it is if the focus is on the mortgage-backed securities market. More specifically on privately-issued mortgage bonds. Just a few months ago there was hardly any market for them at all, and if there were one, the prices of them were on life support.

But now this particular sector is stirring. At least a little bit. Mortgage bonds secured by 30-year fixed-rate prime paper issued in 2006-07 traded for 55 cents on the dollar in March, reports Amherst Securities Group, a dealer and market maker in mortgage-backed securities. That was then, now the same paper is going for almost 80 cents to the dollar. A nice improvement in about three months. It shows that private money is slowly returning to the home loan marketplace, that investors see some stability and viability in it. This should especially help out in the jumbo mortgage segment where private financiers have historically played a major role.

This seems to be just one of the first steps toward a healthier mortgage environment. As long as there is interest toward the market, that's a positive sign, instead of scaring investors to run away from it. The fundamentals, though, are still rather distorted and it'll take many months to right them. But a small encouraging advance here and there is what's needed to get the momentum changed and this appears to be one of those.

Luxury high-rise condos and condo-hotels were all the rage in Las Vegas only a few short years ago. Developers couldn't put them up fast enough on the Strip and elsewhere in town to satisfy all the demand. And of course there was all sorts of mortgage money available to grab a unit or two for one's portfolio. Life was good then.

Today that rosy picture has seen a tragic makeover. Demand for the product has waned, mortgage funding has practically dried up and hundreds of units sit out there vacant.

Palms Place, a 599-unit luxury tower, obviously lost its patience in waiting for the real estate market to turn around and decided to do something to get its unsold condos closed. It worked out a deal with the same group of banks that funded the project itself to participate in seller-backed financing. Buyers who have put down at least 20% will be eligible for this program and based on the size of the down payment will get a mortgage interest rate between 4.25-7.00%. If the plan works out well, it conceivably will be expanded to help other buyers to close on their condo-hotel units.

This type of an arrangement could be something that other troubled high-rise projects in Las Vegas could take a closer look at. Let's be honest, the market is largely at a standstill. It would give the lenders that have financed these towers a chance to get a decent chunk of their money back. It might not happen in a short time frame, but at least something is being done to get them there one of these days. It's very probable that the luxury condo segment in Southern Nevada, as over-built as it is, will take quite a bit longer to recover than for instance the single-family product.

Being creative in finding mortgage money just might be a better solution than foreclosing on these gleaming high-rise glass structures

Another whiff of optimism over the local real estate market blew into the Las Vegas valley this week. Any small improvement anywhere in the industry stats is nowadays welcomed with wide-open arms. So, let's take it.

In the latest statistical report on the housing market here just released, the Greater Las Vegas Association of Realtors, or GLVAR, discloses that the inventory of homes fell by 9.3% from the same time last year. Moreover, there were 21,181 units in it in May, about 1,000 less than in April when the number stood at 22,112. This statistic has remained alarmingly high despite the rather robust sales lately in the lower half of the market. A steady stream of bank REOs being listed has kept the figure that high. Now there seems to be a small break to it, even a drop by 1,000 homes is in some way an encouraging sign that perhaps a new trend is developing. Many are waiting for the day when the total inventory number sinks below 20,000, and stays there. And keeps going south.

In addition, according to GLVAR, 3,255 single-family houses were closed in May, a slight increase from April, and a large leap from last year, amounting to an improvement of 60.7%. Existing home sales have been strong for a while thanks to affordable mortgage rates and low prices. First-time home buyers and investors are seeing great real estate value here in Las Vegas and are eagerly gobbling up nice deals.

The median price continues to find new lows, this time easing down to $140,000, a 40.9% decrease from a year ago. Yet, the positive sign here is that it dropped only 1.2% in the month-to-month game, or $1,720. 1.2% only adds up to about 14% for a 12-month stretch looking into the future, whereas the loss of value was over 40% for the last twelve months. That's a big change for the better. Maybe, maybe a shift is underway for rosier days ahead. 

Let's go right to it. In the 10 Most Undervalued cities Las Vegas placed third, according to IHS Global Insight. The firm put the report together by analyzing household incomes, historical prices and housing densities and then arrived at statistically normal home prices which were subsequently weighed against actual values of a city. The difference either placed the area in the overvalued or undervalued category.

In this study, Las Vegas median home price was determined to be $140,000, meaning it is 40.9% undervalued. That is a high number.

It's hard to say if this is good news or the other kind of news. On the good news side would be the fact that homes here now are fast becoming, actually already are, nice and affordable again. Specifically the lower half of the market is beginning to align well with Southern Nevada's average annual income. That is generally considered a healthy environment, supported by recent upbeat existing home sale figures.

On the other hand, on the bad news side, values have dropped so far that many existing homeowners are increasingly upside down, effectively disqualifying them from any mortgage refinance or moving up or even allowing them to leave town. Those who've bought property in the last five years are really vulnerable here. Under their circumstances to do any of those would require they bring a wad of money to the closing table and that is today an unlikely scenario in most cases. Who has an extra $30,000, or $80,000, or whatever, to plunk down just to close a deal. Practically nobody. This development is rather unhealthy for the real estate market in Las Vegas. It is going to take many years before this massive imbalance will correct itself.