Home sales in many markets are dominated by bank REOs, or Real Estate Owned as foreclosures are called after they have gone back to the bank. Generally these REOs will sell below market and can be a great deal for the buyer. However in areas that have an overabundance of REOs they do not sell below the market, they are the market.

Las Vegas

On the surface it may appear that the Las Vegas market is going to lead the housing market out of the doldrums. Looking strictly at the numbers you will see that April home sales were up 78.3% from April of 2008 (article). The median price has dropped to $141,720, a 39.9% reduction from a year ago. Figures for inventory, days on market, and days of supply have dropped as well. These are all good things, right?

Not so fast, it depends on which side of the transaction you are on. For buyers these numbers are awesome. Homes in Las Vegas are more affordable than they’ve been in a very long time. First-time homebuyers can take advantage of an $8,000 tax credit to make it even more affordable. For buyers it’s all good.

Which leaves the sellers. REOs absolutely dominate the Las Vegas market and there are a large number of short-sales as well. In a normal market these distress sales would be an aberration and not a major factor in real estate prices. However, distress sales in Las Vegas counted for a whopping 86% of all closings in April. In a normal market an appraiser can overlook distress transactions when compiling comparable sales. When 86% of closings (article) are distress sales, they become the comps and there isn’t much that you can do about it.

Hobson’s Choice

A seller is now left with the choice of pricing a property low enough to compete with the REOs or not selling it at all. Indeed, many homes have been pulled off the market as sellers wait for prices to improve. Many sellers can’t lower prices to compete because they owe too much on the house. A recent report shows that an astounding 67% of Las Vegas homeowners owe more than the house is worth (article). Their options are to sit tight, try for a short-sale, or lose the home to foreclosure. Ouch!

New homebuilders are facing the same pricing pressure. However, they have overhead and holding costs to deal with as well. They have reacted to this by limiting the number of new homes to a bare minimum and greatly reducing prices on homes that are at or near completion. Some Las Vegas builders have actually reduced prices to a point that is below their cost in an effort to finish projects even if it means taking a loss. The positive point here is that a reduction in the supply of new homes will lead to an increase in sales of existing homes.

In their attempt to alleviate the foreclosure problem the Government created programs to help struggling homeowners. Unfortunately these programs may only prolong the agony. One program, Fannie Mae’s Home Saver, has experienced a re-default rate of 70% (article). Not exactly a promising statistic and it shows that this mess is going to be with us for quite some time.

The bottom line is that this is a terrible time to be a retail seller. If you are an investor who is looking to buy for cash flow, it’s a great time. If you’re an investor who is looking to buy cheap rehab properties and flip them at low prices, it’s not such a bad time. If you are someone who absolutely must sell, good luck because you are going to need it.

What do you think a stimulus is? It’s spending - that’s the whole point! - Barack Obama

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Tags: foreclosure, Foreclosures, las vegas real estate

As a young boy (way too many years ago) whenever I wanted something that was outrageously expensive my mother would say, “sure, I’ll go out back and pick some cash off of the money tree.” This was, of course, a variation of the adage that money doesn’t grow on trees. Ah, if only it did.

Unfortunately there are a whole lot of grown men and women who never outgrew that childhood misconception. Many of these irresponsible adults inhabit the various state capitols as well as that bastion of fiscal irresponsibility otherwise known as the United States Congress. Let’s not forget the shinning example of financial restraint residing at 1600 Pennsylvania Avenue. What were their mothers teaching them?

Lessons Learned

What conjured up these monetary thoughts from long ago? It was actually an article I was reading about the budget woes that California was facing. We all know that the economic downturn has affected all but a few state budgets. My own state, Nevada, is facing a shortfall of approximately $1 billion, which is nothing compared to California’s anticipated deficit of $15.4 billion. That number is already 18% of the budget and could grow to over $21 billion depending on the outcome of a special election on May 19^th.

It was the following quote that caught my attention:

“Sacramento is not Washington - we cannot print our own money. We can only spend what we have.” - Arnold Schwarzenegger, California Governor

What a concept! Only spend what we have, hmmm. It seems to imply that if he could print money he would. I hope nobody tells him that the Constitution does allow states and municipalities to have their own currency.

States are learning some valuable lessons that the Caped Crusaders of the Washington Beltway don’t seem to understand, you can’t spend money like a drunken sailor with impunity. Creating social programs ad nauseum will lead to problems when the revenue dries up. California and most other states are now faced with the prospect of cutting programs, worker layoffs and raising taxes. Exactly the opposite of what should be done during a recession.

