Builder: It is ‘rational’ for homeowners to walk away

By Buck Wargo

Friday, March 13, 2009 | 2 a.m.

If the Las Vegas housing market didn’t have enough bad news, the picture has gotten even gloomier when it comes to falling prices and the frightening prospect of people walking away from their homes.

More than 234,000 or 58.2 percent of Las Vegas homes with a mortgage are underwater, according to a report by First American CoreLogic. An additional 14,088 mortgages, or 3.5 percent, are near that point, bringing the total to 61.7 percent of all outstanding mortgages.

Nevada was ranked No. 1 in the nation with 55 percent of homes underwater or upside down, meaning borrowers owe more on their mortgage than the home is worth. That contrasts with 20 percent nationwide.

After Nevada, Michigan was ranked second in the nation with a negative equity share of 40 percent. Following these two states are Arizona at 32 percent, and Florida and California at 30 percent.

“It is amazing, stunning and a catastrophe,” says Richard Plaster, founder of Signature Homes who has been warning about the foreclosure problem in Las Vegas growing worse. “At every breakfast or dinner table, there is a discussion going on about ‘what are we going to do.’ It is going to be hard-pressed on why people should stay in their house. People have no choice if they are rational.”

Plaster says the government’s plan to help reduce foreclosures doesn’t go far enough because it won’t aid those who are so far underwater and will walk away even though they can afford their mortgage payment.

“It is simply not going to help those way underwater, which is what most of Las Vegas is,” Plaster says.

People who can afford to pay but start going the foreclosure route further depress prices, which are down nearly 50 percent from the market’s high, Plaster says.

“Banks are getting more and more back and what they are doing in effect is auctioning them off,” Plaster says.

The housing market has been helped by investors purchasing homes, but there are only so many of them out there and the supply will far outpace demand, Plaster says. And given the slowdown in the economy and many buyers who are frightened about their job prospects, that doesn’t bode well for prices stabilizing, he says.

The average loan-to-value ratio for properties with a mortgage in Nevada was 97 percent, or less than $8,000 in equity, leaving the typical mortgaged homeowner with virtually no cushion for the rapidly declining home values, the firm reports.

Steve Bottfeld, executive vice president of Marketing Solutions, a Las Vegas housing consultant, says anyone who bought a home from 2004 to 2007 is underwater and many aren’t going to get government assistance.

Bottfeld says Las Vegas will be one of the first markets out of the housing slump, but until prices hit bottom, there is not going to be a recovery. He says he remains concerned about a backlog of foreclosure inventory at prices so low that it forces other prices downward.

Bottfeld takes the opposite approach to Plaster that people shouldn’t walk away from their homes if they are underwater. People should be educated that homeownership is important to wealth and that the housing market goes in cycles, Bottfeld says.

“It is important that people stay in their homes and not walk away,” Bottfeld says. “They would be walking away from their investment. If they hang onto it, it will come back.”

Dennis Smith, president of Home Builders Research, says it’s the homeowners who used their homes as a bank account and took out equity are the most likely to walk away.

“It shouldn’t be a revelation that there are going to be more foreclosures,” Smith says. “The government is trying to put a Band-Aid on the situation, but I don’t see how foreclosures are going to go away in the near term.”

Smith says he doesn’t expect people to walk away en masse today for being underwater, but instead suggests it may happen over several months or years. Many people may not know now that they are underwater, but once they come to that realization, they will take time to make that decision to leave, he says.

Hanley Wood report

New-home sales may be down these days, but D.R. Horton is leading the way among homebuilders, according to Hanley Wood.

The 306 sales of single-family homes in January was 68 percent more than December, but 56 percent down from January 2008.

Sales of D.R Horton’s communities contributed nearly 50 percent of the 310 sales, says Shane Whitmore, regional manager with Hanley Wood Market Intelligence.

Of the top 10 selling communities, D.R. Horton held nine of the 10 spots.

Sales of single-family homes accounted for a majority of new-homes sales at 69 percent, Whitmore says. About 25 percent were town homes and duplexes and 5 percent were condos.

The median minimum sales price for single-family homes sold in January was $219,990, a drop of 12 percent from December and 19 percent from January 2008, Whitmore says. In January 33 percent of the new homes sold were priced under $150,000 and 42 percent were priced under $200,000.

The median square footage across all product types in January was 1,750 square feet with a median price per square foot of $108, Whitmore says.

The cancellation rate — the number of sales contracts previously written by builders that were canceled — fell to 29.7 percent in January for single-family homes. It was 39 percent in December.

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].