The New Money Pit

Walking through the gated community of Black Mountain Vista on a hill in Henderson, Nev., Thomas Blanchard offers a guided tour of real-estate woe. A row of stucco duplexes that recently sold for as much as $500,000 sit empty. “That’s a repo,” the real-estate agent says as he stands in front of 678 Solitude Point Avenue. Then he points to the adjacent houses, where yellow patches blot the spartan lawns and phone books lie on front porches, their covers bleached from weeks under the desert sun. “No. 680, repo; 684, repo. Those two at the end, repo.”

Three years ago, this Las Vegas suburb was teeming with modern-day prospectors armed with low-interest mortgages, all hoping to strike it rich in real estate. Now, what started with the subprime-mortgage mess and subsequent credit crunch are turning communities like Black Mountain Vista into luxury ghost towns. Buyers who got in over their heads are being forced to abandon their homes, leaving behind empty McMansions on the California coast and see-through condominium towers on Miami Beach. Real estate is turning into a money pit, sapping the fortunes of home buyers, hedge-fund managers and house painters alike. The really bad news? This is only the beginning.

No sooner did the housing market peak last summer than pundits and home builders assured the public the bottom had been reached. But with each passing month, the shoes continue to drop. First, dozens of subprime lenders were forced to close their doors. Then in July the nation’s largest mortgage lender, Countrywide Financial, reported that mortgages held by borrowers with better credit were starting to curdle. Nearly 180,000 homes fell into foreclosure in July, up 93 percent from a year ago. Last week President George W. Bush offered a series of proposals designed to ward off a flood of foreclosures. Sales of new single-family homes were off 22.3 percent in June from a year earlier, and sales of existing homes—a much bigger market—were off 9 percent in July. The National Association of Realtors reports there’s enough housing inventory for sale to last 9.6 months, more than double the 2005 level. The Case-Shiller index, which tracks national housing prices, fell 3.2 percent between June 2006 and June 2007. While that’s a relatively small drop, “this is the largest sustained decline in year-over-year prices since 1991,” says Yale economist Robert Shiller.

The decline in housing construction and sales has had an immediate economic impact. From the perspective of job creation, real estate was the best sector in which to have a boom, providing jobs at every rung of the ladder: real-estate agents and mortgage brokers, architects and lawyers, investment bankers and decorators, movers and painters, contractors and landscapers. Between November 2001 and April 2005, housing and housing-related industries created 788,300 jobs, or 40 percent of the total created in the United States, according to Asha Bangalore, an economist at Northern Trust in Chicago. The demand for mortgage brokers in Las Vegas was so strong that “every stripper, waiter and bartender on the Strip had a broker’s license,” says Boyd Nyborg, a former mortgage broker who now tends bar at the Tao Las Vegas.

But since August 2006, employment in housing-related industries has declined 119,400, according to Bangalore. Last month brought a rash of job cuts: 1,600 at Accredited Home Lenders, a subprime-mortgage company based in San Diego; 1,900 at Capital One Financial’s GreenPoint Mortgage unit; 6,000 at Tucson, Ariz.-based subprime lender First Magnus. Many real-estate professionals who work on commission have seen their pay plummet. Mike McNamara, a broker at Windermere Coeur d’Alene Realty in the Idaho resort town, says sales in the area have fallen by half since the summer of 2005. “My sales are down 30 percent from last year,” he says. “There are about 1,500 agents in this market and approximately 300 are making a living.” Harry Heyward, who has been appraising homes in Tampa, Fla., for almost 20 years, says he’s doing about five appraisals per week—down from 10 to 15 at the height of the boom. “I keep thinking it’s going to get better, and it never does.”

The collateral damage is spreading. Because home sales and moves stimulate purchases of appliances, electronics and furniture, the giant chains that catered to house flippers and renovators have reported recessionlike results. In the second quarter, same-store sales were down 5.2 percent at Home Depot and 4.3 percent at Sears.

Americans who were living high by taking out home-equity loans during the boom have watched their equity drop, and are now faint of heart when it comes to big-ticket discretionary purchases. The National Marine Manufacturers Association said it expects pleasure-boat sales, down 6 percent in 2006, to fall 10 percent more in 2007, largely due to the housing woes. Boatarama in Ft. Lauderdale, Fla., had to consolidate from four locations to one, and it now sells only used boats. Brunswick Corp., which makes Sea Ray boats, said in July that it was slashing production due to the housing situation “in Florida and California, which are two of the nation’s largest boating markets.”

The nation’s biggest retailing sector—automobiles—is likewise feeling the effects. In July, auto sales were down 12 percent from the year before. When CNW Research asked consumers who were putting off plans to buy new cars why they were doing so, 17.6 percent cited housing issues like falling home equity or rising mortgage payments. That compares with just 2.3 percent in 2005. John Crane, general sales manager at Ron Smith Buick Pontiac GMC Jeep in Merced, Calif., a farming community of 80,000 that has experienced an influx of Bay Area refugees, has seen a tremendous slowdown in the past six to eight months. “People don’t have the money to look at cars,” he says. “They’re having a hard time paying house payments. Now their second mortgages and 1 percent loans are coming up.”

Which brings up another problem. Roughly $370 billion in adjustable-rate mortgages will reset this year, according to First American CoreLogic, and millions of Americans will have to pay significantly more per month just to stay in the same home. Mark Zandi, chief economist for Moody’s, says that in the peak month of October 2007, some $50 billion worth of mortgages will reset at higher rates. Meanwhile, new mortgages are getting harder to come by, and not just for borrowers with subprime credit. Freaked-out lenders are ratcheting up requirements for minimum-credit scores and down payments. Kim Dicce, a Realtor in Tampa, where housing inventory is piling up, notes that lenders now seem to be requiring buyers in her area to put 15 to 20 percent down and have a credit score above 700. “Now we only have one third of the eligible buyers that we had before, and five times as many houses.” Higher-income earners with good credit haven’t been spared, as chastened lenders focus on making loans that they can quickly sell to Fannie Mae and Freddie Mac, which buy mortgages only up to $417,000. Rates on 30-year fixed jumbo loans have risen in the past month from 6.625 percent to about 7.5 percent, says Michael Daversa, president of Atlantic National Mortgage, a mortgage broker in Westport, Conn. On a $500,000 mortgage, that’s an extra $4,375 per year in interest—a 13 percent increase.

It’s difficult to project where all this will lead. As was the case in the tech boom, seers and prognosticators have been proved wrong time and again. Some markets are holding up just fine, especially in so-called superstar cities like New York and San Francisco. But unlike stocks, which can fall 20 percent in a day, housing markets take longer to correct. Shiller notes that after the 1980s housing boom, housing prices fell in real terms (i.e., adjusted for inflation) by 20 percent from 1989 to 1996. “This time I think it could be worse, because it was a bigger boom,” he says. “And look at the apparent confidence problem that we’re seeing right now.”

Confidence is indeed in short supply. Robert Toll, founder and CEO of Horsham, Pa.-based home builder Toll Brothers, was one of the avatars of the boom. In 2005, Toll, whose company specializes in building high-end homes in the suburbs, prophesied in a New York Times Magazine cover story of a day when middle managers might pay $4 million for a home in the distant New Jersey burbs of Philadelphia or New York. But on a conference call with investors last week, Toll glumly declined to call a bottom. “This past week was the worst week for traffic in our history,” he said.

All of which means those houses outside Las Vegas—and those auto showrooms in Merced—could stay empty for a while. That’s probably not what the developers in Henderson had in mind when they named the street Solitude Point Avenue.