Analysts say another wave of foreclosures could hit Las Vegas

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Falling home prices in Las Vegas and prospects they won’t recover soon may trigger a new wave of people walking away from their homes.

That’s the concern of those who track the Las Vegas housing market, which is undergoing its own mini version of a double-dip decline in prices. Studies have suggested about one-fourth of Las Vegas foreclosures are so-called strategic defaults in which people walk away even though they can afford their payments.

The prospect of falling prices, prices that won’t rebound for years and a weak economy may exacerbate the problem when many were hopeful that strategic defaults were dissipating.

Real estate service Zillow said 85 percent of Las Vegas homeowners are underwater. CoreLogic pegged the numbers at 66 percent in a state that has led the nation in rate of foreclosure filings for more than four years.

“I do have concern because as the prices go down further, it might provide more incentive for people to strategically default,” said Nasser Daneshvary, director of the Lied Institute for Real Estate Studies at UNLV. “They still owe the same amount of money to the banks, but I think it’s getting bad enough that the ethical issues become less important to people.”

Starting at just under $290,000, median prices fell nearly 60 percent between 2007 and the spring of 2009 before holding steady for about a year between $120,000 and $125,000, according to SalesTraq. But once a federal tax credit effectively expired at the end of April 2010, prices have started to fall again.

In April, SalesTraq reported the median price of existing homes sold was $106,900, which was 14.5 percent below where it was in April 2010.

Some of the forecasts about the housing market predict further declines. Financial services firm Fiserv, which produces the Case-Shiller Indexes, predicted a 20.9 decline combined in 2011 and 2012.Frank Nason, the corporate broker of Residential Resources Inc., said he’s more concerned about strategic defaults than ever.

“Friends and associates that would have never considered walking away a year ago to 18 months ago are,” Nason said. “It’s about the dismal outlook going forward. They see it’s going to take a decade before there is any daylight in their house.”

Those people were raised that they should honor their contracts, but they can walk away from their house and rent for far less than what they’re paying for their mortgage, Nason said. About three quarters of the home sales have been distressed properties over the last two years and the slumping housing market affects people’s psychology, he said.

“It wears people down,” Nason said. “It’s going to start impacting people who may not have considered walking away from their house. How big is that going to be. I’m not sure, but it’s going to be going on for some time.”

Las Vegas housing analyst Dennis Smith, president of Home Builders Research, warned about the problem worsening as well in his recent newsletter to clients.

Without major legislation to force lenders into a program that addresses home values in severely distressed markets like Las Vegas, the foreclosure mess will continue for years, Smith said.

“Consumers that are many years away from seeing any positive equity growth will continue to walk away from their homes,” Smith said.

Most would prefer to stay in their homes rather than uproot and even if prices stabilized that would give them some hope, Smith said. People are angry about sending money to bailed-out lenders.

“The public anger that was apparent in the last congressional election has not dissipated in severely affected housing markets like Las Vegas,” Smith said. “The loss of artificial wealth can be accepted by most, however, it has gone way beyond that and many have also lost a great deal of their life savings and retirement funds in order to honor their obligations on underwater homes.”

Daneshvary said the best options for banks to prevent people from walking away is to restructure their loans and reduce the principal and share in any appreciation.

No one is expecting that to happen and Las Vegas will have to cope with strategic defaults becoming an even larger problem unless home prices stabilize.

But not everyone is so dire with the forecast that more Las Vegas residents will walk away.

Daniel White, an economist with Pennsylvania-based Moody’s Analytics, said his firm’s projections is that foreclosures will begin to lessen in the state by the end of 2011 and that home prices should bottom by the second quarter of 2012. The firm projects foreclosure inventories will be drawn down to “acceptable levels” by the end of 2012 at the earliest.

“It’s definitely a risk that more people will walk but we don’t see that happening much more in Nevada,” White said. “If people waited it out this long, they are going to be hard pressed to leave now when things are starting to turn around.”

Despite that assessment, there are plenty of doubters.

Richard Plaster, the president of Signature Homes and a leading advocate for people to walk away from their homes, said when homeowners see corporations and other companies getting out of their debt, that makes the alternative more palatable.

“I don’t think people can stay stupid forever,” Plaster said. “It is definitely going to go up if prices are going down. People who keep paying on their mortgage are going to lose.”