Las Vegas Housing Market Crash of 2006 free essay sample

Las Vegas Housing Market Crash of 2006, who is to blame? By Tina Beach In the United States, the lending industry’s lack of aggressive monitoring was a big part of the housing market crash of 2006. The Las Vegas housing market, once a booming industry in 2003 to 2005, is now one of the top 3 cities in foreclosure properties. I sat with Suzanne Pashnick to get her take on what happened, who is to be blamed and what can be done for the city to recover. Suzanne has been in the real estate field since 1995 and began her career in Michigan.In 2005, she moved to Las Vegas and continued her career in real estate and is currently an agent for CENTURY 21 MoneyWorld and remains licensed in Nevada. Las Vegas during the boom of 2003-2005 got too big too fast. What goes up eventually comes down. And when it came down, it came down with consequences. We will write a custom essay sample on Las Vegas Housing Market Crash of 2006 or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page No one ever imagined that the housing market in Las Vegas would go down; they only thought the market would either go up as it had been or at least stabilize. Speculators and exotic loans pushed home prices in this gambling Mecca dramatically higher during the first half of the previous decade.But after peaking in 2006, the real estate markets crash cleaned out investors and submerged an alarming portion of area homeowners. â€Å"Through the fourth quarter of 2009, more than 81 percent of single-family home mortgages in Las Vegas were underwater. †According to Hubble Smith of the Las Vegas Review Journal, he said â€Å"The existing home market in Las Vegas has applied the brakes, slowing to 7. 7 percent growth in median price and 2. 4 percent in monthly sales, local research firm SalesTraq reported. † It started with the lending industry.They made the process of getting the money to purchase a home so accessible, so easy, and so convenient. They created programs that got people who couldn’t qualify, wouldn’t qualify on a normal basis, for a home loan†¦ a mortgage. There were programs where the income wasn’t an issue. As a result of this, the lending industry is now forced to become stricter in their lending techniques. However, if you think about it, are they really stricter? No, not really. The banks have always been this strict with their riteria to lend out money, they just got greedy. The fear of losing business to another company forced lenders to push a loan through when clearly they knew that the application should have never been filled out. As the housing market started its downward spiral and people were losing their homes because the adjustable rate mortgages {ARMs}were coming to an end, the government stepped in to bail most if not all the banks out. Now, the banks are verifying income, verifying whether or not the buyer has a sufficient amount of a down payment, etc. ARMs generally permit borrowers to lower their initial payments if they are willing to assume the risk of interest rate changes. In many countries, banks or similar financial institutions are the primary originators of mortgages. † â€Å"In fact, there were warning signs. In the decade preceding the collapse, there were many signs that housing prices were inflated, that lending practices had spun out of control, that too many homeowners were taking on mortgages and debt they could ill afford, and that risks to the financial system were growing unchecked.Alarm bells were clanging inside financial institutions, regulatory offices, consumer service organizations, state law enforcement agencies, and corporations throughout America, as well as in neighborhoods across the country. Many knowledgeable executives saw trouble and managed to avoid the train wreck. While countless Americans joined in the financial euphoria that seized the nation, many others were shouting to government officials in Washington and within state legislatures, pointing to what would become a human disaster, not just an economic debacle. This probably doesn’t make the real estate agent very happy, but had they followed the ru les, maybe the housing market wouldn’t have been so chaotic. The threat of losing income or a commission to a real estate agent is a very real thing. It’s their income and without their income, they are like everyone else. They can’t pay their bills, they can’t pay for food and gas, and they can save for the future. The public was uneducated in how the process worked but seemed not to be bothered because it got them into the house. They don’t want a mortgage, they want a home.A home they can raise a family, build equity, build a life, have a sense of freedom. That â€Å"boom† market gave it to them. The lenders probably told them to just sign here for now and we’ll get your mortgage down to where you really want it and in a couple of years and we’ll figure out the rest. When you have no idea that the market would crash as it did, are you prepared? No, because who is thinking that your home is losing value, that