The Interest-Only ‘House Of Cards’ In Las Vegas
The Las Vegas Business Press has an update on that housing bubble. “As the home-loan delinquencies rise nationwide, Nevada’s numbers remain surprisingly strong. However, the pending interest-rate hikes by the Fed, the day-to-day fluctuations in oil prices, and the Silver State’s high percentage of interest-only and adjustable-rate mortgages have left some lenders and analysts wondering if the bubble will burst.’”
“‘Where you will probably have problems is with the no-down-payment, 100-percent-financed ARM (type of loans), and interest rates go up,’ Nevada State Bank Senior Vice President Jeff Bargerhuff said. ‘It’s kind of like the perfect storm of mortgage lending.’”
“Nevada ranks second in the nation at 61.3 percent, behind only California (69 percent; in 2004, it was 46 percent), in the percentage of potentially negative-amortizing mortgages, including interest-only and products with ARM options, according to the FDIC. Nationwide, 49.5 percent fall into that category. ‘ARMs tend to have a higher rate of foreclosure,’ said an official from the MBA.”
“The year-end 2005 FDIC statistics show a sharp jump from the same time 12 months before, when Nevada’s interest-only and adjustable-option loans were more in line with the rest of the country. The state had 39.5 percent of its mortgages in that category at the end of 2004, compared with 31.1 nationwide.”
“Problems can show up when underwriting standards are relaxed, Nevada State Bank President Bill Martin added, ‘It just depends how tight the lender tied it and if they just didn’t care because they wanted the loan. You have to realize people have car payments and other things to pay.’”
“Some of the riskiest of loans, the subprime ARM loans, showed an increase in delinquencies at the end of 2005. The Mortgage Bankers reported 7 percent of such loans were 30 days or more past due in Nevada, compared with 5.2 percent the year before. The U.S. averaged a 12.6 percent delinquency rate in subprime ARM mortgages as of December 2005, which was up from 10.7 percent the year before. ‘It’s what we have been expecting,’ a MBA representative said. ‘There are so many new loans out there that haven’t been seasoned. Interest rates may play a role in the future, but right now, it is just the economy, job loss and low (home) appreciation.’”
“One realty broker, Linda Rheinberger believes there might be too much emphasis put on Nevada’s interest-only loan numbers anyway. ‘It’s just to maximize return,’ she said of the financing’s popularity among investment buyers. ‘If you don’t hold the properties that long, it doesn’t make sense to put money down.’”
‘Nevada ranks second in the nation at 61.3 percent, behind only California (69 percent; in 2004, it was 46 percent), in the percentage of potentially negative-amortizing mortgages..If you don’t hold the properties that long, it doesn’t make sense to put money down’
Looks like a majority of buyers in 2005 are speculators that bought very near the peak of prices. Interesting the BP rn this, as they usually are RE cheerleaders.
Interest only loans with zero down are going to bury a lot of rookie buyers. The lending industry has lowered the historical credit guidelines so far that eventually a lot of lenders will get buried too.They are borrowing future demand to keep things plugging along. This will catch up to them real soon.
Don’t know if someone posted this already on another thread…
Home Foreclosure Fraud Rising in SoCal, from LAT
http://tinyurl.com/omeox
Can’t he void the contract he signed? He’s legally blind for God’s sake!
What a sad story
I’m sure there will be a lot of this in the future.
Nevermind the future it’s happening now at a pretty good clip.
Just now on Squawk Box interview of Peter Thiel ….Trader Monthly had done a piece on him. He is the one who sold PayPal to eBay has sold his property and is now a happy renter. He is telling his friends to do the same as he expects a very hard down spell (15%-20% this year). If RE unravels he expects a recession to follow. His words is to sell housing and buy bonds. He runs Clarium Hedge Fund.
For Nevada “Some of the riskiest of loans, the subprime ARM loans, showed an increase in delinquencies at the end of 2005. The Mortgage Bankers reported 7 percent of such loans were 30 days or more past due in Nevada, compared with 5.2 percent the year before”
The percentage will increase way beyond 7 percent. It will hit 10% this year. The Las Vegas economy is in for big problems. Just wait. Las Vegas where you can gamble at the casino or at the local mortgage broker’s office. It is sad.
David
Bubble Meter Blog
Not just LV, Northern Nevada (Reno area) will be hit just as hard. So many of the houses for sale now are empty.
Something interesting I noticed, I have lived in my neighboorhood for 14 years. Alot of home that were rentals going back as far back as I can remember, are now for sale.
