Residential Realities

A Better Future Ahead?

April 01, 2008 - What’s happening with the residential real estate market? Is the constant barrage of media doom-and-gloom right on target or over the edge? Both ends of the state are experiencing the affects of the market.

At Preview 2008 in Las Vegas, Jeremy Aguero, principal of Applied Analysis graphically detailed the industry’s historical trend of peaks and valleys. It was evident that, currently, the market hovers in the depths of the valley. But, for those seeking a silver lining, it was also evident that every valley was followed by a dramatic upswing, or peak. The analysis can be interpreted as a negative (wallowing in the valley at the bottom), or as a positive. Aguero’s graph should have given hope to even the staunchest naysayer, because nothing was more evident than the resilience of Las Vegas’ expansion and growth when viewing this saw-toothed graph dating from 1903 to the present. It appears the question is not if the market will rebound, but when.
Nevada's Choice

Dennis Smith, president of Home Builders Research, Inc., noted in a recent Las Vegas Housing Market Letter, the preliminary tally of 2007 home sales of all product types was at 19,670. This represents a year-to-year decrease of 16,486 recorded sales, or a decline of 45.6 percent. That’s the lowest number of recorded new home sales since 1995. But perhaps, there is another way to look at the numbers. Home sales for 1996 through 2002, a period of seven years, ranged from a low of 19,785 up to 22,940 (in 2001), so do those figures reflect the norm, or do the 38,950 homes sold in 2005 and the 36,156 in 2006? Maybe the 19,670 figure for 2007 isn’t quite as horrible as it sounds. Granted the homebuilders worked overtime with creative ways to eek out those sales using deep discounts and offers that cost them dearly. It seems safe to say that those 19,670 sales did not represent the same profit margins as in previous years. According to Smith, the fact that the housing recession is regional and national may well extend the recovery process. The industry was hit by a credit crunch “of the likes we have not seen in 30 years in this industry.”

However, Smith also had some good news that bodes well for the market. “The bottom is closer, so better times are not too far off,” noted Smith. The predicted 100,000 to 200,000 jobs to be created from the new projects currently under construction on the Las Vegas Strip certainly promote a positive economic basis for our housing market. “New jobs mean increased demand for housing. There is definitely pent-up demand developing, and that will eventually spur housing activity,” he said. First quarter interest rate cuts by the Federal Reserve add another positive factor, along with the new loan limits for Fannie Mae, Freddie Mac and Federal Housing Administration loans. Guidelines now range from 125 percent to 175 percent of the median home price of a given area. The Southern Nevada Home Builders Association reported the loan figures for Las Vegas allow for a maximum FHA loan of $400,000 and $417,000 for Freddie Mac and Fannie Mae loans.

Reno’s Forecast

Northern Nevada’s picture looks a bit brighter than in the southern part of the state. Five industry leaders announced their predictions at Forecast 2008 & Beyond in Reno. U.S. Bank Economist John Mitchell predicted that the economy will not hit a recession and that Nevada’s economy will grow in 2008. Mitchell also said that he believes the housing market will recover this year in the fourth quarter. Mark Krueger, managing director and senior vice president of Grubb & Ellis, said that the current supply of new home lots presents about 3.4 years’ worth, and that land prices are expected to drop another 10 percent, back to 2003 levels.

Wayne Capurro, president of the Reno/Sparks Association of Realtors, presented a residential resale overview. He reported that the bell curve is flattening – which means from January 2003 to January 2006 the median home price rose 100 percent. Prices in mid-January were hovering around 2004 levels. “It does feel like things are changing,” commented Capurro. “We saw median prices drop by 25 percent – 15 percent in 2006 and 10 percent in 2007.” Currently, the number of properties going into escrow each week is larger than the number of new home listings. “I’m not quite ready to say we’ve hit rock bottom, but if we are not at the bottom, we are near. I feel the worst is over. The sub-prime market has prolonged the agony. In fact, our numbers were looking good in April and May of 2007, but, the sub-prime market started to have an impact, and it was a major blow,” he said.

In comparison to the Las Vegas market, Capurro thinks that Northern Nevada took a nose-dive earlier than in the south, and may just come out of this dip a bit earlier. “We are a much smaller market, and have not had to deal with property auctions. Our foreclosures here are non-judicial,” he said. “So, when someone defaults on a loan, they go through the foreclosure process and the title returns to the lender (a bank or mortgage company). Usually the property ends up being listed for sale in our MLS system, so essentially it returns to inventory,” Capurro said.

Throughout 2007 and into the middle of first quarter of 2008, Capurro noted that active listings represented slightly over a 12-month supply. “It’s considered a buyer’s market whenever we have above a six-month supply and a seller’s market when our supply is below six months,” he said. There is no question that today’s market is currently very much a buyer’s market. “However, Northern Nevada is also seasonal, so that impacts our sales pace, too. As we move into spring and better weather, we are moving into our biggest selling season and things can change rapidly. I know a lot of buyers are sitting on the sidelines waiting for the bottom. It’s quite possible those homebuyers who are waiting for the bottom may have waited too long,” Capurro said.

Brian Kaiser, business research analyst for The Center for Regional Studies at University of Nevada, Reno, who collects local economic and housing data, said his research indicates that Washoe County has not hit rock bottom. “Take one look at the monthly foreclosure data for Washoe County last year and you’ll see the steady increase that will inevitably carry at least through the first half of 2008, if not the whole year,” he said. “Condos have been doing relatively well this past year and quite a few new condo developments are set to begin selling this year.” He estimates Washoe County will see about 2,500 new home starts in 2008 – about half the number of the peak 2005-2007 years – and still slightly less than the area’s average year.