Real Estate:

Study confirms role of home flippers in Nevada housing price collapse

Sam Morris / Las Vegas Sun file

Houses sprawl across the Las Vegas Valley. When the housing bubble burst in 2007, Las Vegas became the No. 1 area in foreclosures nationwide.

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A new study confirms the big role investors, including "house flippers," played in Nevada’s home price run-up and its subsequent near collapse.

Researchers at the Federal Reserve Bank of New York last week reported that their study "revealed some astonishing facts" confirming that in four states hit hard by the real estate meltdown, investors played a disproportionate role in inflating prices to unsustainable levels.

Those states are Nevada, Arizona, California and Florida. Investors are those buying homes intending to rent them out and hoping prices rise over time — or those planning to simply "flip" houses, i.e. selling quickly and reaping a quick profit, the Fed report noted.

Keeping in mind that when home prices fall investors are more likely to default on mortgages than are owner-occupants, the Fed report found:

• At the peak of the boom in 2006 and 2007, about 35 percent of U.S. new-purchase mortgage loan dollars were going to people who already owned at least one house. In Nevada and the three other hard-hit states, that percentage was about 45 – up from about 25 percent in 2000.

• Investors owning three or more properties were responsible for 20 percent of loan originations in 2006 in Nevada and the three other hard-hit states, almost triple their share in 2000.

• Investors nationwide were more likely than owner-occupants to have received nonprime loans, or loans with low down payments and high interest rates. About 25 percent of such borrowing nationwide at the end of 2006 involved borrowers with three or more properties vs. 35 percent in Nevada and the three other hard-hit states.

The collapse of the housing bubble, as expected, then led investors to default at high rates both nationwide and in the hard-hid states, the study found.

By the fourth quarter of 2008, investors’ share of seriously delinquent mortgage balances was about 31 percent nationwide vs. about 36 percent in Nevada and the three other hard-hit states, the report found.

“The availability of low- and no-down-payment mortgages in the nonprime sector enabled investors to make these (housing price) bets,” the report says. “This may have allowed the bubble to inflate further, which caused millions of owner-occupants to pay more if they wanted to buy a home for their family. In the end, even the value of the 20 percent down-payments made by responsible, prime borrowers was wiped out — leaving the housing market, and the economy, in the vulnerable state we find them in today.”

In Nevada, the collapse has led to home prices in the Las Vegas area declining to levels last seen in February 1998 and to the state perennially leading the nation in foreclosure activity.

Home price inflation also appears to have been driven by misrepresentations in which investors falsely said they would be owner occupants, the Fed study suggested.

An area not examined in the Fed study is that the bubble was also inflated by irresponsible and predatory lending by some lenders to owner occupants who often, in hindsight, shouldn’t have qualified for mortgages and now have high default rates.

This was confirmed by the U.S. Financial Crisis Inquiry Commission as well as lawsuits by Nevada’s Attorney General over allegedly deceptive lending against lenders including Countrywide and homebuilder Pulte Home Corp.

And, ironically, the Financial Crisis Inquiry Commission found in its report issued in January that the Federal Reserve – among other agencies – had failed to deal with irresponsible lending during the economic boom despite warnings that it wasn’t sustainable.

“There were warning signs,” the panel concluded in its report last year. “The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not.”



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Discussion 17 comments

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  1. During 2006 I visited several Del Webb projects that interested me in buying at that time. I noticed few occupied homes in one No. Las Vegas community but "for sale" signs on more that half of them. I questioned the sales person but received an evasive answer.

    It was easy to surmise these were homes purchase during development for immediate resale or "flipping" as you call it. You didn't need an expensive study to tell you that this was going to lead to a disaster. I passed, glad I did and could have saved others a lot of money at no cost had they asked me.

  2. If this surprises any Las Vegan, please take your head out of the sand - or out of wherever it might be.

  3. Another student of the obvious heard from. You will certainly be "surprised" to learn who is buying homes now and it isn't first time home buyers as previously reported in this newspaper.