Is your area Reno ???
Close, I’m about 30 miles south in Carson City.
The reason I asked is that I know a lot of people (mostly public employees) that have purchased in Reno, Carson City, Sparks, Menden, Gardnerville over the past 10 years and rented the houses…Not for investment but for their retirement home….
No state income tax on their pensions was the motivation…
From Calif?
No state income tax is nice, but they forget about the snow. Your golden years are not the time to learn about snow. I see people like that from Calif all the time. After one winter they leave.
Most I know either have Motor Homes or winter homes…
Yeah, you gotta do that or else like winter. It helps to be a skier! I live in Washoe Valley, between CC and Reno. I can check out how busy the lift looks with my binocs out the back window.
Sounds like the smart money is considering this the top and is cashing out. If you could track these people, you’d probably find an approximate good time to buy RE when you see them jumping back into the game.
Oh, I know when to buy. When most people are saying how RE is a bad investment.
Test
“Linda Rheinberger also stated that ‘If you don’t buy right now then you’ll be priced out forever because real estate always goes up in double figures and, you know, they aren’t making any more land.’”
Seriously, can’t someone just run the numbers on GED-less yahoos? If the median price is 350k and you have 15% appreciation every year the median price in ten years will be 1.4 million. 10% appreciation puts you at 900k. This is after doubling and tripling since 2001. Fact is, there’s too many people of very average intelligence listening to idiots like Rheinberger who think there’s an easy an limitless amount of money to be made. These lower rungs on the intelligence ladder are paying the guys a few rungs up on the ponzi scheme.
‘If you don’t hold the properties that long, it doesn’t make sense to put money down.’”
Damn, I missed another loan opportunity! (I/O) if it goes up I sell quickly, if it goes down I quickly walk away….great idea for someone in their twenties.
‘If you don’t hold the properties that long, it doesn’t make sense to put money down.’”
Well now….Thats kind of sums it up doesn’t it….
I have said it a million times , the lenders never should of allowed 100% financing for investors. Investors should of been made to put 20 to 30 % down and charged a higher rate. A investor loan is a higher risk loan always . Now the lenders made it so easy for investor/flippers that they created a false demand market . These sort of investors are short term hit and run types .Investors should not be sitting the appraisal comps for a area because it does not reflect what the end user demand would be .
AMEN!
Investors should not be sitting the appraisal comps for a area because it does not reflect what the end user demand would be .
Too late now..The Bubble Genie is out of the bottle.
I know , but I’m still mad about it .Look at Arizona and Florida right now , they are so messed up on proper pricing because of the investors that its frighting .
Good point wizard….
I’ve made some fair money in real estate, but I’ve been sitting out for the past 2 years (and of course in hindsight I’ve missed out on a fortune) because even 2 years ago I thought the prices around here (Portland area) were a joke. At any rate, at least when I was buying, one did have to pay more for a loan if one weren’t going to live in the house. Has that changed?
Looks like it did. Investors use to be a small percentage of the market . They were either fixer upper types , or landlord types buying the investment to rent out long term. This new age investor is the hit and run type , driving up the prices , and leaving creating a false demand .
That is still the case (paying higher costs for a non-owner occupied property), but a potential borrower can get 100% financing for investment property and not have to prove if they can pay the loan back. Where I think the real problem lies is that a borrower says they will live in a property and in reality rent it out. It is breaking the law. They attest on the loan application that they will live at the home. Some folks will do anything to save money, especially their “investment”. If these speculators can’t flip, the ARM kicks in, they get the new tax bill, and they can’t get enough in rent to cover the mortgage payment there will be a lot of nervous lenders.
Yep. Back when I purchased my rental townhouse (in VA) in ‘99, it was 20% down and a higher interest rate (fixed). And I fully understood….it was, after all, investment property. Fortunately, in 2003 I was able to reduce my payments with a refi to a much lower rate (fixed). Now I’m $300/month in the black.
If I had gotten one of the voodoo loans at that time, I’d be crying in my beer along with the sheeple. But I’ve never been one to follow the crowd anyway…I do my homework even if it’s to buy a new mp3 player (and it ain’t gonna be an iPOD).
BayQT~
“Problems can show up when underwriting standards are relaxed, Nevada State Bank President Bill Martin added, ‘It just depends how tight the lender tied it and if they just didn’t care because they wanted the loan.
WTF should the local lender care…
This f*ckheads simple bundle the mortgages and send them off to some idiot wholesaler who repackages them to China, or some poor domestic pension fund or REIT.
