In southern Nevada, between 13,000 and 14,000 new home permits have been pulled in 2021, up 11 percent from 2020, said Nat Hodgson, CEO, Southern Nevada Home Builders Association (SNHBA). “We thought we were going to get about the same as last year, so an 11 percent increase when we were factoring zero is pretty good. We’re actually tracking over 14,000 right now, but I don’t think we can build them, so I’m trying to be conservative.”
“Builders are pulling permits faster than they have for quite a while,” said Forrest Barbee, corporate broker, Berkshire Hathaway HomeServices Nevada Properties. One resource showed 1,200 pulled in July, and they’re closing more homes than closed in 2020. At the heart of the pandemic, as unemployment rose, southern Nevada builders experienced a 40 percent cancellation rate on contracts in new developments. “Even though they closed over 10,000 new homes, they still had about a 30 percent cancellation rate on contracts last year.”
Then something changed. If homes were built, they were absorbed. The absorption rate in southern Nevada is now better than 100 percent.
“Everything sells,” Hodgson said. In early August there were 23 completed but unsold homes. That’s low. The number used to be 400-500. There’s so little inventory that unsold may mean “deal in progress.”
In northern Nevada, six months inventory is usually 3,600 homes on the market. “For a sustained period earlier this year, we had one week of inventory,” said Kevin Sigstad, broker/owner, RE/MAX Premier Properties Commercial. There were multiple offers on available homes, with buyers offering $50,000, $100,000 over asking price, waiving appraisals and inspections.
Buyers are entering into contracts for production homes before the foundations are poured, said Dan Morgan, executive officer, The Builders Association. The only thing keeping permits pulled close to 2020 numbers is supply chain and labor issues. Certificates of Occupancy get delayed by shortages in basics like cabinets when manufacturers haven’t caught up from pandemic lockdown and don’t have a full workforce because of social distancing.
“The market is crazy, it’s been really hot, low inventory, prices keep climbing. Our median price in June was $395,000. The numbers for July haven’t come out yet but I’m anticipating it will be over $400,000,” said Brandon Roberts, president-elect, Las Vegas REALTORS board of directors. “The $395 topped an all-time record set in May by $10,000. Prices are up about 20, almost 22 percent over last year.”
When the pandemic locked down all but essential businesses in 2020, Nevada was one of 17 states where construction was considered essential. Only about 10 percent of builders temporarily halted production, and work picked up again when homebuyers began flooding into the state in record numbers.
Which meant in April the industry appeared shutdown, and in June there were record numbers of homes under construction.
“We finished the year at the highest numbers since the recession,” Hodgson said. “What a weird year last year was, and this year is turning out to be no different.”
New home construction and sales continued through the pandemic in Reno. The increasing demand for homes was matched by the increasing unavailability of materials.
“A lot of it has to do with on-demand inventory,” said Morgan. “Nobody warehouses significant inventory supply anymore. If they need 100 units of something they send an email off to the manufacturer to manufacture it and ship it and it doesn’t sit in inventory.”
Several new developments have come online in Douglas County, including condos and townhomes, which are new to Minden. Major builders moved into the area, and the market experienced an uptick. In August, inventory stood at 54 homes.
“In a normal market, that’s around 220 to 250,” said Brad Spires, president, Nevada REALTORS. In June 89 units out of 149 sold, a 60 percent absorption rate; 25 percent is considered a seller’s market. That’s driven the median price up to $573,000 and the median days on market to six. The percentage of closing against asking price is 102.3 percent, said Spires – basically anything available isn’t available in less than a week.
Past, Present, Future
A thriving residential market should be indicative of a healthy economy, but one that’s overinflated causes concern.
Tight inventories and high demand put pressure on prices, which have risen more than 20 percent from 2020. That’s not considered a stable market.
“Last time we had price increases like this we had substantial price decreases that followed,” said Sigstad. Between 2008 and 2001, prices declined roughly 50 percent. “But this is a different economy, and these are different times; that crash was for different reasons.”
