Economist Examines Housing Prices, Recovery Plans

Karl Case, professor of economics at Wellesley College, and co-founder of the Standard & Poor Case-Shiller Housing Price Index, says across the country between 12 million and 13 million people now hold mortgages worth more than their homes.

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ROBERT SIEGEL, host:

Joining us now to talk about some of the issues raised by Yuki Noguchi's report from Las Vegas is Karl Case who is co-founder of Standard & Poor's Case-Shiller Housing Price Index. He's a professor of economics at Wellesley College, and he joins us from Wellesley, Massachusetts. Welcome to the program.

Dr. KARL CASE (Professor of Economics, Wellesley College): A pleasure to be here.

SIEGEL: And first, let me ask you. We've heard about Las Vegas. Is the situation that Yuki reported on typical of what's gone on around the country, or is it in some respects unique?

Dr. CASE: Well, there's common elements around the country, but there's elements of uniqueness too. I mean, the Midwest had a house price decline largely because the economy went sour back in the early part of this decade. In the meantime, the East and West Coasts were doing very, very well, but they went way up in value. There never was a housing bubble in the Midwest. There was in the East and West Coast.

And then in the South and Florida and Arizona and in Nevada, there was a speculative bubble that just blew everything else away. So the conditions that led to these falling house prices are different in a way, but they have a common element, namely the expansion of the subprime market which pushed the low end of the housing market into huge inflation in the middle of the decade.

SIEGEL: Well, we heard reference to people out in Las Vegas, all of whom are upside-down on their mortgages, that is they now owe more than what the house is worth on the house than what the house is worth in today's market. What's the current estimate of how many such people in the country are in that situation, first?

Dr. CASE: Well, estimates range from eight up to 14 million. But I think the figure closer to 12 or 13 is the one I kind of subscribe to. It's hard to really know because you don't know what's happened to prices in detail. We only know in particular areas how much prices have gone down and what the corresponding mortgage values are. I'd say it's about 12 or 13 million. That's a big number, though.

SIEGEL: Keeping those people in mind, have you been able to detect any consensus coming out of Washington as to what the solution is? Is it to get house values back up again? Is it to reduce the mortgage debt significantly? Is it to let the chips fall where they may in the market?

Dr. CASE: Now, there is an emerging consensus. Most people agree that we really want, for a lot of reasons, to prevent foreclosures from happening. It causes a lot of hardship for the families involved. It creates extra costs in terms of the property being vacated and potentially vandalized. There are neighborhood effects that when your value goes down and you walk from your property and it goes out on fire sale, the values of neighboring homes go down. So the focus is clearly in Washington now on these foreclosures and can we correct the problem for the people who are underwater in a way that will keep them in their homes.

All of the proposals that I've seen really basically involve restructuring in a way. You do one of three things. You can extend the terms of the loan. You can reduce the interest rate on the loan. Or you can reduce the principal, which is the last resort. All of which is designed to get the homeowner to stay in the house and keep paying on the loan. But there are some things that are making that very difficult to do because to be effective in terms of stabilizing the housing market, keeping prices from falling further, it's got to be done on a large scale, and it's tough to figure out how to do that.

SIEGEL: If the object, in part, is to keep housing prices from falling any further, is that a polite way of saying that it's in the government's interest to inflate the bubble once again, a little bit, get those values up perhaps higher than they might reasonably be otherwise right now?

Dr. CASE: Well, the bubble parts of the country are in a way not the problem. It's the bottom end that - well, the bottom end did have a bubble. I mean, the bottom end found this expansion of credit to low-income people pushing prices up a lot. And in a way, it is trying to preserve some of that because if it all came crashing down on the heads of the banking and financial system at once, it's - you can see what it's done. It's created a worldwide financial crisis. So what it's really designed to do is prevent that worldwide financial crisis from getting worse. And if prices fall, and the 2008 and 2009 books of mortgage business - the mortgages written in 2008 and 2009 - go bad, we've added another couple of trillion dollars to the world's financial problems.

SIEGEL: Karl Case, co-founder of the Standard & Poor's Case-Shiller Housing Price Index and professor of economics at Wellesley College. Thanks a lot for talking with us.

Dr. CASE: A pleasure to be here, Robert.

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Housing Gamble: Vegas Swims In Foreclosures

Homes in foreclosure i i

hide captionOn Helens Pouroff Avenue in North Las Vegas, two adjacent homes are in foreclosure, and one is for sale at a deep discount.

Yuki Noguchi/NPR
Homes in foreclosure

On Helens Pouroff Avenue in North Las Vegas, two adjacent homes are in foreclosure, and one is for sale at a deep discount.

Yuki Noguchi/NPR

In Depth

Read part two of this series:

Brian Burns i i

hide captionBrian Burns, a graphic designer, purchased his Las Vegas house with no downpayment three years ago. It's now worth less than half of what he paid, and Burns says he is walking away, leaving it to his lender to sort out.

Katia Dunn/NPR
Brian Burns

Brian Burns, a graphic designer, purchased his Las Vegas house with no downpayment three years ago. It's now worth less than half of what he paid, and Burns says he is walking away, leaving it to his lender to sort out.

