Las Vegas Sun

March 28, 2024

Speculators bear brunt of foreclosures

Big majority of homes lost aren’t owner-occupied

If location, location and location are the most important factors in real estate, timing is not far behind.

When the Southern Nevada real estate market was white hot a few years ago, mortgage companies came up with creative financing plans that made it easy for individuals who lacked the normal financial wherewithal to jump in.

Subprime lending programs allowed some borrowers to obtain loans beyond their economic means - at least as measured by the usual yardsticks used to determine loan qualification - with no down payments and initial low interest rates.

Recently, however, the interest rates began to climb, and many homeowners were unable to make their mortgage payments. That led to an increase in foreclosures and a glut of homes on the market.

Here's what a typical homeowner might have faced with a $250,000, 30-year adjustable - rate mortgage :

For the first three years, he might have a reasonable fixed rate of 6 percent, resulting in a monthly payment of $1,499 .

After that, however, inflation and other financial factors could start pushing the rates up toward a ceiling of perhaps 11 percent.

If the rate rose 2 percentage points annually, within six years of taking out the loan, the homeowner could be making a monthly payment of $2,300 when the cap is reached.

That's $800 more than the original payment. And that's also why For Sale signs dot so many streets in the valley.

You don't need to tell that to Igor Doncov, who had the misfortune of investing in the booming Southern Nevada housing market just before it began to collapse three years ago.

But today the 60-year-old San Mateo, Calif., computer consultant considers himself one of the lucky ones as he watches from afar the valley's rising foreclosure rate which, driven primarily by investors walking away from their homes, has become the nation's highest.

Doncov didn't lose his two $450,000 homes to foreclosure. But he did lose $100,000 in down payments after he was able to sell both properties for what he owed on them a year after buying them.

His troubles began in October 2004, after the homebuilder , despite assurances to the contrary, dramatically slashed the price of new homes in his Henderson development just months after Doncov bought his properties.

"It could have been much worse for me," Doncov said.

Unlike Doncov, who escaped with only a hefty financial loss, many other investors are now caught up in the valley's growing foreclosure epidemic.

Nevada led the nation in the rate of foreclosure filings in August, with one filing for every 165 households - triple the national average of one per 510 , according to RealtyTrac, a Southern California company that monitors foreclosures nationwide. The filings included notices of default, auction sales and bank repossessions.

A Sun computer-assisted analysis of RealtyTrac data found that new foreclosure filings in Southern Nevada have skyrocketed in the past six months, from 2,165 in March to 5,242 in August.

Combining the RealtyTrac figures with data from the Clark County assessor's office, the analysis found that 74 percent of all single-family homes in foreclosure during the past six months were owned by investors who did not live in the homes.

Roughly 85 percent of actual auctions or repossessions of homes from March 1 through Aug. 31 involved properties not occupied by their owners, the figures show.

The Sun was able to determine which homes were owner-occupied because their property tax increases are capped at a lower rate than homes owned by investors.

"The fact that investors are more likely to walk away from their property shouldn't be surprising to anybody," said Jeremy Aguero, a Las Vegas economic analyst.

Speculators have played a prominent role in the real estate market here, making up as much as 40 percent of it in recent years, Aguero said.

That view was shared by Doug Duncan, a senior vice president of the Mortgage Bankers Association in Washington.

"If you look at the rate of construction relative to population growth, there was a lot of speculative buying in Nevada," Duncan said. "Once the prices began falling and investors were losing money, they began dumping their homes."

As of Sept. 1, however, the Sun analysis found that 38 percent of all single-family homes in Southern Nevada were still owned by investors.

Many of those investors jumped into the market with the help of lax lending rules and an eye toward "flipping" properties that were rapidly rising in value to make a quick buck.

So-called subprime loans - offered to home buyers and investors with less than ideal credit who otherwise might have difficulty qualifying for mortgages - allowed people to purchase homes with no down payment and an initial low interest rate, further fueling the staggering sales boom.

An Associated Press analysis of Census Bureau data found that from 1990 to 2006 median home prices in the state rose from $95,300 to $315,200, a 231 percent increase that led the nation.

During the peak of the rush in 2003 and 2004, valley homebuilders couldn't build homes fast enough.