No sweat off their collective azzes for relaxed “underwriting standards”.
If there was, you can be damn sure the rules of the game would be different.
Ben -
Did you see Lennars numbers? On the surface they look ok?!?! What gives!
15 mins ago profits up 32%
http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B6BBE0BD3%2DB74C%2D4A58%2DA1BB%2DACD9532739F5%7D&source=blq%2Fyhoo&dist=yhoo&siteid=yhoo
That’s what gives.
There is more to this story. The YOY numbers of 4% look horrible and no B/S. As a CPA I could never evaluate a company without a Balance Sheet.
They have financial flexibility….They have tremendous economies of scale…Like Cote said; focus on the lenders….
Weren’t you one of the “prices to drop 30-50%” people? Still waiting for any sign of that.
Maybe LEN’s numbers are good because people are buying there houses. At least that is what they’re saying:
“While there has been a slower sales pace in certain markets in which we operate and price appreciation in these markets has moderated relative to the appreciation experienced in the past few years, we were still able to achieve a 4% increase in new orders during the first quarter,” said Chief Executive Stuart Miller in a statement.
Not me….
A portion of the article:
Motley Fool
Cracks in Lennar’s Foundation?
Tuesday March 28, 11:37 am ET
By Stephen D. Simpson, CFA
Into this mess come Lennar’s (NYSE: LEN - News) fiscal first-quarter earnings. The earnings themselves were fine, which doesn’t really surprise me — this company has a healthy recent track record of meeting or exceeding expectations, and I doubt it would want that to change. Revenue rose about 35% in the quarter, with operating earnings from homebuilding up 36% and overall income from continuing operations rising 34%.
Less positively, new orders were up just 4% — the weakest result I’ve seen here in a while. What’s more, the company reported that gross margin in the first quarter came under a little pressure from incentive programs in the West and Central operating areas. So what will the gross margins look like on the new orders booked this quarter? Management guidance certainly didn’t sound problematic, but I’d remind my fellow Fools that if guidance were always perfectly prescient, we wouldn’t see the words “earnings surprise” so often.
I apologize for sounding like a broken record here, but I’m miffed once again that the company still does not include a balance sheet or cash flow statement with its release. If a company is going to talk up its balance sheet (as management did several times on their conference call), it’d be nice to actually, you know, see it.
—-my question below:
I’d like to know more about these “incentive” programs…seems rather vague.
The lack of a balance sheet is why I haven’t posted on LEN’s numbers. Basically, they haven’t come out yet.
Its purposely vague……Next you will see the 4.99% fixed rate financing if not lower….
I haven’t looked at Lennar in particular, but a lot of the HB’s are using their cash to purchase their shares in the open market, thus supporting their share prices. I wouldn’t look to short this sector because basically that’s a bet on whether I could outlast the ability of the HBs to funnel cash flow into share repuchases. Not a position I’m willing to take.
In fact, in this market I’m doing nothing, not buying, not shorting the HBs. There will be enough time later to pick through the wreckage. For now, I’m just sitting back and letting it all unfold.
As Yogi Berra used to say “You can observe a lot just by watching.”
Thanks Ben for your consistently outstanding work.
Thats right Tulip….and, stay out of the way because the “Big Boys” are getting ready to play some serious hardball when it comes to competing….
How the lenders could have ever turned a blind eye to the “other things to pay” that make up a person’s credit profile is beyond me.
This whole thing evolved out of greed on behalf of both lenders and flipper/borrowers. There was a fradulent level of complicity between mortgage brokers, appraisers and Realtors(tm) that created this mess.
Its a total disregard for time tested lending guidlines .
“‘If you don’t hold the properties that long, it doesn’t make sense to put money down.’”
..and as we all know (NOT), you can just sell your property any time you want..and for at least what you paid for it!
OT, but what is up with the consumer confidence index? It’s at it’s highest level since 2002. What are people smoking? Maybe they still have a little bit of room left on their credit card credit limits or home equity line limits or both. I can’t wait till the “consume at all costs” mantra gets squashed…..
Denial stage . The market should correct , but Im afraid that there will be a push based on the false sales pitch of” get in now before the rates go up”. The reason that it is false is because the prices should go down if rates go up . BB only raised the rate 1/4 I just heard .
I think that some people will fall for the RE agents saying using the “rates going up” trick, but with all the news about housing slowing down, you would think people might be a bit worried. I think FN’s still have a false sense of comfort with their perceived home equity “cushion”, thus higher consumer confidence. How long this can last will be interesting, since once things start unwinding the consumer won’t be able to hang their hat on job gains or the home equity piggybank.