Today, 51 percent of housing transactions in Washoe County from January to May 2021 were cash.
“If you list a house for sale and you’ve got six or eight offers for $50,000 or $30,000 over asking price, and the appraiser says it won’t make appraisal at that, but the buyer has the ability to put in more cash, that’s a very, very different situation than 2008,” Morgan explained. “[Back then] people were getting mortgages and taking seconds to make their down payment. They were essentially buying a home with really no skin in the game.”
Nevada’s current residential market isn’t unique. Markets nationwide face low inventory, high demand. “In some respects it’s good that it’s cooled off a little,” he added. “Certainly, it was unsustainable and we don’t want to see 20 percent price increases year-over-year.”
Homebuilders, burned in the last crash, are being conservative. They’re releasing a few homes at a time and taking advantage of price increases. But they’re also dealing with huge price increases in materials and a shortage of labor. So, they’re cautions, making certain they can sell homes at a profit, and not building spec homes.
When the pandemic hit, no one expected it to drive the residential housing market.
“We didn’t know what [the market] was going to do,” said Roberts. “I didn’t expect it to increase real estate like it did. I think a lot of the growth happened because people realized they could work remotely.”
That caused people to explore new places to live. Many chose Nevada, and today Nevada’s residential market is thriving.
But not for everyone. “We’re still affordable for people coming from out of state,” Hodgson said. “But our Nevadans will be priced out.”
By the Numbers
The demand for new homes hasn’t fluctuated more than 5 to 10 percent in the last four or five years, but the ability to build them has. Skilled construction workers left the state during the 2008 crash and haven’t returned. The industry is aging. As skilled tradespeople retire, no one’s taking their place.
“Supply chain issues that are affecting the delivery of [homes to meet demand] have reached all the way to the labor market,” said Morgan. “Whether it’s faucets and cabinets and concrete or it’s labor, a lot of homebuilders are seeing very high demand for their product but it’s a challenge to deliver that product.” Land is scarce. In 2010 there was land available in Somersett, Wingfield Springs and Damonte Ranch. Today there’s much less and the local government is moving more slowly on approving projects.
Technology creates further challenges. Two years ago, municipal building departments were trying to create online systems. Then, in a single pandemic week, everyone had to be online, said Hodgson.
“What we experienced is delays in all of our processing,” he explained. “Not just local jurisdictions, but with the engineering process, with utilities, gas meters, electric meters, you name it, we’ve had delays, and that costs money. It’s never been harder to build a house than it is now.”
Building materials prices have skyrocketed. Lumber costs alone shot up 300 percent. Some materials are impossible to find. For some there are workarounds, but there’s no going forward without roof trusses, Hodgson said. The strangest shortage? The day there was a shortage of paint. The market is unusual, but not unique; markets are similar nationwide.
The Rental Market
The unexpected length of the pandemic gave landlords and tenants time to work together when tenants couldn’t pay rent, but there’s been concern that when federal and state eviction moratoriums lifted, there’d be mass evictions.
There haven’t been. But now that the moratoriums are lifted landlords can collect, and homeowners who want to sell their rental properties can get tenants out and do so. “It’s going to be a challenge for people,” said Sarah Scattini, president-elect, Reno-Sparks Association of REALTORS. “If you’re not paying rent, where are you going to go? Because landlords aren’t able to pay their mortgages then, and you can’t just not pay your mortgage, because then they’ll foreclose and then the tenant is really out.”
Moratoriums meant some mom-and-pop landlords ended up seriously behind on mortgage payments when tenants couldn’t pay rent. It’s expected in many such circumstances owners will choose to sell. On one hand that brings more homes onto the market. On the other, it means renters face further reduced inventory.
