Underwater mortgages mount

By Buck Wargo

Friday, May 22, 2009 | 3 a.m.

More than 80 percent of the homes bought in Las Vegas from 2005 to 2007 are underwater, a reflection of the danger that still lingers for the housing market.

The real estate Web site zillow.com released a report that shows 67 percent of Las Vegas homeowners owe more on their homes than the houses are worth — the No. 1 ranking in the nation. Stockton, Calif., was second with 51 percent. Twenty-one percent of the nation’s homes are underwater, the report said.

“Considering the bulk of those homes were bought in 2004 to 2007, that is not a surprising figure,” said Steve Bottfeld, executive vice president of Marketing Solutions. “The key question is how long can those people hold on and how rapidly prices come back. Nobody has the answer to either of those questions.”

The rising number of homeowners underwater has raised the specter that many will walk away from their homes and let them go into foreclosure. Las Vegas is ranked No. 1 in the nation in foreclosure filings, and that has prompted prices to fall more than 50 percent from their peak in June 2006.

“I think we are getting to the point where people are realizing they don’t want to be stuck in this house where they literally are buried and the prices aren’t going to come back in any realistic time frame,” said Richard Plaster, president of Signature Homes. “What I see is the number of foreclosures are definitely going to increase.”

Under the Obama administration’s plan, homeowners can only be underwater up to 5 percent to receive assistance. For those greater than 5 percent, lenders would have to agree to assist homeowners but that has been rare, Zillow spokeswoman Katie Curnutte said.

“I have to be worried about these people walking away because pundits are telling them that is the thing to do and go to the end of the block and buy something cheaper,” Bottfeld said, adding that that is a mistake because people will take a hit on their credit.

Plaster has been one of the people urging others to walk away even though he said he would never do so because he needs good credit for his business.

Banks aren’t interested in helping out homeowners and reducing the loan amount, and they are the ones who are benefiting from the bailout, Plaster said. It can take several months for banks to foreclose and, in the meantime, the homeowners can horde their cash, he said.

These people only need to wait three years to qualify for a Federal Housing Administration loan and four years for a conventional loan and prices should remain low for a while, he says.

Plaster said he doesn’t understand the criticism leveled against people who walk away from their homes. Local developers have done it on master-planned communities and no one bats an eye. And when casinos are unable to make debt payments, no one criticizes them, Plaster said.

Plaster said the more people who walk away from their homes, the quicker the housing market and prices will stabilize.

“If you are paying $2,500 a month on something that you can rent across the street for $1,200, it is not the brightest course to stay in that house,” Plaster said. “The banks have been bailed out. Why should the homeowners be the ones to suffer?”

Dennis Smith, president of Home Builders Research, said the high number of homeowners underwater doesn’t bode well for the housing market’s recovery anytime soon. Many of those homeowners won’t be in a position to sell their house and move up to a pricier home.

“We may not see any changes in the move-up market for some time,” Smith said. “Maybe two years.”

The boost in home sales has been driven by houses at the lower end of the scale. The median price of existing-home sales was $125,000 in April, according to SalesTraq.

The inventory is already expected to swell because of the 10,000 to 25,000 homes in foreclosure that banks are holding out of the market for now, Smith said.

“I don’t think anyone expects the foreclosure part of the market to change significantly for three years, and we haven’t even heard from high rises yet,” Smith said.

Markets such as Las Vegas that had a lot of construction have had the highest number of homes underwater, Curnutte said. There is no indication the Las Vegas housing market is recovering because prices continue to fall at the same rate, she said.

According to Zillow’s numbers, the median price has fallen 49.3 percent between the first quarter of 2006 and first quarter of 2009.

“Vegas is one of those markets that is not showing improvement (in terms of prices),” Curnutte said.

Over the past five years, 75.4 percent of homes purchased are underwater, according to zillow.com. Ninety-five percent of homes lost value but the median percentage of owner equity was 29.6 percent, it reported.

Homes bought in 2007 had the highest percentage of homeowners underwater at 82.7 percent. Eighty percent of the homes bought in 2005 are underwater. That lessened to 65.4 percent for homes bought in 2008. In a reflection of falling prices, 22.6 percent of the homes bought in 2009 are underwater, zillow.com reported.