Feature Stories - October 2007

Industry Focus: Residential Brokers

Recently, industry experts sat down at Cili Restaurant in Las Vegas to discuss Nevada’s residential real estate market, including loans, the housing market, media impact, workforce issues and competition. Connie Brennan, publisher of Nevada Business Journal, served as moderator for the event which as part of the NBJ’s monthly Industry Focus series, brings industry leaders together to discuss issues pertinent to their professions. Following is a condensed version of the roundtable discussion.

Challenges in Residential Real Estate

Andy Maline: One of our biggest challenges is educating the buyer about our market because the information that’s out there is not accurate.

Honey Borla: The information reported by the media is my biggest concern – it’s extremely skewed. Many times, this information doesn’t even come close to actual fact. We need to teach the general public – be it buyer or seller – that accurate information doesn’t come from a generalized public Web site.

Fred Trujillo: One of the hurdles that I have encountered is the process of educating the buyer. We need to convinvce the buyer that the sluggish market cycle will resolve itself in due time. Most of my buyers are very astute and they understand that when investing in the stock market – there are wins and losses. The same thing takes place in the real estate industry.

Paul Bell: A major concern is the negativity being projected in the media. We have experienced this in the past, when many buyers waited, thinking prices would go down however, the opposite happened.

Myrna Kingham: I think educating the buyers right now is one of the biggest challenges. They feel if they wait six months to a year, the market’s going to be better for them. And, quite honestly, the market is really great right now for buyers. It used to be, that you couldn’t get a loan unless you paid points, and those ran from six to 12 points, depending on your credit. Currently, we’re returning to a normal, stabilized market, where sub-prime lenders aren’t out there distorting numbers.

Rob Jensen: I agree, we need to educate the buyers. The market is obviously a little slow, but we have seen some fairly good activity in sales. I think there’s going to be a lot of opportunities. I have clients from Los Angeles who keep buying property because they see this market as the next Los Angeles.

Stephen Redman: If I had to pinpoint one problem that is going to grow in the next 12 months, it is the loss of affordable products. We are facing a cycle in the midst of a downturn, in addition to a mortgage industry meltdown. It is going to take a lot of work to get through it.

Sue Naumann: I think there’s good news and bad news about the Las Vegas market. The good news is, that we have a lot of inventory, and the bad news, is we have a lot of inventory. It depends on which side of the fence you’re on – buyer or a seller. With the sub-prime loans going away, now is the perfect time for investors to increase their rental properties. The problem in our industry is the frenzy that the speculators have created. Speculators want to make a quick buck and move on, but real estate is a long-term investment just like the stock market.

Joan Brooks: As recently as last year, we were very concerned about affordable housing in Las Vegas. Today, you can purchase a nice home for $200,000 to $250,000 that is not in foreclosure. However, the struggles that mortgage companies have been going through, we have a problem getting great programs for first-time home buyers. They’re tightening up on the standards of mortgage lending – which is probably a good thing – but they’re going to have to rethink it because it seems that the pendulum is swinging in the other direction now.

The Media’s Role

Redman: I don’t believe the media understand how the market cycles work. If they did, they would realize this is a natural thing, and the see glass is half-full. We may be looking at the same numbers, but they’re putting a negative spin on it.

Maline: I can’t find where they are getting their information, but I know where we get our numbers and the reports are vastly different than what the media are reporting.

Redman: The media just don’t understand that business has normal cycles. If they focused on that, they would realize that this is a prime opportunity to take advantage of reasonable loans.

Borla: The market we experienced for the past two years was not a normal market – it was fueled by new home shortages. We were told that they could not obtain enough permits, or build enough homes to satisfy the immediate demand. Buyers were put on waiting lists, and told they needed to bid competitively on properties. I feel an artificial urgency was created, which also made sellers afraid they would have no place to live if they sold their homes.

Naumann: Well, it resulted in a feeding frenzy. When I first came to this market, residential development phases each comprised about 40 homes. Incrementally, between each phase released, the price would increase. Builders decided to create this market frenzy - artificially increasing demand by reducing the number of units released in each phase to about 10 homes. The market became so competitive that buyers moved into the resale market. If someone purchased a home right before the big resale boom that we had a couple of years ago, they may have paid $300,000, and watched the property’s value jump to $500,000 as a result of the unusual market conditions. Today, they believe those residential appreciation rates continue, and think their property should now be worth $700,000, when, in essence, it has not risen past $500,000. Rather than acknowledging their $200,000 gain, they perceive the situation as a loss.

Housing Costs:

Is the price of homes still going down?

