Feature Stories - November 2004

Southern Nevada Homebuilders Forecast

Charting a Volatile Market

by Kathleen Foley

What’s ahead for the red-hot housing market in Southern Nevada? Now that housing prices seem to have peaked, are we heading for a crash? Or will the scarcity of land drive prices out of range for the average wage earner?

On September 9, Tom McCormick, president of Astoria Homes, and Dennis Smith, president of Homebuilders Research, Inc., met with Nevada Business Journal Publisher and CEO Connie Brennan to discuss the residential market in Southern Nevada. Here are their insights on this rapidly-changing situation:

Dennis Smith: Homebuilders Research, Inc., has published housing reports on the Las Vegas area for the last 17 years: absorption, sales figures, permit figures, etc. We use two different types of databases. One focuses on the weekly traffic and sales reports that come to us from home builders, and our second database involves hard numbers we get from reading the deeds recorded at the Clark County Recorders Office. We also do a lot of customer studies and site-analysis work.

Tom McCormick : Astoria Homes is a single-family-home builder. It’s our tenth year in business, building detached homes. Based on closings, we are the largest privately-held builder in Las Vegas. We have nine neighborhoods under development around the Valley. Our first year, we closed 44 homes. This year we’ll be doing about 1,050. It’s a very exciting time, but we’re in a situation we’ve never experienced before. It’s great to sell homes at higher prices, but when we’re also paying higher prices for property, we wonder how strong the market really is, and that’s where Dennis comes in with advice. So far, he tells us it is going to be good going forward, and we hope he’s right.

Connie Brennan: Let's start off by talking about housing costs. Will the median price of a new home continue to go up?

Smith: I think reports will show the median price of a new home continuing to rise at a fairly significant pace over the next two or three months, and then it will slow down and go back to a year-to-year rate similar to what it was before January 2004.

Brennan: Is that length of time the lag between the actual sales and when the numbers are published?

Smith: Right. We can look at what the resale median price has done, and historically the new home median has been about $20,000 more than the resale median. So, I expect the new home median will be at least $20,000 higher than the resale median by the fourth quarter of this year and probably sooner. Next year I think the median price of new homes is going to continue to increase, although at a slower consistent rate, maybe in the year-to-year range of 8 to 10 percent. I base this on the price of land. How can someone say new home prices are going to come down when there’s still a huge demand for land by homebuilders? At the end of August the new-home median price was $259,700. That's a year-to-year change of $53,533, a 26 percent increase. The resale median was $250,000, and that’s a year-to-year change of $78,000, an increase of 45.3 percent.

Brennan: What do you think is your biggest challenge?

McCormick: Affordability and availability of land are both big challenges. For a while, even if you paid the asking price, you could not get the property – you had to pay above the asking price. We are competing with public companies, which have to build a certain number of homes in order to meet growth projections they’ve promised their stockholders. So these larger companies are willing to pay what seems like virtually any price to keep that pipeline full, whereas, as a private company, we don’t have that option. The unique thing about homebuilding is that it may take a minimum of two years from the time you originally purchase the property to the time you close a sale. So we are trying to look forward and see if the price we paid today – which seems like it’s probably too high – is going to be justified. We have to ask, "What’s happening with median incomes? What’s happening with interest rates? What's happening with the overall market demand?" I don’t think there’s ever going to be a lack of demand, but there may be a lack of affordability. To use an extreme example, look at a place like Orange County (California). There’s no shortage of demand there; people would love to own a home, but when the median price is $550,000, you can’t own a home. So, another question we have to ask is, "How deep is the demand among people who can actually afford what I’m building?" t isn’t the cost to build a home, and it isn’t the cost to put in the improvements or pay the fees – all those are going up, and that’s hurting affordability. But when land has gone from $100,000 to $600,000 an acre over the past two or three years, if you put five units on an acre, a lot that used to cost you $20,000 now costs you $120,000. Before you even talk about markups, it’s a $100,000 increase. And once you purchase that land, there’s nothing you can do to get that number down. So that’s where Dennis is dead on: prices aren’t going to go down unless builders have to panic to sell a home. If for some reason, this market were to slow down a lot, we would expect to see homebuilders cutting prices to meet their numbers, but interest rates are still unbelievably low, and there are a lot of reasons to believe the market will keep going. If the BLM and the county agreed to flood the market with land, and 20,000 acres suddenly became available, housing prices would fall noticeably, but that’s not a very likely scenario.

Brennan: But the cost of building a house is more than just the land. Hasn’t there also been a substantial increase in the cost of building materials?

McCormick: Those costs have gone up, but the cost to buy the land, put in a street with a graded lot, make the improvements and pay the fees is higher than the cost of actually building the home.

 Smith: That’s a good point.

McCormick: The $100,000 increase I’ve just described is what’s hurting affordability the most, and Astoria’s market is lower-priced homes.