  4. It doesn't help that the real estate brokers, the title companies, the appraisersm and loan agents, have been all working together. What is crazy is there are clear anti-racketering laws that have not/are not being enforced. Of course this a a huge speculation and generalization with no data submitted to back the thought. However, the only way for prices to continually increase is if the appraisers increase them, the only way to target a community is for the brokers to be on board, and the only way to close is if the title companies and agents allowed it. Interesting when it is all put together. The folks who had the most to gain by not enforcing the law were the ones who were supposed to be enforcing it.

  5. Its sad really, the vermin who occupied leadership, oversight and enforcement authority during the "Bubble" did nothing and rode the wave until it crashed own on all of us. I am speaking of the rats and lowlifes at GLVAR, the Nevada Bankers Association and the State and Federal regulatory authorities. Where are these vermin now? Why are none of these enablers not in orange jumpsuits dong a perp walk? We know their names and who they are! Yes even the promoters, shills and so call MSM at the Review and Sun who touted the run up and ignored every sign and warning of these real estate business travesty. I can name them all but what's the use. There should have been a Federal and State RICCO investigation of GLVAR and the other so called "professional" real estate companies, title companies, lenders and developers. Many got away with millions in ill gotten gains during this time. Justice would be served if they all got brain cancer and died a long miserable death for their wrongdoing and greed. But you know the truth. They are already back. The vulture "investors". The "Flip Las Vegas" promoters you saw on TV this summer. There will be an eventual payback. Many are just waiting for the klaxen call to sound and then the people will seek their own retribution. It not far off now, we are waiting for the right moment and like the saying goes, "What goes around will come around and the payback will be a SOB!"

  6. Took these morons this long to figure out what the locals here have known since the beginning. Greedy people looking to make a truck load of money, without having to work. With a majority of them from California, taking advantage of easy money. TV series was even dedicated to it....and if they did not make that last flip at the right time, are stuck. And stuck a whole bunch of other people too in their greed to make more and more.

  7. Truly, the panoply of bankers, developers, and the uneducated leeches among real estate agents, title company employees, mortgage loan employees, and appraisers do not know how to conduct business with a conscious. Prostitutes by any other name.

  8. I just hope the current wave of flippers, who are buying mainly with cash, get burned. Many of these HOA community amenities will start falling apart and the assessments will be huge. Many of these investors will not be present for the HOA votes and that little pool and clubhouse may become massive if the new residents approve these items. Google Florida Condo Commandos and see what can be done by a bunch of retirees that have nothing to do but plot grandiose schemes.

  9. So...this is news?

    Back in 2005, I recall there was one subdivision near us that within a week's time, the prices went up $20,000!! Also, during 2006, there was one community we really liked so I went there one weekend to look at the models. The sales people wouldn't even answer any of my questions - I had to sign up via email and then the builder would send an email with an assigned frickin' number to come in and look at the models and talk to them!! I was totally turned off by that attitude. They had no idea if I had my checkbook with me and was ready to buy - very arrogant. As it turns out, we did end up buying in this community in January of 2007 - when they were throwing incentives at the potential buyers like crazy so they could get rid of their inventory. BTW - the price paid for the house we got was over priced (we had our pool though!!) but the hype was still out there about prices rising.

    Those of us who lived in Vegas during the boom years have plenty of stories. One of our neighbors rented a house from a guy who owned SIX properties in the area. ALL except one property was in foreclosure - he lived in Phoenix. It was fall of 2007.

  10. I note that there is not one comment about Chris Dodd & Barney Frank and the fact that they blackmailed financial institutions into making loans to unqualified buyers. Any that resisted were put on notice they would not be allowed to expand into new markets or add branches and would be subject to stricter federal scrutiny. Fannie & Freddie Mae got into the act and bought up the "toxic" loans at the urging and with the blessings of Dodd & Frank. The housing market collapse was inevitable because of their actions. Thankfully, after the November 2012 elections, both Dodd & Frank will be gone. Frank can then spend all of his time with his boy toy prostitute.

