Home market expected to suffer as investors pull out

By Steve Brown

THE DALLAS MORNING NEWS
ORLANDO, Fla. — An investor pullout from the housing sector this year could spell trouble for many U.S. markets.
High-priced-home markets and condominiums will be the hardest hit by an anticipated slowdown in investment activity, the country's top housing analysts said Wednesday.
"We expect housing activity to drop about 8 percent this year — it's primarily because of the investors' slowing purchases," said David Berson, chief economist with the Fannie Mae mortgage company.
Berson and other housing economists were in Orlando this week for the National Association of Home Builders' annual conference and exposition.
All the economists are predicting a dip in home sales in 2006, caused mostly by a decline in investment activity.
"We can't find a period when the investor share of home sales has been higher than in the last year," Berson said. "In the fourth quarter, it looked like investors were starting to step back."
That's bad news for such cities as Las Vegas, Phoenix, Orlando, Miami and San Diego, where investors account for more than 25 percent of the home purchases. Nationwide, investor and second-home purchases total at least 20 percent of the market.
In the Tucson area, experts such as University of Arizona economist Marshall Vest say many investors already have pulled out, but demand for housing remains strong due to population growth.
Investors also account for a big chunk of condominium sales in cities nationwide.
"I've been suggesting that we be careful not to oversupply the condominium market," said Dave Seiders, chief economist for the National Association of Home Builders.
"Once the investor activity declines, we may be looking at some pretty soft conditions there."
In both the condo and single-family-home sectors, the fear is that investors will choose to sell properties or decide not to go through with purchases they've signed up for, the analysts say. That could lead to oversupply and dropping prices.
"That's the big downside risk to the housing market this year," Seiders said.
The National Association of Home Builders is betting that home starts will drop by about 6 percent this year. Home mortgage rates also are expected to increase, to an average of 6.6 percent.

Economist says housing market won't collapse

Nevada prices could stagnate instead

By JOHN G. EDWARDS
REVIEW-JOURNAL

Fears that Nevada's swollen housing prices may come crashing down any time soon may not necessarily come true, an FDIC analyst said Wednesday.

"A boom does not necessarily equate with a bubble," Rich Brown, chief economist of the Federal Deposit Insurance Corp., said during a conference call with reporters.

Brown said housing appreciation rates, such as the 50 percent-plus increase Nevada recorded in the third quarter of 2004, are not sustainable. But he suggested prices may stagnate for the next several years rather than collapse.

"Fundamentals are going to have to catch up, and home prices are going to slow," Brown said.

Recent home-price busts have occurred in areas in which the local economy tanked, but Nevada's economy shows no signs of slowing.

Housing prices slumped in oil-patch states when crude oil prices collapsed in 1986, he pointed out. Southern California and the Northeast, similarly, had home prices plunge during severe recessions in early 1990 and 1991.

Still, FDIC officials pointed to signs that the Nevada and Las Vegas housing markets are starting to descend from a peak.

"The Greater Las Vegas Association of Realtors reported that the inventory of homes listed for sale grew from a few thousand in early 2004 to nearly 16,000 in September, prompting one of the area's major home builders (Pulte Homes) to reduce asking prices in October," the agency said in its Nevada profile.

The skyrocketing housing prices are a negative for buyers, the FDIC pointed out, because the typical middle-income family cannot afford to buy a midpriced home in the Las Vegas area.

Home-price affordability plunged 27 percent in the Las Vegas area, said Catherine Phillips-Olsen, San Francisco region manager for the FDIC.

At the same time, demand for apartments outpaced the number of new units coming to the market, driving vacancy rates lower and rents higher, Property and Portfolio Research reported.

On a positive note, the FDIC reported that Nevada's economic growth continues to surge.

"The gaming industry, of course, is attracting a lot of visitors, and the retirees going into the area are contributing as well," Phillips-Olsen said.

Nevada also recorded a 4.5 percent year-over-year growth in jobs. Las Vegas posted a 4.9 percent gain, tops in the country, and Reno came in sixth at 3.9 percent.

"Every sector is showing positive growth (in Nevada)," Phillips-Olsen said.

Statewide, construction added 11,000 jobs during the period, three-quarters of which were in the Las Vegas area.

Nevada ranks second nationally for construction expansion, with Arizona in first place, Phillips-Olsen said.

Nevada-based banks, meanwhile, are growing more reliant on commercial real estate loans and construction and development loans. The median or middle commercial real estate loan concentration at Nevada banks was 421 percent compared with capital or net worth in the third quarter, up from 391 percent last year. That's the fourth-highest concentration of any state.