Maline: It depends on what information you read. Statewide – at the end of the first quarter – home sales were still up 6 percent and Southern Nevada was up 17 percent –based on median price. These percentages also reflect more people moving here with stronger and better incomes.

Redman: Overall, the Valley’s home prices are not going down, but certain pockets of the market have decreasing costs. For example, Aliante and Southern Highlands have certain areas where prices are declining. If you averaged in the whole Valley, we are close to breaking even. You also have to factor in that people are overpricing their homes so everybody is complaining they had to drop their price by $100,000. So if the property was overpriced to begin with, and was reduced by $100,000, did the seller really lose $100,000?

Jensen: I agree with you. GLVAR (Greater Las Vegas Association of Realtors) statistics show the average sale price is still about $300,000, give or take. There were probably half as many sales, and prices have gone down, but the market is stabilizing.

Borla: The home values are not really going down. Anything under $300,000 is still turning. That market is moving comfortably – it’s the in-between market that has lagged.

Mortgage Industry Issues

How have issues in the mortgage industry affected residential sales?

Redman: It’s a tremendous problem. The biggest challenge with the jump in foreclosures, it often generates new set of comps. We need some type of reasonability to come into play with underwriters who won’t use 10 foreclosures or comps on a person’s home who transferred to another market. Once you have a comp from a foreclosure, it becomes a part of the equation for another person who buys or sells a home.

Borla: I recently comped three condos. One sold for $146,000 and the other two went back to the bank with loan amounts of $100,000 and $106,000. That’s definitely going to affect anything else coming into the market.

Redman: And, the secondary market gaps and closes at $470,000. Anything that goes over that, we call a jumbo loan. Wall Street is no longer interested in jumbo loans, and if these types of loans are out there, they’re priced at almost 12 percent interest on a jumbo loan – with 20 percent down. Wall Street right now is just freezing the credit markets because there’s so many different ways for the ball to bounce, and that’s going to hurt us for awhile.

Naumann: Before sub-prime loans became the way to buy property for entry-level buyers – if you wanted to buy a house – you had to have money down, good credit, or you weren’t eligible. So all of a sudden, it’s a crime that somebody can’t buy a house if their credit is trashed or they have no money. Eighty/Twenty loans required a minimum of 20 percent down – anything less than that and homebuyers’ monthly payments were increased significantly. The market is coming back to normal – where you have to have funds to qualify to buy a house.

Redman: I think it’s good for the communities because homebuyers have a vested interest in their property.

Borla: A number of years ago, the federal government came out and said it wanted to see everybody in this country own a home. There were all types of programs out there to accommodate the first-time homebuyers. Keep in mind, many of these properties are now going into foreclosure.

Lending Ethics

Should lenders be regulated?  

Brooks: The problem is mortgage lenders aren’t regulated. In the best of times, when so many homes were on the market and selling, lenders were putting loans together for their clients at much higher rates to get them in a house. Now, what do you think has happened to those people today? They have gone into foreclosure and those are the people who couldn’t afford to go into foreclosure. They scraped the money together to get the loan in the first place, and the lenders did as they pleased, charging those clients whatever they wanted to get the loan done. And they got away with it. The biggest crisis across the country is that lenders are not regulated.

Maline: Lenders arbitrarily switch the terms on the loans. Then they have a mark-up and can’t find a property because it’s percolating so much, but sign the papers because they don’t have much of a choice. They brought that upon themselves.

Redman: We have to keep in mind there are several different types of lenders. There are bankers, who are heavily regulated, and brokers, who are likely to be regulated. But you don’t want to give them all the work, because they take advantage of it.

Brooks: There should be a standard similar to the standards that govern every other type of business. This business is very important to the American economy and to homeowners. Washington should understand the need for regulation. We don’t need banks in the real estate industry.

Borla: Washington understands that. The problem seems to be every time Washington tries to regulate the industry, lenders say if you tie their hands, there won’t be any money available to lend. That’s the threat they have used for years. The bottom line is that any individual can take the test and be regulated, however brokers must be licensed, but their loan officers do not.

Brooks: Loan officers aren’t held responsible at all if anything happens.

Borla: They don’t have to pay any taxes, either.

Jensen: Well, the loan problem happened when Silver State Mortgage closed their doors. In a cash-back deal, several properties sat on the market for a year. They were originally appraised at $500,000, but sold for just $400,000. Silver State came in giving them $500,000, and took $100,000 of it back.  