  11. I live in PA and have been thinking about moving to the LV area...after following the housing market and being 63 years old not sure I want to move there...the weather is a plus but the housing and medical questions that I'm seeing leaves me turned off. The taxes also seem out of propotion for what houses are worth...should be lots lower in a strong gambling state. Any helpful news would be appreciated. By the way the realty that has been contacting me is Zip Realty are they any good...Thanks Dave

  12. Since I am like everyone else here, and I saw it coming and said something about it but no one listened to me, I have decided my time is better served by blaming it on Hussein Obama and illegal immigrants.

  13. Finally!!! a group of las vegans that doesn't blame it all on the banks. Those bankers certainly did contribute in a big financial way, but they were not the sole cause of the bust.

  14. ps. for those thinking of moving out here to Las Vegas.. Go For IT!!! the weather is great, the landscape is beautiful, the city is new and constantly being updated. The problems with schools and jobs take care of themselves as more permanent dwellers take over. Real Estate as an investment is pretty dicey right now. But as a home, we have a really big selection at every price point.

  15. Well, let's not shoot the messenger (Mr. Green) for reporting the results of research that fails to shock the conscience. There's obviously some baggage activated to garner many of the angry reactions we're seeing.

    Let me be blunt - I find it hard to believe so many people failed to see this housing crash coming. Come on, people. The writing on the wall was in flashing neon on this one. I'm not saying I don't feel sorry for those who got burned - for I do. What I am saying is, if people missed the warning signs (indicators) on this housing crash, they simply weren't paying attention.

  16. @lvfacts101 (Jerry Fink) There's not one comment here about Dodd or Frank because your point is made up BS you heard on the Fake News Channel. Did you even read the Sun's story? You know the one you're supposed to be commenting on here? This story confirms the flippers' role in this. You are so full of hate you take every single Sun story as a chance to spread some fake GOP talking point. Nobody takes you seriously dude. Get over it. A Black man is in the White House. Deal with it. The LVRJ forum is full of teabagging fools. Maybe you'd be more comfortable telling your lies there?

  17. A quick geography lesson about the Las Vegas Valley. The valley is landlocked by BLM land. Only when the BLM released large tracts of land was development able to expand. This land was placed up for auction typically in 800 to 1600 acre tracts. With the major residential developers (i.e., Pulte, KB, CENTEX, Pardee and Lennar, among others, so intent on buying land regardless of the cost, raw land at the height of the insanity was bid up to as much as $365,000 per acre (last sale in 2006). We had a serious influx of residents mostly from the East Coast and our neighbors to the west looking for a quick buck. So they came to town, drove our prices up and then bailed, leaving us to pick up the pieces. Yes the banks were guilty of loaning to everyone that wanted to get in on the action, regardless of qualifications, but they did not set the prices, and they did not force the people to take the loans out, but was more akin to a feeding frenzy, which, anyone with any common sense realized, the source of food (property), would eventually reach critical mass.

    We have become a society based on making as much money with as little effort as possible. We had a house in a portion of central Las Vegas that we paid $136K for in 2004. By the time 2006 rolled around, the same tract house across the street from us sold for $499K. As the market tanked, we got out for $156K in 2009, which paid off the loan, and then we rented. Judicious timing, as the Engineering Firm I worked for closed their offices on December 31st 2009, WITHOUT letting the employees know. We showed up on January 2nd to find the office closed and all the furniture and laboratory equipment gone. Which, by the way was a California firm. Seems like California is the cause of a majority of ills that we are left to face.

    Last year we bought a small house in North Town, not the best neighborhood, and had to down size from 1,750 square feet to 928 square feet. But were able to weather nearly two years of unemployment for me, and are getting back on our feet again.

    Since people do not learn, I am quite sure, that 6 to 10 years from now, the same cycle will begin again.