Construction and development loans as related to capital rose to 137 percent from 120 percent a year ago, the second highest among states.

Phillips-Olsen acknowledged that the focus of real estate lending is understandable in the state, but she said bankers in Nevada should watch it closely, just as banks in the Farm Belt monitor their level of agricultural lending.

Leaving Las Vegas?

Home prices in Vegas hit record highs recently. Now, say real estate agents, the market is cooling.
August 26, 2004: 2:32 PM EDT
By Sarah Max, CNN/Money senior writer

BEND, Ore. (CNN/Money) – In Las Vegas, it's only a matter of time before your luck changes. So after enjoying the nation's most robust real estate market, homeowners there may soon discover what gamblers have always known: Fast money moves in two directions.

Between the second quarters of 2003 and 2004, single-family home prices in Las Vegas shot up 52.4 percent, according to the National Association of Realtors. It was the greatest 12-month increase ever for any metropolitan area.

Sin City was sizzling. It wasn't unusual for sellers to get a dozen offers on a house and sell it in a single day. Builders had waiting lists for new developments. Buyers – many of them "investors" from out of state – were so eager to get their foot in the door they made offers on property without even seeing it.

"They gave instruction to their agents to buy anything between $250,000 and $300,000 that looked like a good rental or a property to flip," said Daniel Butterworth, an agent with Re/Max Advantage in Las Vegas.

Now, seemingly as quickly as it heated up, Vegas real estate has cooled down.

"In the last 60 days the market has died," said Leslie Carver, with Prudential Americana in Las Vegas. "Before, I couldn't keep a listing for day. Now, not even one person has looked at some of these houses in a couple of weeks."

The boomtown of year
Warm weather, affordable housing and amenities, such as shopping, restaurants and golf courses, made Las Vegas a popular destination for out-of-state newcomers. (See "Why some markets are hot."

Between 2000 and 2003, according to U.S. Census Bureau estimates, new domestic residents accounted for a 25.9 percent increase in the population of Clark County. (Domestic migration is just one element of population growth. Births, deaths and international migration also factor in.)

As all those new residents were moving in, word got out that Las Vegas was the place to buy property and resell for a profit. "We got a big influx of investors over the past six to nine months," said Butterworth.

There were so many "investors," in fact, that builders in new developments began refusing to sell to anyone who didn't plan to occupy the house. "They wouldn't work with agents and they didn't want investors," said Carver.

Now, said Butterworth, builders are contacting agents and offering even more than that standard 3-percent commission. Other sellers are rethinking asking prices and adjusting their expectations for how long it will take to sell.

Lessons from the oasis
According to Lee Barrett, president of the Greater Las Vegas Association of Realtors, things have indeed slowed down, but the market is still healthy. In July, 79 percent of all listings sold within 30 days, according association statistics.

Based on the number of out-of-state driver's licences being traded in at the Department of Motor Vehicles in Clark County, Las Vegas is still bringing in 6,000 to 7,000 new residents a month. And the number of houses and condos sold in July is about what it was in April.

"We've gone from an exceptional market to a normal market," said Barrett.

The problem is too much supply. Investors and even permanent residents have flooded the market with new listings.

There is now a five-month supply of homes on the market, verses a slim 1.7-month supply during the second quarter, Barnett explained. And the total number of properties on the market is nearly twice what it was in January, according to the Greater Las Vegas Association of Realtors.

Many are actually relieved.

"Sellers had false ideas about the value of their house and the time it should take to sell, and that wasn't fair to buyers," Barrett said.

"People expected to make a $100,000 after just a couple of months," added Butterworth. "They were starting to get greedy."

The unique sharpness of the rise of Las Vegas may exacerbate its relative (and relative is the key word) decline. Still, there are lessons in all this for the rest of the country. Across America, other notably "hot" housing markets seem to be cooling down as well.

"Things have slowed down, but to a manageable level," said Yvonne Cromer, a property owner in San Diego, whom we profiled in May. "Six months ago buyers were writing offers above asking price before they had even seen the property, just so they had a chance."

In Orange County, meanwhile, there is a five-month supply of houses on the market, verses a one-month supply earlier in the year, said Vinh Ha, an agent with Re/Max Realty Services.

"The market has really slowed down in the past couple of months," he said. "I think it just got to where people were fed up with high prices."