Brennan: Do you still have people on waiting lists to buy your homes?

McCormick: We do, but we’re one of the few, because our prices are low.

Brennan: What does your lowest-priced home cost?

McCormick: It’s about $205,000, and it’s a home we used to sell for $125,000.

Brennan: So if you always have more people to buy a home than you have product to sell, that’s a great spot to be in. Do you expect that to continue or do you see it cooling off? 

McCormick: My feeling is that the person with the lowest price is always going to be in the best position. We want to be the last people to feel the markets lower. We’re seeing some builders in some of our markets cutting prices, but these are the builders who were so far ahead of the pricing curve, you wondered how they were justifying the prices they started out with. There was a lot of speculation going on, with people overpaying today, but betting that by the time the house was built, the price would be right.

Smith: The affordability factor is something that is discussed over and over again in various groups and meetings with elected officials, and so forth. It’s not as difficult as it may seem – it’s just a matter of the supply of land. Phoenix has an endless supply of land for sale – it was $40,000 an acre five years ago and it’s $40,000 an acre today. It will probably be $40,000 an acre five years from now. But that’s not Las Vegas. There are no models to use for Las Vegas. There’s never been a market like this, not even in California. Another reason Southern Nevada is unique is that it’s not just a local market. In making predictions for a normal housing market, you look at job growth, at in-migration, at potential supply in various areas, and you can make assumptions and predict. But we have people moving here from all over the world now. So it’s not just a Las Vegas demand; it’s not even a United States demand; it’s demand in China, the Philippines, Europe. People from everywhere are buying property in Las Vegas.

Brennan: So, what’s your summary about what’s happening in the resale market?

Smith: In a nutshell, the resale segment has experienced a dramatic increase in supply, which has caused prices to level off. In many instances, properties listed for sale are competing with new homes offered by homebuilders. In fact, of the 13,000 resales listed now, roughly 11 percent were built in the year 2004.

Brennan: Is that unusual?

Smith: Yes, very unusual.

McCormick: That means someone’s reselling a home in a neighborhood where we have a sales office still open, and he’s probably saying, "I’ll sell it to you for less than the builder will."

Brennan: So it is investors doing this?

McCormick: Yes. That’s why homebuilders try to keep them out.

Brennan: But how do you keep them out?

Smith: Homebuyers have to sign a disclaimer that says they intend to occupy the property.

McCormick: The loan documents are going to tell us whether you’re an owner/occupant or non-owner/occupant. If we see you’re a non-owner/occupant, we cancel your sale.

Brennan: But there's nothing to stop me from moving into the house for only two weeks.

McCormick: No, but that’s a lot of trouble for you. I’m not worried about the investor who buys one or two homes. But, if I have a street full of homes that are all owned by investors, that is the worst thing when it comes to resale. When they decide to cash it out, all of a sudden the whole street has "For Rent" or "For Sale" signs. Now, I have a neighborhood that looks like a rental neighborhood. There is nothing wrong with people renting a home, of course, but if you have too many rental houses owned by people with no investment in the neighborhood, the homes are not well maintained. The common areas are not maintained. The people who are moving into the neighborhood aren’t necessarily screened very well. This also means the homebuilder has no pricing power whatsoever, because every one of them wants to just sell their home and take their profit and get out.

Smith: We have already seen some changes in the market. During the first quarter of this year, we lost a lot of our local buyers. They were in sticker shock and just backed off. Most of the houses being sold were bought by people who were moving into the area or by speculators. So, we have to get those local buyers back in the market. Because of the huge number of investors and speculators we had during the first part of the year, we expected to see a big uptick in the supply of homes in the $400,000 to $600,000 price range, and we did. The supply is now there for these homes, so you can get a good deal if you shop around. Whereas, if you look for a $200,000 home or a $250,000 home, the supply isn’t there, so you’re going to pay what the seller wants you to pay. It’s all back to supply and demand.

McCormick: You can tell the market is changing by looking at the Saturday and Sunday real estate section of the local paper. A few months ago, the real estate section was nonexistent, but now it’s coming back.

Brennan: So people are going to have to start marketing again, except possibly those who are building lower-priced products. But you don’t see the prices of homes going down?

Smith: No. Overall, I don’t see them going down. As Tom said, there may be price cuts, but these might really be termed price adjustments. Builders that may have just opened new subdivisions may have missed where the demand was, and so they have to roll prices back to adjust to where market demand is.

McCormick: I agree.

Smith: When we get to a point where the supply of homes becomes greater, you will see prices adjust, just like they are doing now in the resale segment. In the resale segment now, you can bid down on a house. You don’t have to always bid up, like you did a few months ago.

Kathleen Foley
Kathleen Foley is a freelance writer based in Southern Nevada.