Report from an Underwater Wasteland

Christine Lagarde, the head fixer at the International Monetary Fund, says U.S. policymakers need to be more aggressive in dispensing medication to boost America’s punk recovery. Washington bureaucrats, she believes, have all the fiscal and monetary tools they need to get the job done.

Ben Bernanke’s printing press is collecting dust, she thinks, and legions in Washington have stayed home to escape this summer’s uncomfortable climate change. There’s not enough QEs and Twists to suit Lagarde. Not enough red, white and blue government programs for the IMF brass. Striking an Independence Day theme, Lagarde is hoping for more government “firepower” in the good old U.S. of A.

Well, let’s look at a test case for how the firepower is working out for Las Vegas. On July 4, the titans on the Strip kept their powder dry, and the smattering of neighborhood fireworks displays were no match for the Fourth’s full moon.

If housing demand is all about low rates, why don’t 30-year fixed rates under four percent set loose the animal instincts? Why did the tax incentives for home purchases of a couple years ago only generate a slight blip in sales?

Here in the underwater wasteland that is the Las Vegas desert, the ethics of walking away and plight of the typical Vegas homeowner dominated our Fourth of July conversation. A member of our party sells homes for living but hasn’t made a payment on her mortgage in three years, with little harassment from the mortgage holder.

This realtor put down twenty percent back in the boom for a $650,000 home with Indy Mac providing the rest. But now the house will fetch no more than $325,000, and the $200,000 in negative equity is a bridge too far.

The Indy Mac mortgage became the property of OneWest Bank when OneWest bought Indy’s $20.7 billion loan portfolio for $16 billion, with $9 billion of it financed by the FDIC and Federal Home Loan Bank. The haircut was not passed on to Indy Mac’s borrowers.

The underwater realtor has attempted to renegotiate the loan, but OneWest has been unresponsive, until recently. The bank communicated by finally filing a default.

This is a very typical scenario in Sin City. According to, 71 percent of Las Vegas homeowners are underwater, at the same time the unemployment rate remains stubbornly high at 12.4 percent. There are likely hundreds of thousands of people living in homes they ostensibly own, but haven’t made payments on for years.

Some actively fight in court, questioning whether the lender has standing to foreclose. Others attempt to modify only to have their patience tried. They then give up, and wait for the Constable to arrive with the eviction notice.

Not only are there thousands of individuals not paying their mortgages, but, according to a local appraiser, plenty of commercial tenants have not steadily paid rent since the city’s real estate crash. In some cases the landlord will let a tenant slide just to show activity in a center. In other cases, the landlord quit paying its lender, and in turn, quit collecting rent. Eventually the foreclosing lender appoints a receiver, who often just collects whatever a tenant can scrounge up at the moment.

The business of going broke is brisk. The local bankruptcy clerk’s office now accepts cases around the clock, including holidays. A local real estate developer and casino owner who pitched his projects incessantly on TV during the boom took the opportunity to file Chapter 7 on the Fourth.

Two days after the holiday the Las Vegas Review Journal business pages offered only four locally generated stories. Two of the stories were local bankruptcies, one reported that Moody’s is pessimistic about the Riviera’s prospects, and there was a single positive story about a local high-tech company.

At the same time, our realtor says it’s difficult to get deals done. There is little inventory and massive pools of investor money are trolling Las Vegas buying up houses. There are hedge funds looking to buy houses a hundred at a time, along with dozens of foreign and domestic investor buyers. All buying with cash. No financing required. Some houses attract 50 offers.

Individuals that require financing can forget it. It takes a cash offer of $10,000 over asking price to have a chance. The realtor did say that she can get some investors to accept a quick ten percent over their purchase price to flip their purchase to a buyer requiring financing.

KB Home is reportedly selling everything they put up and builders are actually raising prices here and there. Gone are the boom days when there were 500 active subdivisions. Today the number is 220, a ten percent drop from a year ago.

The lack of resale inventory and robust new home sales has builders buying land and pulling permits. Residential permits are up 40 percent from a year ago, and the price of residential land has increased to just short of $170,000 an acre, up from $150,000 a year ago. It’s still a long ways from the $600,000 an acre residential dirt fetched at the height of the boom.

“Things are coming back in the valley because there’s nothing in the resale market and the foreclosure process is just a drip,” Discovery Homes’ John Prlina told the Las Vegas Review Journal. “We don’t know what the banks are going to do. As a builder, that’s OK as long as they don’t pour them out at one time.”

Nevada’s robo-signing law, Assembly Bill 284, went into effect last October. The law requires lenders to provide an affidavit of authority to foreclose on homes. The law has slowed the process, stopping the flow of properties coming onto the market.

Experts question whether homeowners will be able to live free from mortgage payments forever. When the problem is resolved, a torrent of homes will hit the market.

Bill Lenhart of Sunbelt Development & Realty Partners told the Review Journal he believes the circumstances driving the Las Vegas market are “tenuous and eerily familiar” to when the Obama Administration implemented the Federal Home Buyer Tax Credit. That policy spurred new home sales in the first half of 2010. Land prices also spiked then, but five quarters of declining new home sales, lower median prices and falling land values followed, he said.

“So don’t expect miracles from the Boondogglization programs,” writes Bill Bonner in Dice Have No Memory, a book that deliciously skewers the Lagardes and Bernankes of the world and their incessant meddling.

But while the pols interfere and central bankers print, concerning Las Vegas land prices, Lenhart points out, “Right now, it could be decades before we return to the peak that we saw five or six years ago, with lots of peaks and valleys in between.”

The bailed-out zombies have no time to negotiate with the hoi polloi. After all, there is testimony to provide and matters in London to address. After all, Wall Street is secure in knowing they will never have to live with their mistakes. Main street in Las Vegas has been given a reprieve from living with theirs. But the reprieve is only temporary. This desert is still underwater and will be for a long time.


Doug French

The Daily Reckoning