Swampland Shenanigans

Unfortunately Washington can and does print money as needed. A recent report shows that the United States Government will borrow 46 cents for every dollar it spends in the next fiscal year. Imagine if your household did that, how long could you survive before you went bankrupt? At some point this house of cards has to come crashing down.

So how is this being handled? By spending more money of course. We’ve had the bank bailouts and the stimulus package. A budget deficit that was at one time projected to be an unprecedented $1 trillion is now expected to top $1.8 trillion. Obama’s proposed $3.6 trillion budget is using economic assumptions that call for the GDP to decline by 1.2% this year and actually grow by a fairly robust 3.2% next year. Most economists call these numbers pure fantasy. Now the President is pushing for a health care plan with an initial cost estimate of $1.5 trillion, any wagers on how much higher the actual bill will be?

But have no fear. Just as he promised during his campaign, President Obama has gone through the budget line-by-line in an effort to cut wasteful spending. He came up with a “whopping” $17 billion in cuts. That represents less than ½% of his proposed budget. To put it another way, it would be like having credit card debt of $10,000, reducing it by a “whopping” $46 and being ecstatic about the progress you’ve made.

  Another fine mess you’re gotten me into. - Stan Laurel (Laurel & Hardy)

Tags: California budget crisis, deficit, Obama spending plan

Most people have heard of schemes in which a lender is defrauded by someone who uses an inflated appraisal to obtain a loan for much more than a house is worth. This type of scam generally requires the cooperation of several people. In addition to the person running the scam you need an appraiser who provides the inflated valuation, a real estate agent who goes along with it and, frequently, phony buyers. Sometimes the buyer is a victim in the scam but it is usually the lender that is left holding the bag when the other participants disappear.

However, in an unusual case of “man bites dog”, the usual victim becomes the scammer. Unlike most of these schemes, which involve small-scale criminals, this one involves some of the biggest names in the real estate industry.

The Particulars

A lawsuit has been filed in U.S. District Court in Arizona against Countrywide Financial, KB Homes and LandSafe Appraisal Services (article) accusing them of artificially inflating home prices. This is definitely a new twist. This allegedly took place in the Arizona and Nevada market. According to court documents the scheme netted $280 million between 2005 and 2008.

The lawsuit claims that KB Homes steered buyers to Countrywide Financial who, in turn, used LandSafe Appraisal Services to provide the incorrect valuations.  Some of the appraisals may have been inflated by more than $80,000. Talk about being upside down!

The article didn’t have a response from any of the defendants, nor could I find any elsewhere. If these allegations prove to be true it could cause a lot of problems for Bank of America since they purchased Countrywide.

Housing On Steroids

Manny Ramirez Suspended for 50 Games

It’s bad enough that we have been suffering from the collapse of a runaway housing market that came crashing down. Like a baseball player who was caught using steroids, we now see that some of the housing gains were “juiced” as well. It remains to be seen how widespread this is, perhaps it was just an isolated incident. Somehow I don’t think so.

This breach of trust could make it difficult for builders in the future. Will people begin to look at them they way they look at car dealers? The housing industry could learn a lot by watching what Major league Baseball is going through with the steroid scandal. The builders need to get out in front of this problem and make sure that it doesn’t happen again.

You can observe a lot by just watching. - Yogi Berra

Tags: Countrywide Financial Lawsuit, KB Homes, LandSafe Appraisal Services, Lawsuit against KB Home and Countrywide

I feel like I just stepped out of a time machine after travelling back to 2003. That was when I first moved to Las Vegas from New York. The real estate market hadn’t reached the bubble phase yet but the market was strong. Entry level new homes were selling for about $90 per square foot with premium homes in the $100-125 range. Resale homes were going for about the same price depending on age and location. The buyer’s choice was to purchase a resale home that was ready now or buy a new home that could be tailored to their individual taste but required a wait of six months or more before it would be completed.

I was one of those who opted for the new home. I purchased it in February of 2003 and it was completed in September of that year. In the time it took for the builder to complete the home, the prices of the same model had increased by about $30,000, or about 8%. That number pleased me because it indicated that the market was appreciating nicely. It turned out that I had bought my home just before the boom took hold.

The Heady Days

From that point on the market seemed to go straight up with no end in sight. Within two years the price of my home had gone up by about 125% based on model match comparable sales. Builders had jacked up the price of new homes to $200-250 per square foot. I was certain that this growth was not sustainable and actually looked to other areas for my real estate investing.

We all know what happened next. People were caught up in the frenzy and used newfangled mortgage loans to buy houses that they couldn’t afford with little or no money down. The bubble burst and Las Vegas became one of the nation’s leaders in foreclosure activity.

