What bailout means for housing market

By Alexandra Berzon

Thursday, Sept. 25, 2008 | 2 a.m.

As the roar of Wall Street’s crumbling and consolidating banks reverberates, observers can’t avoid noting a certain comparison.

“Keep it in Vegas,” New York Times columnist Thomas Friedman declared. He imagined the 158-year-old Lehman Bros. bank’s being told “thanks for playing” as its fortunes vanished when it declared bankruptcy.

John McCain said Wall Street had developed a “casino culture.”

The roulette-rich references to Las Vegas seemed apt. The city is, in some ways, ground zero in this mess. It is among the top cities in the rate of foreclosures that followed a period of predatory home loans from lenders. That left banks saddled with billions in mortgage-backed securities that failed when the housing market soured.

Now, as Congress decides whether to support the Bush administration’s plan to bail the banks out with $700 billion for their bad assets, Las Vegans might wonder what that means for our still-falling housing market.

Single-family home prices in Las Vegas are down 30 percent from last year. Two out of three homes sold here were last owned by the banks, and 25,000 units sit vacant.

Experts say the trouble potential home buyers have had getting mortgages is compounding the problem, although it is not the primary culprit in the downturn. Recently, mortgages have become even tougher to secure amid the turmoil on Wall Street, meaning fewer Nevadans have been able to buy homes even if they want them, mortgage brokers say.

“It’s getting worse and worse,” said Paul Harris, president of Residential Capital Mortgage. “There’s not a week that goes by that I don’t get multiple updates from the various investors we deal with telling us of more restrictions, more tightening of guidelines.”

That’s particularly true for “jumbo” loans — loans that exceed $417,000 — and loans for condo-hotels and for foreign nationals seeking to buy property. For those latter two groups, finding a home loan is nearly impossible, Harris said.

For potential buyers with good credit who can afford a big down payment, conditions eased somewhat a few weeks ago when the federal government announced it would take over the failing mortgage lenders Fannie Mae and Freddie Mac. That produced a brief drop in interest rates.

But even under those circumstances, terms are still much tougher. The definition of “good credit,” for example, has risen from a credit score of 650 to 720.

“There hasn’t been a healthy lending market,” said Thomas Davidoff, assistant professor in real estate at the University of California, Berkeley’s Haas School of Business.

“There’s a feedback, of course, because when Vegas does badly that makes the mortgage market even weaker.”

Economists and local housing analysts say the proposed bailout being debated in Congress would probably help create more home lending. Banks should have more money to lend if they can rid their books of bad securities. Creating a market again for mortgage-backed securities should also encourage more lending, economists say.

“This puts a floor on how low the price will be because the government stands ready to buy these,” Davidoff said. “If you’re lending money for mortgages you might think, ‘Geez, I might want to sell this thing off and I don’t know what it will be worth.’

“The government is trying to announce there will always be a mortgage-backed securities market,” Davidoff said. “That’s part of the intent.”

But experts say that even if mortgages become easier to get, it won’t guarantee that buyers will rush into a market that most analysts predict is a year from rebounding. That’s especially true given that population growth in Las Vegas has tapered off as job creation has stalled and unemployment hit its highest point in 23 years.