Katia Dunn/NPR

This is the first of two reports.

For a snapshot of what a housing market in free-fall looks like, look no further than Las Vegas.

In this city, particularly in the newer developments outside the Strip, the city's center, there are tens of thousands of homes in or facing foreclosure. A massive boom, speculative buying, lax lending standards and an enormous run-up in home prices over the past decade are now unraveling at a fast pace.

Two years ago, buyers were so eager to buy homes here they lined up and camped out in front of sales offices. For many years, Las Vegas' population was increasing at a rate of more than 5,000 people a month. To manage demand, builders meted out their homes, and there were lotteries to select bidders.

"It was ridiculous," says Brian Burns, a graphic designer who found himself priced out of the market for several years, and then bought a home in 2005 in the Henderson suburb for $304,000.

Many of the homes in those kinds of neighborhoods now sell for half the price they fetched in 2006 — including Burns', which he was told recently would sell for $145,000.

Looking out over Highway 215, which cuts through North Las Vegas, there are stretches of thousands and thousands of homes — all built within the last five years — that seem to extend right to the foot of the Las Vegas mountain range.

Foreclosures Stack Up

Within the basin of greater Las Vegas, the foreclosure rate in October was more than seven times the national average — about one in every 60 homes, according to market research firm RealtyTrac. But more staggering, perhaps, is the fact that half of all homes in the Vegas area are worth less than the loans owed on them. There's more to come: Every month, several hundred more homeowners fall behind on payments.

No one is immune from this housing mess. The realtors and mortgage officers NPR interviewed are all under water on their homes, meaning they owe more than their homes are worth. Jeremy Aguero, a Las Vegas-based economic analyst, was the one exception—though he says he would be, too, had he not aggressively paid down his home.

Aguero, who founded the consultancy Applied Analysis, is nevertheless sanguine about Las Vegas coming out of its housing hole. He and others believe the housing sector will rebound when the economy as a whole comes back — bringing back the tourism industry that sustains much of the city. But in the immediate term, he also sees promise in the recent uptick in home sales, which he says will help cycle through some of the excess inventory on the market.

"And people forget, you know, there are still half a million people here who are still paying their mortgages," he says.

Real Estate Speculation

Dave Shaffer runs Shaffer Realty in the shadow of the famed Las Vegas Strip. The condo where he lives is worth roughly one-third less than what he owes, he says. With prices so low, he and several partners decided to invest in a condo in September. They bought it for $105,000, which was about half what it sold for a couple years before. But in the two months since then, it's lost another $20,000 of value.

That's simply par for the course, he says. On a block of one neighborhood in North Las Vegas, there are two foreclosed homes for sale right next to each other. Next to that, another home is also selling at a deep discount.

"This is a brand new house. Never been lived in," Shaffer says, his voice echoing off the empty walls. "And this is a speculator who got 100 percent financing, so what investment did they have in the market? None."

Shari Springer is also a longtime real estate agent and owns three homes she bought for $600,000 or more. She'd hoped to rent them for retirement income, but now pays more on the mortgages than she can make up in rent.

The fall in prices, she says, is a result of banks trying to unload foreclosed properties at fire-sale prices. Each one of those sales drives down the price of the neighborhood's homes even more.

"The banks are competing with each other," she says, and most homeowners can't afford to sell at such a low price. There is talk in Washington, D.C., of lowering the mortgage interest rates for home buyers to 4.5 percent, though that plan is not a done deal. And financing, Springer says, is still hard to come by for new buyers. Bargain hunters are hamstrung, which means the inventory of the thousands of bank-owned properties will just sit on the market, she says.

Renters Feel Impact

Even renters are affected by this crisis. Samantha Dolgin lives across the street from three homes for sale. She says she had to move there earlier this year because her previous landlord went into foreclosure. Dolgin was told she could lease to buy her previous home. Instead, the foreclosure notice came and she had to vacate within 30 days, she says.

Virginia Cavallaro lives next to foreclosed homes. While everyone around her leaves or puts their homes up for sale, she's stuck because she and her husband paid a lot of money down on their home.

"It's very difficult to live here," she says. In every direction around her, Cavallaro says, people are trying to jump ship. Earlier this year, she counted 48 homes in her development for sale — but almost none of them could get any interest among buyers.

Walking Away

For an untold number of people, simply walking away from a home has become an option.

Such is the case for Burns, the graphic designer in Henderson. He lost his job in May, as casino advertising fell. He fell behind on payments and tried unsuccessfully to get his lender to modify his loans so he could meet payments. So he's selling many of his things, packing his car and letting his lenders figure out how they can recoup the most for their investment.

With a perfect credit score three years ago, he was able to finance the entire house — so he has little to lose. The one thing he put money into was the backyard, which features a gas fireplace and a grill. But he says he's even now.

"I feel bad, kind of like I'm not pulling my weight in this crisis," Burns says. But the only move that makes sense, he says, is to move away.

Part two of this series will explore how Las Vegas residents are coping with the mortgage workout process.

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