What Goes Up Must Come Down

Eventually the market stopped dead in its tracks and the law of supply and demand took hold. Banks were faced with an ever-growing inventory of foreclosed homes, or REOs, and were forced to slash prices in order to sell them. Builders initially held the line on prices but were forced to lower them to avoid holding costs associated with completed homes in their inventory. The local cost to build a basic home is about $100 per square foot and that was thought to be the absolute floor on prices for a new home.

The banks, however, are not concerned with profit. They are already facing huge losses and are just looking to get rid of these REOs. The average price of an REO is about $84 per square foot and that put the builders at a severe disadvantage. At those prices they are not able to compete, are they?

Builders Fight Back

Builders are not starting any new projects but have quite a few developments in progress. Some builders have pulled out of this market or shut projects down until conditions change in a way which would allow them to compete. Other builders have projects that are too far along to stop or close enough to being sold out that it makes little sense to stop now. What they have done is slash prices in order to compete (article). This is a calculated move on the part of the builders. They have done the math and come to the conclusion that taking a loss on these homes is preferable to the costs associated with keeping these projects open indefinitely.

The buyer is the main beneficiary of this situation. Your choice now is to buy a foreclosure for an average of $84 per square foot and deal with the associated problems. You’ll have repairs to deal with, possible evictions, dead lawns and a host of other problems. Or you can buy a brand new home without those problems at prices as low as $80 per square foot. Builders are offering a host of other incentives as well such as free upgrades, help with closing costs and other perks. Those who are considering a new home purchase should use a buyer’s agent prior to visiting these builders so that you take full advantage of the situation. For the buyer happy days are here again.

If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand. - Milton Friedman (Economist)

Tags: foreclosure, Las Vegas Nevada, real estate

It has become common for builders and real estate agents to require a pre-qualification or pre-approval from a lender prior to working with them on the purchase of a home. This is done so that the builder or agent doesn’t spend a lot of time with someone who will not be able to get a loan. It also helps the potential buyer by letting them know home much home they can afford at the beginning of the buying process.

Pre-qualification and pre-approval are not the same thing.  A pre-qualification is just a quick snapshot of the potential buyer’s position based on income and credit. It merely tells them how much money they might be able to borrow based on the information that they provide. A pre-approval is different in that it goes much further. The lender will generally go through the verification process. In addition to checking credit they will verify income and employment and perform other parts of the underwriting process. A pre-approval is the lender’s way of saying that if the property appraises at a value that meets their criteria of loan-to-value and the buyer makes the required down payment, the loan is approved.

Not So Fast

The collapse of the real estate market and price drops in many areas have caused lenders to decline loans for many buyers who had been pre-approved. This has caused problems for both buyers and sellers. A buyer finds a home that they like and puts a deposit down and the seller is happy to have found a buyer. Both are surprised when the bank denies the very loan that they had pre-approved because of changes in the real estate market.

In Las Vegas there has been an epidemic of this happening in the high-rise condo market. Buyers who had been pre-approved had placed many of these luxury condos under contract. However, in the time between contract and the completion of construction real estate prices had plummeted and the lenders refused to honor the commitment. The developers have been left holding the bag on many completed units. Buyers who had arranged their own financing rather than use loans arranged through the builder have lost substantial deposits in many cases because they were unwilling or unable to complete the purchase. This situation has forced many of the projects into bankruptcy or left them teetering on the brink of insolvency.

Turning It Up A Notch

It’s bad enough when this happens to an individual who is trying  to

Image via Wikipedia

purchase a home. It’s even more problematic when it happens to a companythat is building a $3.1 billion resort. Fontainebleau Las Vegas had secured commitments from multiple lenders on the $800 million in financing that was needed to see the project through. Unfortunately the lenders decided to pull the plug on the project just as it is nearing completion. The lenders include some of the biggest names in the industry such as Bank of America, JP Morgan Chase, Deutsche Bank, Royal Bank of Scotland and Barclays Bank. At stake are 3,300 construction jobs and over 6,000 jobs when the 3,815 room resort opens in October of this year. The developer has filed a lawsuit (article) in an effort to get the lenders to honor their agreement.

This is just the latest blow to Las Vegas. The area had been rocked by the stoppage of the $4.8 billion Echelon Place and problems with the $8.7 billion City Center project. The area is one of the hardest hit by the recession with unemployment over 10% and at or near the top of the nationwide foreclosure rankings. Just as area residents are wondering “what else could go wrong” something does.

