Twenty years ago Japan plunged into a severe recession after a highly inflated real estate and stock market bubble burst with devastating consequences. The Bank of Japan steadily reduced interest rates until they effectively hit zero in hopes of re-stimulating demand and re-energizing the economy. Did monetary stimulus of this magnitude do the trick? No it did not, and to this day Japan suffers from the “hangover effect” of excessive financial behavior originating over two decades ago. How does this correlate to the Las Vegas real estate market and the US economy? This week saw two important events in the US financial markets. The Federal Reserve announced that rates would remain at record lows for the foreseeable future and the average rate for 30-year fixed-rate mortgages hit their lowest level in recorded history. The price of money has hit record-breaking lows in the US economy, but will it be enough to stimulate demand for homes in particular and goods and services in general? Nobody really knows …
Archive for June, 2010
Describe them any way you want; institutional players, wall street investors, hedge fund operators, the “smart money” crowd … it doesn’t really matter. For the last eighteen months the “professional money” set has been very active in the Las Vegas real estate market. No one really doubts that the pendulum has swung too far back after the bubble years and that today’s prices for Las Vegas homes represent substantial long term value. As daily participants in the residential market we are constantly hearing stories about bulk purchases of product by various types of investment firms. The newest target by hedge funds and others seems to be raw dirt. As you can imagine, the price of land took a horrific beating along with everything else in Southern Nevada over the past few years and this has created an opportunity for so-called “value players”. The builders are still on the ropes and foreclosure pricing is still setting the tone, but it won’t remain that way forever. The Las Vegas market is demonstrably in the process of correcting itself and someday new home builders will find it economically feasible to re-start construction again. When they do, they will need raw land to build on, and the hedge funds will be there to sell it to them because they are bidding on it now, in bulk of course.
House Republicans have proposed a last minute provision to the FHA Reform Act that would disqualify anyone deemed to have “strategically defaulted” on their mortgage from ever receiving an FHA insured loan in the future. I wonder if these same Republicans would be willing to bar any corporation from ever receiving business, rather directly or indirectly, from a US Government contract, if they have ever strategically defaulted on a loan in the course of doing business. The hypocrisy of this proposal is just incredible, yet not at all surprising, especially for Republican law makers. It’s an absolute fact that corporations, including the Fortune 500 variety, make the rational business decision to strategically default on loans all the time. When do they do this? When it makes good business sense to do so. Corporations large and small make these decisions not because they literally don’t have the money to pay, but because it makes no sense to pay based on “the numbers”. The most famous recent example is the high-profile default by Tishman Speyer and BlackRock Inc. on the $5.4 billion acquisition of Stuyvesant Town and Peter Cooper Village in New York City. These titans of business and finance bought at the top of the market and then promptly bailed out (defaulted) when the global economy collapsed and it became very clear that their “genius investment” had no chance of paying off for the foreseeable future.
So explain something to me, how is the decision by Tishman to strategically default on a $5.4 billion real estate loan any different than a decision by an individual in the Las Vegas real estate market to strategically default on a loan made in 2006 on a Las Vegas home that makes no rational sense by today’s valuation standards? Why aren’t House Republicans drafting similar language to bar corporate strategic defaulters from benefiting from future government contracts ?? Why indeed …
A major credit rating agency released a report just the other day contending that many home owners that have successfully completed mortgage modifications through HAMP (Home Affordable Modification Program) will end up re-defaulting within a year. In fact, they predicted that at least two thirds would do exactly that. This is a huge number and a highly discouraging statistic. It should be pointed out that this is a prediction made by economic forecasters, which often times resemble the accuracy rate of weather forecasting, but it’s a worrisome issue nonetheless. In all likelihood, the Las Vegas real estate market will see it’s share of re-defaults due to continued sluggishness in our local economic recovery (among other factors). But at that point, at least there is a newly viable process developing that will stave-off foreclosure in many re-default cases. Las Vegas short sales through HAFA (Home Affordable Foreclosure Alternatives) are being positioned by the Treasury Department and the major banks as the next line of defense against the toxicity of full-scale bank repossession. The banks benefit from the promotion of the short sale process by saving on fees and decreasing the severity of their overall financial loss, while borrowers get the opportunity to move on with their lives more quickly and with less damage to their credit in many cases.
Senate Majority Leader Harry Reid took an important step forward today to help recent buyers in the Las Vegas real estate market. To be fair, it’s not like he did this to help Las Vegas specifically, but rather he introduced an amendment that will help people nationwide with a potentially serious financial problem. As you might expect from a situation with a deadline that also involves a significant amount of money, there was a major last minute rush to qualify for the $8,000 federal income tax credit. This deadline came in two parts, and it is part two that could potentially cause some real problems. Currently, buyers that signed contracts by April 30th must close those escrows by June 30th in order to qualify for that juicy tax credit. This appears to be more and more problematic for two reasons. Reason #1 is that a significant number of these “by April 30th” transactions are short sales and it is doubtful there is enough time to finish completely by June 30th. Reason #2 is a matter the banks don’t really want to discuss. We are hearing from our bank contacts that the work load created by the last minute rush is so daunting that it’s unclear whether bank admin staff can finish all the work on time. Under an amendment offered by Senator Harry Reid, the closing deadline would be pushed back to Sept. 30th. Keep in mind however that this is merely an amendment to a very complicated piece of legislation at this point. Passage of this provision into law is still far from certain.
Matt Vernon, short sale and REO executive at Bank of America, has made it very public and very clear that his bank has made a strategic business decision to give the newly improved short sale process the priority that many in the real estate industry have long felt it deserved. Speaking on a recent panel discussion at the REO Expo in Dallas, Vernon made these comments …
“We’re going to do everything possible to liquidate property prior to foreclosure. REO will still be available, but we will do everything we can to do short sales.”
The Las Vegas real estate market has been starved of foreclosure inventory for the better part of 18 months now, so this is welcome news indeed. It’s just incredible to have a situation where so many qualified and motivated buyers cannot secure Las Vegas properties because of a massive and absurd supply and demand imbalance. The technical and administrative transformation of the short sale process, combined with the HAFA program from Treasury, has given new impetus to the willingness of all participants to re-examine the feasibility of a short sale transaction. Las Vegas short sales are rapidly becoming incentivized in ways that could scarcely be imagined only six months ago. The Michelle Sterling Team is fully on board and the recent news that Wells Fargo and Wachovia are joining BofA on the Equator system only increases our enthusiasm.
The new Equator administrative platform, initially conceived to standardize and streamline the short sale process, actually appears to be working. The nationwide system has just passed the 200,000 mark for short sale transactions uploaded in just over seven months time. This is highly encouraging news for the Las Vegas short sale segment of our market, which is expected to grow substantially over the next few years, if not longer. Equator is also developing a new version of their system designed specifically to interface with the recently introduced Fannie and Freddie HAFA programs taking effect later this summer. The frustration level with the short sale process (for both buyers and sellers) actually has a real chance of subsiding in future, as completion times shrink from six months to ten weeks in many cases.