A Shortage of Homes, Not Buyers

Arizona, Florida, California, and Nevada are on the front line of foreclosures, yet a recent newspaper article heralded Las Vegas' new construction boom. In fact, new construction has doubled in Las Vegas, Phoenix, and Tucson, with Florida and inland California not far behind.

How is new construction fiscally possible when 9,517 new homes sit empty in Las Vegas and lenders repossessed 5,600 Las Vegas homes in Q1 2010? Nonetheless bankers and builders have embarked on 1,100 brand-new homes, and those homes are selling. Builders are frantically buying up lots to meet more buyer demand, causing some of us to ask if cutting down forests to build more homes when we have a home glut is financially or perhaps even morally responsible.

Obviously tax credits, free appliances, and subsidized closing costs on foreclosed homes are not resonating with every Las Vegas buyer. The decision to "buy new" may be born of frustration. One buyer said he'd tried to buy a foreclosed home five or six times but just couldn't win the bid so he bought from a builder.

Perhaps he was competing with other buyers who also wanted the foreclosed home—five or six times more buyers than houses if you look at his failure rate. Or perhaps the seller rejected his high bid, meaning on Friday he was the excited winner at the auction and then days later realized it was all a colossal waste of time because no matter how hard he'd fought to win the house, he'd lost it—not to another bidder but to the seller who already owned it.

Sellers respond that they are taking time to value each home, looking at each offer carefully to avoid wasting taxpayers' money. They are speculating, via traditional sales methods, in order to preserve the asset's value. Despite arguments that they're incurring high carrying costs or, worst case, contributing to societal decay, the industry insists current methods are working and will continue to work. Only recently have a few brave voices in the mortgage-servicing realm begun to challenge that notion.

Meanwhile, tired of carefully managed REO, buyers are working out their own solutions and ignoring ours. According to one industry publication, first-time home buyer transactions dropped by nearly 5% in April despite buyers still having time to apply for the 8K tax credit. In Las Vegas many buyers aren't applying for tax credits, or waiting for foreclosed houses to be released, or for the servicers or investors to approve their high bid...they're buying new. Developers have apparently afforded them speed, choice, and results.

Recently in Middle America, an auction of 200 properties was shut down by the seller, who was under pressure from city government that feared out-of-state investors would swoop in and buy the auctioned homes and allow them to fall into even worse condition-governmental concerns having migrated from "the wrong people might buy" to "the wrong people might buy and do the wrong thing."

Two million, three million, seven million, now Morgan Stanley estimates eight million by year's end—the shadow inventory grows with every reading. They estimate it will take forty-seven months to move this inventory through the pipeline using current methods. Best efforts to achieve flow have culminated in loan mods, government programs, and short-sale bottlenecks. How many times have we heard this advice: release assets slowly so we don't flood the market, make sure we get the right price for the property, shut out investors who want to get rich, put an end to anyone who wants to flip for a quick buck, guarantee that the buyer will live in the home. Meanwhile Detroit just bulldozed ten thousandhouses—demonstrating the downside of trying to manage the buyside.

Despite all of this, we still see buyers lining up everywhere at auction. In Q1 2010, Williams & Williams received residential-buyer interest from 182 countries. Our monthly live-from-the-lawn auctions all across the US were broadcast in real time, allowing interactive remote bidders equal access to the live event. Seventy-five percent of the bidders were local or in-state buyers.

There's a fine line between breathing life back into the housing market and blowing out its remaining breath. Buyers are entrepreneurial, in a hurry, and focused on finding the asset that suits their lifestyle. We know that the vast majority of our buyers are purchasing for themselves, their children, their parents, or another family member. They have family issues to solve, they don't need inventory issues.

We're in the industry that prides itself on competitive solutions: three vendors instead of one, champion challengers to keep everyone delivering at top performance levels, scorecards for success.

So why have we constructed one long narrow highway of equity write-downs, loan mods, housing programs, short sales, traditional listings before we take the homes direct to the marketplace via auction? The shadow inventory includes mortgage loans that are ninety days late and the majority of those thirty to sixty days in arrears. Amherst Securities reports the cure rate on the former is a mere 1% and 5% on the latter. HAMP states that slightly more than half of the 1.2 million trials are still in active status. Delay is deadly. In Detroit, they stopped mowing down grass and started mowing down houses.

We're not suggesting we usurp any of the existing programs on the long road to real estate solvency; we're merely suggesting that some people might want a buy-pass. Facilitating that would mean putting inventory that is vacant and unoccupied on the market now. Associated Press reported the U. S. Commerce Department stats: new single-family home sales up 14.8%, following a 29.8% surge in March, the largest monthly increase in forty-seven years. Obviously, the buyside is ready and they're nothing if not inventive. They will go where the deal works. It's apparently working perfectly for Las Vegas' new construction. The obvious question: will what's happened in Vegas stay in Vegas?