It is a well-known historical fact that most governments – democratic or autocratic – introduce perverse laws. Ignoring the law of unintended consequences, thoughtless, ill-educated politicians produce laws that achieve the exact opposite of their explicit objective.
Few lawmakers, however, can bathe in the infamy of Nevada, a gamblers’ state whose residents gambled excessively on the housing market bubble that burst in 2007. Las Vegas confronted one of the most serious house foreclosure consequences of this gamble. Well, as a signature gambling state, the Nevada legislature gambled one again, recording another spectacular loss in the arena of the American housing dream.
Between 2002 and 2006, house prices doubled in Las Vegas with many buyers making zero or minimal deposits, and confronting the sketchiest of income and asset evaluations. From 2007 through 2012, average house prices collapsed 62 per cent, driving many households into foreclosure and short sale. What is required in such circumstances is a swift and efficient foreclosure system, removing those who cannot pay their mortgages out of home ownership and into the rental market, allowing house prices to fall quickly to their bottom, and thus encouraging a new inflow of more affluent home owners.
The State of Nevada rejected outright this solution. New legislation – in the form of A.B. 284 – threatens criminal penalties for bank officials who do not follow new rules to certify that foreclosures are processed properly. Further, it makes it a felony for any one who makes a false representation concerning real estate title. Worse still, the wording of the new law, rushed through the legislature, is highly ambiguous. Severe penalties apply to vaguely defined crimes.
The Nevada law simply stopped foreclosures cold. In October 2011, the first month after the law took effect, lenders filed just 600 notices of default, an 88 per cent drop from the previous month. By May 2013, foreclosed homes, which accounted for half of all homes sold in Las Vegas since 2007, accounted for only 11 per cent of home sales. Many mortgage holders have gone 60 or more months without making any mortgage payment and still remain in their homes, without any notification of foreclosure proceedings.
As a perverse consequence of the foreclosure seizure, Las Vegas now has only 4.300 previously owned homes listed for sale, down 70 per cent from two years ago. New home sales, in contrast, are up 87 per cent so far this year. The number of new building permits issued this year is up 52 per cent from last year.
Because mortgages for these new homes are extremely difficult to come by – the consequence of A.B. 284 – most of the new homes purchases are by cash buyers, many of whom are aiming to flip their purchases in order to re-sell at higher prices driven by the foreclosure seize-up of the existing housing stock.
So the New Nevada law has effectively destroyed the market in existing houses and driven a rising bubble in new house construction. When this second bubble bursts – as burst it surely will if ever the existing stock of houses comes onto the market – Las Vegas will be right back in 2007, with an even larger stock in houses that should, but will not be, foreclosed.
Well, it is the gamblers’ city. The game is in play and the tables load up until the dealer calls out : ‘Rien ne vas plus“!