Rental inventory is already low. Reno’s vacancy rates are 1.5 percent, where a balanced market is 5 percent, said Sigstad. When 5 or 6,000 apartments came on the market in 2020, they barely made a dent. Even when new product comes online, the cost of construction makes it nearly impossible to build affordable housing, so every unit comes in at luxury apartment prices.
Lap of Luxury
Three years ago, it wasn’t possible to find buyers in Douglas County’s for homes priced $700,000 and above. Today, million-plus product sells as soon as it hits the market.
Southern Nevada luxury properties defined by clubhouses and/or golf courses, finishes and amenities, and price points of $2.5 million or more. Luxury communities are booming. So are off-market products with more land and less homeowners’ associations for the lone wolfs, said Ivan Sher, broker/owner, The Ivan Sher Group.
As quarantine 2020 ended, Nevada’s luxury market was having a good but not exceptional year. It started picking up in September, and in Q4 Sher did the same amount of business as he had during the first three quarters.
“I would say 20 to 25 percent of my buyers came from California in 2019. That jumped to 75 percent overnight,” Sher said. In 2021, it increased to 80-85 percent. “There was an influx of power players in the Silicon Valley market, so now our whole market has shifted. To say our market is active would be the understatement of the year.”
The market usually slows during the hottest part of summer. This year it only slowed a little. “A little meaning we’re seeing some semblance of inventory where before there was no such thing as inventory. It’s starting to creep up,” said Sher. New luxury homes are selling for record prices.
“The luxury market, $1 million and above, has benefitted probably more than any other portion of the market,” said Barbee. “We went from 17 months of inventory in the $1 million market to four months of inventory.”
“Will resale sales cool off? They’ve got to because they’re so overvalued it’s crazy,” said Hodgson. “What I’d like to see with new homes is for our costs to flat-line so [the market] can stabilize.”
“Right now [Reno’s market] is still lower inventory so home values are still up and many multiple offers are still on properties, California buyers are coming in and paying cash, and the median sales price in RenoSparks is $530,000,” said Scattini.
That’s hard on first time buyers using conventional lending. Cash buyers don’t have to wait for appraisals, or for loans to underwrite. “First time homebuyers on FHA loans, coming in with a 3 percent down payment, sellers look at them and see a much higher risk that they’re going to be able to close,” said Sigstad. It will cost the seller more than going with the cash buyer, so why not go with the cash buyer?
Eventually the market will see consequences from buyers paying more than asking price, Scattini said. When those homes are no longer worth current inflated prices, they’ll look for someone to blame.
That’s one reason Sigstad tells his agents to help clients find homes they love, but not by throwing caution to the wind. Due diligence still matters. There’s no point finding the dream house if the foundation crumbles six months later.
In July, Reno’s inventory crept back up to two or three weeks-worth. “Everybody thought the market had collapsed because we’ve three weeks of inventory, what are we going to do?” Sigstad said. But the market only cooled a little. “[That] has helped. People overpriced their homes thinking that homes are going up 1 to 2 percent a month. If they sold for $500,000 last month it must be worth $550,000 this month. [Those sellers] are having to do price reductions and reevaluate where they are in the marketplace so they can get the house sold in a timely period.”
“I don’t think it’s a bubble; 2006 was a bubble,” said Sher. “This market is inflated.”
Whether it drops by 5, 10 or 15 percent is less clear. Sher believes there is potential instability for a number of reasons and, in the next few years, there will be some kind of consequence to the trillions of dollars pumped into the economy. “You don’t have to be a rocket scientist to predict huge amounts of inflation,” he explained.
“The market might be a little overinflated, but I don’t think we’re in a bubble,” said Roberts. “I don’t think we’re going to see a crash, the reason being I believe people have equity in their homes, that’s No. 1, and No. 2, they’ve got good interest rates, good loans, and they’re buying homes right: money down, and it’s not the same kind of financing you saw before the recession. I think you’ll see a stabilization of prices, maybe a little bit of a drop, but you won’t see a crash. I don’t think we’re in that kind of a bubble.”