people are going to lose their jobs or that the economy would turn into a recession. Not the banks or the public thought that.The perception was that the market was going to go up or stay steady, so the homeowners were going to be able to refinance and get rid of their current payment. People were going to make more money, they were going to get a raise in a couple years at their jobs and everything would be better. So when the homeowners refinanced their loan they would get a fixed rate mortgage for 30 years. But that never happened. â€Å"Awareness is the key here. Being aware of what is happening and being ahead of the frenzy that follows once the masses finds out what’s going on.This is the sign of a smart investor. † During this â€Å"booming† market, from an investor’s standpoint, they only saw dollar signs. The housing market is the same as the stock market. You know that there are always going to be risks and investing your money into any kind of financial market, you potentially could lose money. The investors didn’t think that they would lose their money so quickly. They thought with the housing market demand increasing, they would recoup their costs and make a profit in a short amount of time. It became a â€Å"seller’s market† because sellers had control of what contracts they were going to accept and which they were going to reject based on the profit margin. Individuals and companies were buying houses and â€Å"flipping† them to make a profit. Flipping refers a house purchased at a reduced rate, fixed up and sold for a significantly higher price. One of the ways to flip a home is by way of wholesaling. Wholesaling involves purchasing a property and immediately (often times the same day or even at the same closing table) reselling it to another investor for a small profit.The turnarounds were happening so quickly and so often that appraisers had to do appraisals to meet the demand of the investor, just to get the deal done. When the market started to go down in value, the investors were the first to get out, then the unemployment came, and then the economy took a turn into a recession. At some point the liabilities fell onto the appraisers and the lenders and it became loan fraud. So it was loan fraud that triggered the housing crash. The federal government was cracking down on who was to blame for these loan frauds.Because the common practice was â€Å"get the deal done, no matter what†, the investigation unraveled numerous â€Å"red flags†. Following the investigation, they narrowed it down to these people and wanted answers. There are federal cases coming back to all parties: the lender, the REALTOR ® and the appraisers. The threat of any of these parties was apparent; someone found someone to fund the loan, negotiate commission in their own best interest or appraise the property to the amount that suited the deal. A new problem is rising due to all of this and it’s called, â€Å"dumping houses†!Homeowners are walking away from their houses and their obligations because their homes are not worth what they paid before. They have this mentality of â€Å"why should I pay for this amount when my neighbor just bought the same floor plan and square footage as me for less? † These homeowners figured they should either have their mortgages lowered to the â€Å"new neighbors† value and pay accordingly and if the banks weren’t willing to see it their way, the homeowner would walk. They can apply for a loan modification.What’s a loan modification? Adjustment of the terms of a loan during its term in a way not accounted for in the original loan contract but accepted later by mutual consent of the lender and borrower, usually a concession to the borrower in an attempt to avoid foreclosure. With the economy decreasing and the unemployment rising, people couldn†™t (and still can’t) afford to stay in their homes and are forced out by the banks. After that new loan term expires, if the housing market doesn’t stabilize, the homeowner is back where they were.What is it that we should do to make sure that this doesn’t happen again? Some major supervision from the government would be a great start. The lenders keeping their current policy of verification of income to debt ratio, credit history, and the funds needed to come up for the down payment. Again, Suzanne Pashnick said that the lending companies are going back to where they have always been in approving money, so nothing has changed as far as what needed to be done. It was how much do we ignore and hope that it works out.The year 2010 brought very little improvement in the U. S. housing sector. And thats not likely to change in 2011. The industrys weaknesses high unemployment, tight credit, ineffectual government programs, soaring inventories, plunging prices, and so on are simply too gaping to be resolved within the year. So for now, the market is stabilizing†¦ at least as much as it can. The lending industry is doing what it’s supposed to do with its policies. Las Vegas still has a long way to go. WORKS CITED: Suzanne Pashnick, interview May 5, 2011