Census Bureau data obtained by the Sun show that from 1996 through 2002 there were 19,000 to 22,000 permits issued annually for single-family units in Clark County. Permit activity rose sharply in 2003, peaked at 31,741 in 2004, and came crashing back down to 21,590 last year, the lowest total since 2000.

Once the subprime loans' rates were hiked, many homeowners suddenly found their mortgages unaffordable, and foreclosures started leaving a glut of homes on the market.

"With property values going up so fast, people were biting off more than they could chew," said Devin Reiss, president of the Greater Las Vegas Association of Realtors. "They probably were getting into the wrong lending program."

Scott Bice, former commissioner of the state's Mortgage Lending Division, agreed.

"Several years of free and easy credit has fueled this whole thing," Bice said. "Everybody in the industry knew that some of these programs were not good."

But he added that, as a state regulator, he had no control over the lending programs, which were set by Wall Street investment bankers.

Even the homebuilders, who were cashing in on the real estate bonanza, knew something was wrong.

"Many builders were trying to discourage the speculators," said Irene Porter, longtime executive director of the Southern Nevada Home Builders Association.

"We could just feel it and know that we would end up with these problems. But we really couldn't do much to stop it. You can't refuse to sell a house to someone who has a loan."

Today, however, the homebuilding industry is paying for its gluttonous past.

In the last 18 months, as foreclosures have climbed, roughly 12,000 workers have been laid off, about one-fourth of the industry locally, Porter said. That in turn has slowed the ability to build infrastructure to keep up with growth and resulted in lost tax revenue .

And houses that real estate agents once could reasonably expect to move in only a few days now typically take two months or more on average to sell.

Aguero, the Las Vegas economic analyst. who is conducting a foreclosure study for the Home Builders Association, said he doesn't believe local governments could have done anything to prevent the downturn in the housing market.

"The free market isn't perfect," he said. "You have to allow the market to correct itself."

Clark County Commissioner Bruce Woodbury subscribes to that theory.

"The pendulum swings even in Las Vegas, where real estate always seems to go up in value," he said. "It's magnified here because our growth rates have been so high."

Woodbury doesn't have as much sympathy for the speculators as for the homeowners who have fallen on hard times.

"You hate to see foreclosures, but frankly I would rather see investors get foreclosed upon than homeowners," he said.

Though the percentage of owner-occupied home foreclosures is smaller, Aguero said officials should not underestimate the effect on the community.

"It's still troubling, given the volume we're talking about," he said.

Woodbury acknowledged what the experts are saying - that overbuilding has occurred in Southern Nevada in recent years.

But he said the county has worked to approve projects that conform to its master plan.

"Our policies are much better now," Commission Chairman Rory Reid added. "But we can plan better. We need to continue working on affordable housing projects."

Assembly Majority Leader Barbara Buckley, D-Las Vegas, is among those looking for answers to the valley's foreclosure predicament. She has helped put together an interim legislative subcommittee to examine the mess.

"I think a lot of people are at fault," Buckley said. "We didn't count on the glut of investing and the activities of the subprime mortgage companies putting people into loans that were inappropriate."

Buckley said she hopes the committee will look at "how we got here" and "how we make sure we don't get here again."

Buckley and other officials also are concerned about the effect the staggering foreclosure rate is having on current homeowners.

Jim Pair, vice president of the National Association of Mortgage Brokers in McLean, Va., said foreclosures generally drive down home values.

"Usually , the neighborhoods where you have foreclosures can begin to deteriorate," Pair said. "Weeds grow up and vandalism takes place. That hurts the neighborhood and pushes home values further down."

Real estate experts said Las Vegas is now experiencing the "bottom dweller" phenomenon. Investors are back in action, snapping up a large percentage of homes that have been auctioned off or repossessed through foreclosure.

"They're the ones out picking up what falls off the trees," said Dennis Smith, president of Home Builders Research Inc., which tracks housing trends in Las Vegas.

These investors generally will rent the homes in the short run to generate cash flow and then wait until the housing market heats up again before selling them. This can lead to a flattening of apartment rental rates as tenants are lost to house rentals.

"It has always been the general belief that when investors drive the market up, they'll also drive it down," said Jay Butler, an Arizona State University real estate professor. "That's why politicians are in so much trouble trying to solve this problem."

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