Tags: city center, Echelon Place, Fontainebleau Las Vegas, real estate

I had been hearing a lot of talk lately about how home foreclosures were down. Real estate agents were pointing to this and saying that the market was going to turn around soon. Even the talking heads on the late night news were reporting that foreclosure filings were down and things were going to get better. Could we really have hit bottom?

Image via Wikipedia

Not so fast. This was just a case of spinning the facts to make them say what you wanted. What they didn’t tell you was that foreclosures had dropped because of a moratorium on new filings. Fannie Mae and Freddie Mac, along with many banks, had temporarily halted foreclosures while they waited to hear how the new administration was going to handle the crisis.

Hail Mary Falls Incomplete

However, the moratorium was recently lifted and that hoped for game saving touchdown pass fell to the ground. New foreclosures were up 24% in the first quarter from the previous year, so much for hitting bottom. When it became apparent that Obama’s plan was not going to be a miracle cure, the banks resumed taking properties back. In a press release Realty Trac’s CEO, James J. Saccacio, said “In the month of March we saw a record level of foreclosure activity - the number of households that received a foreclosure filing was more than 12 percent higher than the next highest month on record.” Clearly there was not going to be a fantastic comeback in this game.

The states hardest by foreclosures were, once again, Nevada, where one of every 27 homes received a filing, Arizona, California, Florida, Illinois and Michigan. This is a contest where being number one is not such a good thing.

Hype, Hope & Reality

The campaign trail hype and rhetoric has been replaced by harsh reality. This mess is not going away anytime soon. While Federal Reserve chairman, Ben Bernanke, sees “green shoots” and President Obama sees “glimmers of hope” in the economy, reality paints a much gloomier picture. While it is important for the President to remain optimistic, these foreclosure numbers are hardly a reason to be hopeful about any recovery in the near-term.

Nobel Prize winning economist and New York Times columnist, Paul Krugman, isn’t so hopeful. Despite being an unabashed Obama supporter, he is concerned that the administration could become complacent as a result of their own spin doctoring about these hopeful signs. In a recent column he says, “Don’t count your recoveries before they’re hatched.”

Even one of the worst economic times in our history, the Great Depression, had a number of false starts. When things are really bad people will look at any positive statistic as a sign of better days. Unfortunately many of these numbers are nothing more than the dead cat bouncing again. We may have a long way to go before this is over.

The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy. - Milton Friedman (economist)

Tags: Ben-Bernanke, Foreclosures, Great Depression, obama, Paul Krugman

 It seems that for the last two years I have heard one phrase uttered repeatedly. At real estate club meetings, by the spin-doctors of the Government or the spokespersons for various real estate groups it seems to be a constant refrain: “we are at the bottom of the market.” It has certainly been a long way down. How does anyone really now where the bottom is?

The reality is that a bottom can only be identified after it has been passed and a recovery has begun. Those prognosticators who seem to predict a bottom with every sentence they utter have a vested interest in the end of the real estate slide. The typical real estate agent is the biggest offender, who has a greater need to find the bottom than someone whose very existence depends on it? A real estate agent only gets paid if a transaction occurs, how many houses could be sold by someone stating that real estate prices have a long way to fall?

Data Manipulation

There is so much data available today that it is easy to cherry-pick the numbers that prove whatever point you wish to make. Want to prove the market is going to keep falling? There are statistics to support that theory. Need to show that the market has stabilized? We’ve got that number. Do you need to make a case that the market is on the way up and about to explode? Got that covered too.

The next time you hear an agent, pundit or some other talking head telling you that something is a certain way, look for their bias. What is their angle? Why do they believe, or need you to believe, that things are a certain way? Sometimes, as in the case of a salesperson, the answer is obvious. Other times it may not be as clear. Do not take anything at face value, instead try to see through the spin cycle (article).

Do A Self-Test

There is a saying in poker that states that if you’ve been sitting at the table for more than ten minutes and you haven’t been able to spot the mark or sucker, then you are the mark. Another way of saying that is the easiest person in the world for you to fool is yourself. People have a way of interpreting the facts to suit their own point of view. Be careful about falling into that trap.

I remember taking a Debate class in school. The professor would have students state their beliefs on a topic and then give them the assignment of defending the opposite view in a debate. This was a great learning experience for me because it made me look at the things that I believed differently. It is a great tool to use when making investment decisions. Take whatever it is you believe and make a case for the opposite view. So the next time you convince yourself that we are at the market bottom (or top) make a case for why it isn’t so.

Like dreams, statistics are a form of wish fulfillment. - Jean Baudrillard (sociologist)

Tags: Jean Baudrillard, manipulation of statistics, real estate, reale estate market bottom