Next wave of foreclosures may drive housing prices even lower

By Buck Wargo

Friday, Feb. 6, 2009 | 2 a.m.

Anyone looking to regain the appreciation they lost on their homes during the correction over the last 18 months is going to have to wait awhile, according to Scott Dugan, one of the leading appraisers in Las Vegas.

Dugan says the local housing market is about to be hit by another wave of foreclosures — possibly three to four thousand — that could send prices spiraling down even further. Fannie Mae and Freddie Mac have had a moratorium on foreclosures that lifts at the end of January, he says.

“We are going to get hit with another wave of listings that may, in turn, drive down the market further than where it is today,” Dugan says.

A flood of foreclosures could press the market down another 10 percent, says Dugan, who was one of the featured speakers at the recent Southern Nevada Housing Outlook seminar.

If that happens, it will take quite awhile to absorb that inventory and other foreclosures that may occur in the next three to five years, Dugan says. Many adjustable rate mortgages will continue to reset through 2011.

“I wish I knew the answer of when this market was going to correct,” Dugan says. “I don’t think this market will correct for several years. And the real key is the amount of foreclosures that have not hit this market yet.”

Dugan says he’s heard from many people interested in selling their homes that they are just going to wait out the market and for prices to rise.

“When will the bottom be hit?” Dugan said. “I think we have been at the bottom for three or four months with pricing, and I can’t imagine it going much lower than it is today (depending on what happens with foreclosures). The question is how long will it last. I think we will be flat for two years and not see any real appreciation for five years.”

Foreclosures and short sales are definitely setting the market. Some lenders are even selling homes at auction for $60 to $70 per square foot and that has caused some problems in the appraisal process, he says.

Dugan says he doesn’t use such auctions because he doesn’t consider them appropriate to determine the proper values, but other appraisers use auctions to set the values of homes.

The buyers are coming back slowly because of the increased affordability and interest rates of 5 percent and lower, Dugan says.

But what has dominated much of the sales over the past year are investors who are looking at properties for rental income, Dugan says.

They buy a home for $150,000 and pay $1,100 a month on it and rent it out for $1,200.

“It is typical for the buyers to follow the investors, but it takes some time,” Dugan says. “The buyers aren’t as sharp as investors who don’t look at it as an emotional purchase. They look at it as a financial situation to make money.”

Banks and other companies that are selling foreclosures have gotten smarter in how they go about listing them, Dugan says.

Banks are taking homes appraised at $300,000 and listing them at $270,000 to $275,000 as a way to generate multiple offers and get an even better price.

“The good thing for us is it cuts down on the marketing time, and the market doesn’t get stagnant with properties,” Dugan says.

Even though sales of existing homes were up about 50 percent in 2008, Dugan says he still worries about population growth slowing, because that growth is what is needed to help the market recover.

As for the multimillion-dollar market, that hasn’t had the same level of success. Sales of homes $1 million or more are down 50 percent and there are more than 1,100 of those homes on the market.

“That’s going to continue for the next six months to a year,” Dugan says as buyers remain wary. “The big problem in the market today is that unless the buyers perceive they are getting a good buy on a property, they are not signing on the dotted line. They are not going to buy something if they think is still going to go down 10 to 20 percent.”

One market that investors are no longer pursuing is condominiums, especially the condo-hotel market, Dugan says.

“That market is gone,” he says. “It used to be a nice market, but not anymore. Financing has dried up.”

Units at the MGM Signature, for example, have fallen 60 percent to 70 percent in value for anyone who purchased them in 2006 and 2007, he says. Residential condominiums have fallen 40 percent to 50 percent in value in the last two years and that market is still falling with no end in sight, he adds.

There are some changes scheduled for the appraisal industry this year as part of a home valuation code of conduct, Dugan says.

Fannie Mae and Freddie Mac are behind the effort in which an independent third party is involved in the appraisal process. That means lenders and mortgage companies won’t be calling appraisers and applying any pressure, he said.

In other news:

• The Greater Las Vegas Association of Realtors is holding its ninth annual toiletry supply drive to benefit homeless and abused women and children at Child Haven, Safe Nest and Shade Tree. Donations are being collected through Feb. 11 at the Realtors group’s office, 1750 E. Sahara Ave.

• Volunteers from the Realtors group and other supporters will be starting work on a Habitat for Humanity home Feb. 14. This is the 13th home built with donations of money and labor from the group. It is at 1525 London Porter Court.

• Equity Building Services has broken ground on a 121,875-square-foot warehouse in the southwest valley that is expected to be completed by the spring. JDV Procyon@Ponderosa had its construction financing in place before the credit crunch. CB Richard Ellis is the listing agent.