Las Vegas becomes sprawling 'home sweet home'

All of top 10 residential construction companies working in the area
The median price of a new home rose 20.4 percent to $225,813 in the first quarter.

When Steve Petruska moved here about a dozen years ago, his home in a community called Sommerlin looked out into raw desert and mountains.

The view has changed a lot since then.

“Houses, houses, houses and some mountains,” said Petruska, who is now Pulte Homes Inc.’s chief operating officer and commutes to Michigan.

With its job and population growth, sun and low taxes, the Las Vegas Valley has become the fastest-growing U.S. market for new homes among areas with more than 1 million people, and it ranks second overall behind Fort Myers, Florida.

From the north to the south of the Valley, the ash-colored desert and mountain slopes are giving way to terra cotta-like roofed homes and highway extensions.

All of the top 10 U.S. residential construction companies are building in the Valley, which includes the cities of Las Vegas, North Las Vegas, Henderson and unincorporated Clark County (where the famous strip is actually located).

“From my prospective, Las Vegas has gone from a gambling town to a metropolis,” said Bruce Karatz, chief executive of KB Home, the area’s largest builder.

The Los Angeles company, which entered the Las Vegas Valley market in 1993, derives about 10 percent of its business from its operations there.

With a waiting list of 12,000 buyers, KB holds lotteries when new blocks of houses become available.

Demand may be high, but builders are working hard to keep up with it.

In the first quarter, they took out 9,149 new-home permits, up 58 percent from a year earlier, according to the Southern Nevada Home Builders Association.

More upscale
Such growth has made houses less and less affordable. The median price of a new home rose 20.4 percent to $225,813 in the first quarter, the association said.

To reduce the cost, builders are putting up townhouses and duplexes. Some developments, such as KB’s Eldorado Springs, offer homes on small lots of about 35-by-100 feet, with virtually no yards.

While it may seem that the metro area suddenly sprouted from the landscape, some say it actually grew slowly over decades. Others, however, point to the 1989 opening of the Mirage, the first of the current generation of super-luxury hotels and casinos that line the strip.

“The whole idea behind Vegas prior to the Mirage opening in 1989 was the 99-cent buffet and a place to go gambling,” Pulte’s Petruska said. “Vegas turned more upscale with the opening of the Mirage.”

The higher-priced resorts led to higher-paying service jobs and an influx of new residents. About 90,000 people moved to the Valley in 2003, up from 78,000 in 1999.

Still, the unemployment rate for the area was 4.4 percent in April, compared with a national average of 5.6 percent.

About one in every three newcomers hails from California, where the job market and the economy have been struggling since the tech bubble burst, said Keith Schwer, an economics professor at the University of Nevada.

For many new residents, the move brings more-affordable housing as well as jobs. KB sells a new home for about $300,000 in Las Vegas, compared with about $420,000 in southern California, Karatz said.

Both the desert climate and the absence of a state income tax have attracted thousands of retirees and people over 55 to the area. In fact, Pulte’s Del Webb, which specializes in age-restricted communities, was the No. 3 builder of new homes in Las Vegas last year.

Increased sprawl
But not everyone is everyone happy with the Valley’s burgeoning population and development.

“We have seen the increase in sprawl,” said Tara Smith, conservation organizer for the Sierra Club of Southern Nevada and herself a Michigan transplant. “We don’t have sufficient public transportation. Our air quality has decreased significant because of the number of cars on the road.”

Just 23 miles from Las Vegas, Boulder City has decided it wants no part of the development of the Valley and has restricted building. That has sent developers sniffing around Mesquite, a community 50 miles away.

Rouse Co., a master planner that develops land and sells it to home builders, bought Sommerlin in 1996 from the estate of billionaire recluse Howard Hughes.

Rouse paid about $540 million for 22,000 acres, of which 9,000 were suited for home development. Over the years, the Columbia, Maryland-based company has sold about 3,000 acres to home builders.

“Land values have increased tremendously,” Chief Financial Officer Tom DeRosa said. In 2003, Rouse sold half the acreage that it did in 1997, but for three times the price.

The Federal Bureau of Land Management owns about 67 percent of the undeveloped land in the Valley and periodically auctions off parcels. In June, it plans to sell 2,532 acres, including 1,900 next to a Del Webb development in Henderson.

“We sit down and try to figure (the housing boom) out,” said Lee Barrett, broker and president of the Greater Las Vegas Association of Realtors as he drove near the base of a mountain.

“I used to shoot here,” he said. “This used to be out in the boonies.”

Soon it will be the site of New Southwest, another housing development.