Redman: But let’s not put this all on the lending institutions as totally running amuck, because they have improved greatly compared to two or three years ago. We actually have a commissioner, now, who monitors mortgages. To say that lenders operate without guidelines or rules isn’t quite accurate. We don’t want to put all our problems onto their shoulders.

Maline: But who is enforcing it?

Brooks: There are still lenders out there offering homeowners $100,000 for a loan.

Bell: We have been seeing a real difference between the investors. Well, for example, at a recent Seven Hills closing, a seller paid $10,000 for the buyer’s closing costs. The loan officer had to go to the second lender because the first lender had used appraisals from prior experiences to calculate their decision. Whereas the second lender said, as long as the buyer is putting 20 percent down, and the seller is contributing $10,000 to closing, they’re very comfortable with this type of loan. Investors might have these loans that will be the key to a market rebound.

Redman: The real need for change is in the criteria differentiating primary loans from investment loans. There should be a different set of rules for somebody that wants 40 investment properties – that’s a problem waiting to happen.

Borla: But there aren’t enough guidelines and we’ve all seen it – where these investors want to get under similar guidelines as homebuyers.

Maline: The buyers should buy a house because they want a house to live in. When they start looking at it as an investment, an investment risk becomes involved. If you’re buying as an investment, you need to understand it’s just like playing the stock market. More than 60 percent of sellers who have closed escrow on their listings have participated in the buyer’s closing costs. That’s huge.

Broker Education

Educational requirements for residential real estate brokers

Brooks: The Nevada Real Estate Division (NRED) has been talking about increasing the number of educational credits required as well as raising the number of training hours needed to become licensed. This way, undesirable people will be weeded out. Our dues have also increased, so it’s not inexpensive for people to get in and do this part-time. I think we have made it too easy for people to get certified. We know when we have an individual with the potential to be a good Realtor, so we train him or her in-house.  

Naumann: The state has now mandated that licenses for first-time licenses are only valid for one year, after which, the renewal period occurs biannually. Once licensed, you must also compile 30 hours of continuing education that follows certain modules. There’s new blood out there and they’re great. Sometimes a part-time agent is more focused and more productive than someone who sits and collects coffee cups. There are different types of people now with different motives. It’s a very flexible profession, however, you can’t be a “secret agent” in this business. The educational requirements, as well as continuing education requirements, have increased.

Affordable Housing

Brooks: We have great homes on the market, as well as great interest rates right now. Those are two strong positives that people don’t see. If you look back, interest rates were at 14 percent to 15 percent and housing prices were low, people couldn’t afford the interest rates. Now we’ve got great interest rates and affordable homes for sale in the $250,000 to $350,000 price range. Moreover, many condos are for sale in the $100,000 to $150,000 price range because people are dropping their prices. There is attainable housing and great interest rates.

Naumann: Well, I would love to live in a $3 million or $4 million house, but I can’t afford that. It should be called attainable housing or workforce housing, because the Las Vegas area has a huge workforce. We’re working on a program specifically for workforce housing, and are getting employers involved to help with employee retention programs that might offer employee incentives to help defray housing costs.

Brooks: We definitely have a strong inventory.

Moving Forward

Redman: I think it will be less of a buyer’s market. The cycle is going to start turning the other way.

Maline: In the next year, a number of homes will be put up for sale. Homebuilders are purposely withdrawing and not releasing as many units per month. They are waiting for the MLS inventory to decline, which means buyers are going to have to consider the resale market – which will improve our situation in sales.

Jensen: I think it’s still going to be a buyer’s market and buyers will have many options to choose from.

Brooks: Real estate has been around a long time, and it’s not going to correct itself in a year. I don’t think we’re going to see anything dramatic happening in the next year – things will start to level off. It’s going to take us two good years to get back. We have a year’s worth of new home inventory out there right now, and it’s growing every day. It will still be a buyer’s market, and I think we’ll also have great rates. But people are going to continue to be cautious because we are still on the downswing. It’s cyclical- the market will stay low, like it is now, for a while.

Naumann: I disagree. I think if we aren’t at the bottom, we are pretty close. It’s just like the stock market, nobody knows how low it’s going to go or for how long.

Borla: What will determine how our market will look like in the next two years is the percentage of adjustable rate mortgages (ARMs) causing the foreclosures in this industry. That’s what you have to consider.

Trujillo: I think it will be determined by employment. A healthy economy is driven by an employment-based economy. Fortunately, our employment-based economy is expanding. It’s the growth of certain external influences that can stifle the economy. You can point to builders. You could point to the lenders. You can point to a lot of different people. Regardless, we just have to wait for the cycle to finish and start over.