Home prices key to economic turnaround, economist says

By Buck Wargo

Friday, March 6, 2009 | 2 a.m.

The steep drop in home prices and newly approved $8,000 tax credit for first-time home buyers will help pave the way for a recovery of the Las Vegas housing market in 2010, according to the National Association of Realtors’ chief economist.

Lawrence Yun says he expects foreclosures will continue at their elevated level in 2009, but is optimistic that inventory will be whittled down because of the increase in existing-home sales in Las Vegas over the past several months. Only Nevada, California and Arizona have seen big jumps in sales.

In 2008 Las Vegas had 38 percent more sales compared with 2007, Yun says.

“You have gone through some very tough times, but a further decline, if any, would be minimal,” Yun says of median prices that have fallen $138,000 in the past two years to $150,000 in January. “Given $150,000 is very affordable for such a dynamic metropolitan region, once the economy recovers, you are in good shape. But it is just getting over the short term.”

During an interview, Yun says he sees Las Vegas prices stabilizing in the second half of the year and by the fourth quarter they could be higher than at the end of 2008, when the median price was $157,250, according to SalesTraq.

Yun says he wouldn’t be surprised if prices appreciate more than 5 percent in 2010, but adds one caveat to his prediction — although the long-term outlook for the housing market looks good, it is hard to make short-term forecasts. If there aren’t any buyers for the foreclosures that will be coming online, prices could easily fall another 10 to 15 percent, Yun says.

“But I have been hearing more examples of where foreclosure properties are getting multiple bids,” Yun says. “If they are discounted heavily or buyers are fighting over them, I think we are getting close to the bottom.”

If local and national prices continue to decline by another 10 percent, that will further weaken the balance sheets of banks and delay the recovery of the economy. The housing market troubles have been a driving force behind the economic woes and financial meltdown, he says.

“Home prices are key to the economy turning around,” says Yun, who adds he fears any further drops and their effect.

If that happens, he says, Americans won’t have the will to spend another $700 billion on a bank bailout and that could lead to a deeper recession.

Yun, who appeared Monday at the National Association of Realtors’ Rocky Mountain Regional Conference at Green Valley Ranch Resort, says he thinks the tax credit will be a “major influence” in getting buyers off the fence because first-time buyers make up 40 percent of a market during a year. The previous $7,500 tax credit wasn’t as much of an incentive to buy because it had to be repaid, he says.

“It will also open up the trade-up buying,” Yun says of the new tax credit. “Many are not trading up because they cannot sell their homes. There will be some domino impact.”

Homes sales nationwide are where they were 12 to 13 years ago, but the population has grown by 3 million a year since then, Yun says. The tax credit could add about 300,000 buyers: People on the margin where essentially cutting the price by another $8,000 in a market such as Las Vegas will push them to buy, he says. Falling prices caused by foreclosures have sparked sales, he says.

“Areas where we have seen strong turnaround in affordability are the markets that are showing an increase in sales,” Yun says. “The prices have come down here and many of the people who had been priced out during the boom are now realizing they can begin to qualify. It is much more stringent, but those people who can qualify understand the value proposition.”

Yun says it is hoped the economic stimulus plan also boosts the economy, creates jobs and helps stabilize prices.

“The continuing price decline is leading to collateral economic damages, banks are continuing to bleed and the consumer spending has contracted because people have lost value,” Yun says. “We hope this begins to turn the economy around and improve bank balance sheets as well as the housing equity situation, which will improve consumer spending.”

Yun says an increase in the federal loan limits for California from $625,000 to $729,000 should help boost sales in that state and that in turn will give people equity to purchase homes in Las Vegas. The $8,000 tax credit won’t make as much as impact in California because home prices are so much higher there, he says.

As for the foreclosure plan unveiled by the Obama administration, Yun says the biggest concerns he has about it is over fairness of who qualifies for assistance. Despite that, he says it will help lessen foreclosures.

“I think it is a net overall positive in terms of lessening the inventory that reaches the market,” Yun says.

Yun says the concerns over fairness has to do with how people who put nothing down when buying their home are more likely to qualify for foreclosure assistance than someone who put 20 percent down. The reason is the person who put nothing down has a larger loan obligation, he says.

“The fairness issue is those who overstretched themselves rather than buying a starter home are more likely to qualify than those who were more responsible,” Yun says. “It is a complex more hazard issue that is arbitrary.”

Only those who had their loans bought by Fannie Mae and Freddie Mac are eligible for help, Yun says, adding that most people don’t know who has their loan and that includes himself.

“Anytime there is unfairness, it arouses emotions,” Yun says.

The reason for doing that is Fannie Mae and Freddie Mac are government controlled, and it is easier to modify the terms of loans they hold, Yun says. But that can be addressed by giving immunity to mortgage service firms so they don’t have to worry about lawsuits in modifying terms of other loans, he says.

The other policy that could be enacted is using the Federal Reserve to buy mortgage-backed securities to bring down interest rates to help everyone, Yun says.

Despite the program, Yun says there is a concern about the next wave of foreclosures coming from people who can otherwise afford their payment, but will choose to walk away because the value of their homes has fallen well below what they owe. That is a difficult issue for many homeowners to deal with along with the concern of taking a hit on their credit score if they walk away.

“But a lot of people don’t want to look like a fool and continue to make payments when they are underwater,” Yun says. “That’s why it is important for homeowners to see home prices stabilize and turn upward. It could give them light at the end of the tunnel.”

If people are only 10 percent to 20 percent underwater, they are more likely to have hope of a turnaround than if they were 30 percent to 40 percent underwater, Yun says. Those people are more likely to walk away.

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].