A Vegas Housing Rebound? Don’t Bet on It

by Ethan Roberts | November 11, 2011 7:00 am

After reigning for 22 months as the nation’s No. 1 spot for foreclosures, Las Vegas has just been kicked all the way down to the No. 5 position.

Is this cause for hope? Is Sin City, which has lost more than 100,000 homes to foreclosure in the last four years, about to see its housing market stabilize at long last?

Not exactly. According to RealtyTrac, the nation’s leading tracker of foreclosure properties, this drop to No. 5 is temporary, caused by a new Nevada regulation that requires mortgage servicers to provide an affidavit showing the mortgage balance due, verification of title and who has the authority to foreclose. The law is designed to prevent mortgage servicers or trustees from making false representations concerning a title.

But apparently the law also is slowing down the process enough to take away Vegas’ foreclosure crown. At least for now. RealtyTrac fully expects it to regain its top spot as soon as lenders work through the red tape in the new reporting process.

Las Vegas home prices have dropped about 9% in the last year, and almost 60% from their peak of five years ago. Some market watchers estimate that another 100,000 homes could be lost to foreclosure in Nevada over the next four years.

So which were the top 10 foreclosure markets in October? A list just released by RealtyTrac shows the following:

  1.  Stockton, Calif.
  2.  Modesto, Calif.
  3.  Vallejo-Fairchild, Calif.
  4.  Riverside-San Bernardino, Calif.
  5.  Las Vegas, Nev.
  6.  Saginaw, Mich.
  7.  Sacramento, Calif.
  8.  Cape Coral-Ft. Myers, Fla.
  9.  Merced, Calif.
  10.  Orlando, Fla

It’s no surprise that California has a claim on six of the top 10 spots. Areas such as Stockton and Modesto have been kicking around in the top 10 for many months now, and the relatively high default rates in those markets are unlikely to shrink significantly any time soon.

Nationwide,  more than 230,600 foreclosures were filed in October, and while this is down a remarkable 31% from October 2010, it represents a 7% increase from the previous month. RealtyTrac attributes the large year-over-year drop to the discovery last autumn of a large number of “robo-signings” — in which bank employees signed off on foreclosure proceedings without reviewing each case — which banks to temporarily halt foreclosures.

RealtyTrac also notes that new default notices — the first step in the foreclosure process — were up about 10% from September, and represent a seven-month high. This is troubling because it suggests that America’s foreclosure problem is not getting any better, and that increases in foreclosure rates could be on the way.

What’s more, foreclosure rate increases can be self-perpetuating simply because foreclosed homes often diminish property values in surrounding neighborhoods. When values drop, people who are “underwater” on their mortgage (have negative equity in the home) are more inclined to hand their house keys to the bank and walk away from the property, generating yet another foreclosure.

This practice, known as “strategic default,” has resulted in even larger numbers of foreclosures and a greater decline in property values across the nation. A new report by CNBC claims that half of the homeowners in America are now underwater on their mortgages.

So are there any solutions to the real estate doldrums? Well, as I said in a recent article for InvestorPlace, it may be time to give real estate investors some tax breaks or other incentives as a way to clear out the excessive inventory of foreclosures that is damaging the market.

Yes, much lower unemployment will definitely help the real estate market. But achieving that will be a slow and painful process over the next few years. In the meantime, the real estate sector will continue to languish, which in turn will hinder the larger economy.

So don’t expect to see the housing market bottom any time in the near future, and if you are an investor gambling that the Las Vegas housing is suddenly on the way back to prosperity, you may have just rolled snake eyes!



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