The cratering housing market hit Las Vegas harder than cities in America. Las Vegas has bounced back but the high level of underwater mortgages might be preventing the Las Vegas economy from growing faster.  


A underwater mortgage is when the outstanding balance on a mortgage is greater than its resale value. This can be devastating because the owner would not be able to get rid of their debt owed on the house if they tried to sell.


The housing market collapsed in 2008, housing prices went with it. They were also unable to refinance their mortgage to get a lower rate on the mortgage or tap into the homes positive equity to get some cash.


Since the Great Recession was caused by the collapse in the housing market, when housing started to heal, so did the rest of the economy. When people feel more economically secure when their homes are strong value, they are more comfortable consuming and spending more.  


Jillian Batchelor, CEO of Realty One Group, said, “When these homes are underwater and those that are vacant, it drags down home prices in a community because it takes years on average for them to be foreclosed upon.” When so many homeowners are then not able to pay their mortgage, it hurts the bottom line of banks.


Because the housing bubble was so large in Las Vegas, it has the highest rate of underwater mortgages out of the top 104 metro areas in the United States, according to RealtyTrac, which tracks comprehensive data on the housing market. “The bursting of the home price bubble was so severe in Las Vegas, the negative home equity hole is deeper than anywhere else in the country,” said Vice President of  RealtyTrac Daren Blomquist.


In 2012, the number of houses in Las Vegas that were underwater was 70 percent, according to the real estate database company Zillow. Now, that number is down to 28 percent, according to RealtyTrac. What does that mean for employment in Las Vegas? More jobs.


Batchelor said that as a house becomes above water, it can help a family get from under a expensive mortgage they can’t afford. That might not be the only positive: “Homeowners might even be able to walk away with some money in their pocket.”


It is not only the number of houses that are no longer underwater but how quickly houses are sold at the listing price. According to Batchelor, a lot of houses priced below 30,000 dollars sell within 30 days of being listed and sell between 90 and 100 percent of full price. There are enough buyers so the market is fluid where sellers don’t have to lower the price to attract a buyer.


When the Las Vegas underwater mortgage rate was 70 percent, the unemployment rate was about 12.3 percent. When the underwater rate fell to 28 percent, the unemployment rate fell to 6.5 percent.



There is a correlation between the drop in underwater mortgages and the unemployment rate. So underwater mortgages hurt economic growth.


There is economic research that has shown that underwater mortgages can drag down consumption and stop people from moving in order to get a job.


A 2013 study conducted by economists Atif Mian, Kamalseh Rao, and Amir Surfi concludes that the housing crash caused a large reduction in consumption in neighborhoods with more underwater mortgages. It states that if a person’s house does not have enough value to serve as collateral, it will restrict their ability to borrow money. The data shows there is a correlation between the value of a person’s house and the growth in spending. A person won’t be able to tap their home’s equity to finance a new car, a vacation, or other consumption that drives economic growth.


This also hurts household mobility and can keep people stuck in a dire economic situation. Since a family can’t pay off their mortgage by selling their house, they can’t downsize to a smaller home to lower costs. Since they are stuck with a house they can’t sell, it becomes impossible for that family to move at all. If a person found a better paying job in another place, they are stuck. The National Bureau of Economic Research published a paper in 2011 that negative home equity reduces household mobility by 30 percent.


There are many factors that go into the strength of the economy and what drives growth. But the Great Recession was caused by a collapse in the housing market and, as some economists have pointed out, it should not be a surprise to see unemployment going down as home values start to rise.


But Las Vegas is still struggling. The percent of underwater mortgages in Las Vegas is double the national average, according to data from Zillow. The unemployment rate in Las Vegas is 6.5 percent, which is 1.5 percent higher than the national average.

“The city has come a long way, but still has a long way to go when it comes to digging out of that negative equity hole,” said Daren Blomquist.


With the correlation between the rate of underwater mortgages and the unemployment rate, it should not be surprising that Las Vegas still has unemployment higher than the the national average. It seems that the Las Vegas employment situation will improve when the rate of underwater mortgages starts to fall closer to the national average.