Oh by the way I agree with you lagunabeachinvestor
Does anyone get my point . Sellers suffer when the rates go up , but in this market the sellers are saying the buyers has to suffer . Pursuant to history usually for every 1 % interest in interest rate prices drop 5 to 10% .
Yes, sellers are kidding themself. Not just when it comes to IR.
Apparently Hanover and Gettysburg are different than the rest of the country
I just randomly found this article. It would be amusing to capture all of the quotes saying that everwhere else may be tanking but this particular spot in the country is not going to because it’s special!
A few years from now when all is said and done, Las Vegas will look like ground zero for the burst housing bubble. There are no industries outside of tourism, construction, and servicing retirees. Take away RE-related employment and there’ll be nothing left but the strip surrounded by miles upon miles of near-empty neighborhoods and retail centers. Only 3% of Clark County employment is in manufacturing of any kind, and virtually none of that is shipped out.
Sorry, LV Landlord, but you won’t be able to pay people to live in your properties before too long.
Are you from LV?
No, L.A., but have family there and visit often.
Regarding Nellis, yes it’s grown some, but government jobs of all stripes will suffer from the bust, too.
Not quite true–there’s also a significant military presence with Nellis AFB & the gunnery range. Usta be also that the DOE had a big presence due to the nuclear testing, but that’s been phased back greatly.
I don’t know about LV, but the Reno area has done a good job a talking Calif co into moving into Nevada, with our low taxs & low (low next to Calif) cost of living.
The only industries in Las Vegas are casinos, construction, and corruption. I’ve been here 5 years, Hell itself would have been a better alternative. It is NOT a lower cost of living area. That malarkey about no state income tax does not mean a thing when you see that it is a high fee, high tax state. Sales taxes are almost equivalent to Los Angeles, registering a car will shock you with all the fees, property transfer fees, very high gasoline taxes, the governments here are doing very well.
In addition, these are some of the rudest people in the world here, and driving should be classified as a suicide attempt. The method behind roads and infrastructure and zoning here is like some giant kid on a giant computer is playing a bad game of Sim City with the town.
Costs for utilities started to rise right after we moved here, we had something like another natural gas rate hike of about 18% (I think) just as winter started, and are looking, The average resident is looking at a 22% hike in electric rates this summer and, since the water company is the biggest electric user in the area, hikes in water will soon follow. Medical and dental services are outrageous, there is little help if you find you can’t pay for those, plus the quality of care is not well-regarded. I’ve heard more medical professionals (RNs, therapists, social workers, etc.) say to get them to California if they take ill. Even the Nevada Governor wouldn’t have his prostate out in Nevada, went to UCLA for the routine surgery.
Property taxes for 2001 were a few dollars over $1200. Taxes this year are $1700 and would be $2850 had they not capped the tax. I bought in a “desirable” (whatever that means) part of Henderson, 400 feet higher than Vegas on mountain slopes and paid $148,500. I want out of this town, but the poor health of a family member prevents me from doing much now. I paid cash for the house, so taxes and insurance are the only house related costs except maintaining it. I’ve been looking at comps and should be expecting $350K to $380K. I was shocked when the county assessor sent the new values out, he called this house for $320K. It’s not worth it, and my plans have been to sell at $300K to $310K. So far other sellers are still trying to get top dollar, one asking over a half million a few doors down. If it continues to stay stagnant or decline, I will always sell below assessed value, hoping that may move the house when I finally can say “we’re moving”.
I sold a Southern California home in 2001 and would rather be in any part of Southern California than Nevada. I am the first to admit the move to this town was the most stupid thing I have ever done in my life. And I didn’t have to pay $400 to $600 thousand as some are doing in new developments behind my home and a couple of blocks south. When this crashes, which I think it has to, I’ve at least got the luxury of getting out as long as I can sell the place, even if it drops 50% from where it’s at now. Leaving Las Vegas will be worth the loss.
We lived in Las Vegas for 3 years before coming to MA. We owned a condo and cashed out for a 105% profit. Vegas’ property boom was the result of four conditions: Limited land, declining interest rates (and IO/ARM’s), a solid economy and an influx of CA investors looking for the next investment opportunity. When all is said and done, the only prop left will be the limited land availability. I do not think this will be sufficient to prevent Las Vegas home prices from busting.
Can you explain to me the “limited land” part? There is a LOT of desert around Vegas…it can’t all be BLM land, can it?