More homes becoming negative equity casualties

By Buck Wargo

Published Friday, Jan. 9, 2009 | 2 a.m.

Updated Tuesday, Jan. 13, 2009 | 2:52 p.m.

Adjustable rate mortgages and investors counting on appreciation fueled Nevada’s rise to its spot as the foreclosure capital of the country the past two years.

By the time the final 2008 statistics are calculated, the Las Vegas Valley is expected to have more than 25,000 foreclosures, according to SalesTraq’s count.

But in 2009 Las Vegas will start seeing a different wave of foreclosures from people who can afford their mortgages, says Mark Baker, a loan originator with Meridias Capital.

“I am saying at some point people are going to walk away (from their mortgages),” Baker says. “The issue has nothing to do with bad loans. It has to do with equity.”

Baker says the $170,000 to $180,000 median price for homes today is where it should be if you look back 28 years and calculate 4 percent a year appreciation. Median home prices have fallen more than $100,000 in the past 18 months.

“Our biggest problem is that people bought homes at the height of the market, and the problem is when the market will catch up to where it was, it may take 20 years for people to get their money back,” Baker says.

Foreclosures continue to hinder the recovery of area home values, Baker says. A foreclosure affects values up to one-eighth of a mile away, he says.

Even homeowners who have the ability to pay may walk away if they are making payments on a home they bought for $400,000, only to see its value drop to $275,000, Baker says. Baker says he expects many to walk away in the next 12 to 18 months and not care about their credit.

“People are starting to realize it doesn’t make sense to make payments on this,” Baker says. “They will think it is worth it to take a hit.”

Baker says as a mortgage professional, he tells people that they signed their contracts and are obligated to make payments, but admits he has told friends it doesn’t make sense if they are so far under water. He says he has a friend who paid $840,000 for a home at the height of the market. Recently, a similar home going through foreclosure sold for $425,000. He’s paying $5,700 a month compared with others paying $3,000 to $3,500 a month.

“The guy paid 10 percent down and owes $750,000, and the neighbor is paying $400,000. It doesn’t make sense anymore,” Baker says.

The good news about the Las Vegas housing market is its economy has been more structurally sound than other places across the country, Baker says. Although some cities in the Midwest have been losing jobs and population, Las Vegas is still creating jobs.

But Baker says he doesn’t believe anything can slow foreclosures, even with government intervention.

Grubb & Ellis forecast for 2009

Grubb & Ellis, the real estate brokerage, released a report that suggests 2009 will be a challenging year for commercial real estate because the economy is starting the year 13 months into what may become the longest recession since the 1930s.

The economy will continue to struggle in 2009, which will dampen demand for all products and increase vacancy, says Robert Bach, senior vice president and chief economist at Grubb & Ellis.

The firm predicts U.S. job losses in the range of 1 million to 2 million in 2009 on top of the more than 2 million in 2008.

Loan delinquencies and foreclosures will increase with more properties returning to lenders who will be anxious to sell them, Bach says. He says capital will remain tight and expensive, but it will be more available than in 2008.

Office vacancy rates will rise because of supply coming on line and softer demand, Bach says. There should even be a big jump in sublease space.

Tenants will have greater negotiating leverage in 2009 with concession packages becoming more generous as the year progresses. The growing amount of sublease space will press down on rental rates for direct lease space, which is expected to decline 4 percent to 5 percent for Class A (high end) and B space (medium) by year-end, Bach says.

Employment growth drives demand for office space, and the labor market will be shrinking in 2009, Bach says. Government and health care will be among the few sectors with growing demand for office space.

As for industrial space, businesses’ quest for cost-saving efficiencies should spur demand for industrial space in 2009 despite the weak economy, Bach says. The industrial market will recover more quickly than the office market because the construction pipeline is set to thin out sooner, he says.

The retail property sector will continue to be hurt by a downturn in consumer spending, Bach says. Grocery store-anchored centers will hold their ground in 2009, while centers on the urban fringe, where housing construction has stalled, will suffer. Retailers will be even more conservative with their expansion plans in 2009, with more store closings and fewer openings. Expect higher vacancies and softer rental rates by year-end, he says.

In other real estate news:

Summerlin ranked sixth in the nation and Henderson 10th in prospective home buyers searching by ZIP codes, according to ZipRealty Inc. Phoenix was first, followed by the Arizona cities of Scottsdale and Chandler.

• Alex Edelstein, the condominium developer who had a blog on Las Vegas development and the economy, has ended the Web site. Edelstein, whose ManhattanWest project was halted when lenders pulled financing, posted a note on the site saying goodbye and that it’s run has ended.

“I hope this has been useful and interesting. Best of luck to all of you in your endeavors,” Edelstein wrote.

Brian Wargo covers real estate and development for In Business Las Vegas and its sister publication, the Las Vegas Sun. He can be reached at 259-4011 or at [email protected].