Often what we see depends on where we’re looking. The real estate section of Vegas Inc. offers a case in point: The headlines included in the section point about Las Vegas, NV are: “As other retail centers struggle, why are these two doing well?” and “Outlook for Las Vegas retail centers remains turbulent.” No surprises here — the centers in affluent sections of the metropolitan area are doing well, the others not so much.
The picture is similar in northern Nevada. Home values continue to decline, the number of existing unit sales is up, and the high end market is doing very well thank you. [RGJ]
If mortgage interest rates were the guide lights to prosperity, then we’d be looking at a different picture, “The average rate on the 30-year fixed mortgage fell again this week to a record low. The eighth record low in a year is attracting few takers because most who can afford to buy or refinance have already done so.Mortgage buyer Freddie Mac said Thursday that the average rate on the 30-year fixed mortgage dipped to 3.88 percent this week, down from the old record of 3.89 percent one week ago.” [RGJ]
However, low mortgage rates aren’t the silver bullet answer to Nevada’s surplus real estate inventory, and in southern Nevada there’s another piece of the total puzzle to consider:
“There were only 220 residential and 18 commercial permits pulled in October, which does not represent much activity in a court the size of Clark,” Potts said. “Until excess inventories built during the real estate bubble years are absorbed, southern Nevada construction activity will remain low.”More than 70,000 construction jobs have been lost in the region since 2006, when the construction sector was the region’s No. 2 employer behind only the gambling and lodging sector.” [RGJ]
In other words, the low mortgage rates alone won’t do all that much to entice more buyers into the existing property market unless (1) buyers already have the financial resources to enter the market, (2) employment increases such that more buyers are capable of entering the market, and (3) declining home prices are arrested such that homeowners with adjustable rate mortgages have more options than foreclosures and short sales — adding to the already bloated surplus inventory. We can drill down on each of these three basic elements.
A buyers market with constrained lending: The return to underwriting standards by mortgage lenders means that those who may have had the necessary resources to enter the housing market will not have to demonstrate more capacity.
“..mortgage lending standards remain very tight, limiting sales activity. A borrower with a FICO credit rating of 620 or above is generally considered a prime borrower. Many of the housing boom excesses involved deteriorating lending standards for subprime borrowers, but the credit quality of prime borrowers was relatively unchanged from 2000 through 2007, with a median FICO score of about 730. However, since the start of the recession, the median FICO score for prime borrowers has risen about 40 points to around 770 and has not declined. Thus, a prospective homeowner must have a much higher credit rating than in the past to qualify for a loan.” [SFFed]
There is absolutely nothing surprising about this development. Banks, which were only too pleased to lend mortgage money in the form of exotic mortgage products during the Housing Bubble, and which now find themselves awash in Toxic Assets based on those exotic mortgages, have pulled back on the reins and we’re now back to the old saw, “The bank will lend money to you if you can prove you don’t need it.” When the bankers figure out how to write down, write off, or live with, the Sludge of Toxic securitized assets they created during the Bubble, then the FICO score for prime lending might return to a more reasonable 730.
Increasing employment is another matter that needs to be addressed. If there is any good news to be had in the Silver State it’s that we didn’t make the Department of Labor’s list of states with increasing applications for unemployment benefits in the most recent report. The bad news is that in the roster of states that did report declining employment numbers the cuts were all too often in construction, retail, and service jobs. Given the overall picture it doesn’t look like those 70,000 construction jobs lost in Nevada when the Housing Bubble splattered are going to return any time soon. If not construction, then what?
One perspective asserts that we don’t necessarily need to worry about increasing employment numbers. Once upon a time, not so long ago (2005), the punditry at Citigroup decided that Little People didn’t matter as described in the infamous Plutonomy Memos — which their lawyers are now desperate to scrub from the Internet. There is to be in our economic future a bifurcated economy, with the Plutonomous and the Rest of Us.
If one buys into the Plutonomy argument, then there is no need for any legislation encouraging jobs of any sort because the rich, who are taking over the economy will be the drivers, not the 99% who are ‘fallaciously’ considered to be the source of revenues in a consumer based economy. By these lights Plutonomy is the wave of the future, and the Little People are just so many peasants with pitchforks and lanterns futilely raging in their unenlightened darkness.
Unfortunately for the Plutonomy advocates there is such a thing as a U.S. consumer, and the ultra-rich have been unable to spend their gazillions quickly or efficiently enough to prevent the Little People, those quotational Averages, from noticing that they have declining real incomes and thus declining spending power. In short, the 99% know who they are, and they aren’t shopping in the upscale retailers or in the mansion-market. They also know that they will not be entering the housing market until they can find steady employment.
There is an observable bifurcation in the labor market, with the unemployment level for those holding less than a high school diploma at 13.8%, those with a high school diploma or some college experience have unemployment rates of 8.7% and 7.7% respectively, while those holding college degrees have a manageable 4.1% unemployment rate. [DoL table A-4]
The declining value bind also affects the Nevada housing market. If homes were purchased using those adjustable rate exotics, then the prospect of being “underwater” is an unfortunate, but logical, by-product. Those consumers who were talked into adjustable rate mortgages, and to no small extent those who were doing the talking, believed that the housing market would perform as it had in the past — when common practice was defined by fixed rate mortgages. “Underwater” consumers have few choices except refinancing and foreclosure, and without refinancing there is only foreclosure. If there are more foreclosures then there will obviously be more abandoned property added to the surplus inventory. More surplus inventory, more price declines, more price declines, more foreclosures. We get the picture — it’s a whirlpool, and Nevada is participating with a vengeance:
“Nevada, in the meantime, led the nation in home price depreciation in November, CoreLogic said, with prices down 11.2 percent statewide from the year-ago level. Nationwide, there was a 4.3 percent year-to-year decline in home prices during November.
The market in Nevada and around the country has been affected by distressed home sales involving foreclosures and short sales in which banks allow struggling homeowners to sell their properties for less than what is owed.
“Distressed sales continue to put downward pressure on prices and is a factor that must be addressed in 2012 for a housing recovery to become a reality,” said Mark Fleming, chief economist for CoreLogic.” [VegasInc]
It might be argued that the Nevada housing market will start to recover, if and when mortgage lending and related underwriting standards return to pre-Bubble practices. It would also be helpful if employment levels could be sustained, with job retention in both the private and public sectors. Finally, it’s going to take some time before the excess inventory can be removed such that the deflationary pressure on home values can be relieved. This is going to take some effort, not always politically popular, to reduce the number of existing properties which are underwater by either allowing the reduction of principal owed and subsequent refinancing, or converting the property to rental units.
Nevada and the other Sand States never intended to be the poster children for the nightmare that’s come as a result of an over-heated flurry of financial manipulation in mortgage based securitized assets, but here we are.
Desert Beacon 