Short sales, REOs rule in Las Vegas

Distressed properties make up more than 70 percent of transactions

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While some metropolitan areas are seeing stagnant sales activity, the Las Vegas residential real estate market saw more than twice as many home sales in September, 3,603, as it did in the same month in 2006, when 1,740 homes sold, according to the Greater Las Vegas Association of Realtors, which covers Las Vegas and surrounding areas in Southern Nevada.

"Our market actually is quite vibrant in Las Vegas. Unfortunately, it’s vibrant in a less-than-positive fashion," said Rick Shelton, GLVAR’s president and broker-owner of Better Homes and Gardens Desert Properties in Las Vegas. "In other words, in every transaction it’s not a win-win — one side always loses" because of the prevalence of distressed properties, he said. 

"The good news is we have a lot of transactions, unlike some markets in the U.S. right now, but those probably only took a 10 to 15 percent price decline from peak market whereas we took a 50 percent price decline from peak market, so obviously we’ve become an investor haven once again."

The federal homebuyer tax credits helped boost sales activity and home prices in Southern Nevada, but, since then, roller coaster home prices as well as rising inventory leave open the question of whether the Las Vegas market has reached a bottom.

"The tax credit did what we expected, but I think it slowed consumer confidence a little bit and I think it pulled some buyers forward into the future," Shelton said.

Las Vegas agents want to know when the market is going to stabilize, and "fear of the unknown" is a primary concern, he said. That’s especially true when it comes to forces outside of their control, such as lending and federal housing policies, he added.

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"External forces stimulate the market or work the opposite and take the air out of the market. Fed policy on money, (on) support for consumers to drive the market, and banking policies on short sales, deficiency judgements, and disposal of REOs (are concerns)," Shelton said.

A high proportion of distressed properties and rising inventory add to the market’s unpredictability, Shelton said.

"Seventy percent of our transactions for the past three years are distressed property transactions … so that obviously generates an environment of the unknown. If we’re dealing with a normal market, we know what seasonal months look like," he said.

Short sales in September accounted for 30 percent of all existing homes sold in Southern Nevada, just below a 34 percent peak in June. Bank-owned homes made up 42 percent of all existing sales last month, down from a 53 percent peak in February, according to GLVAR.

(Although Nevada is not a judicial foreclosure state and has therefore been largely unaffected by decisions by several large mortgage servicers to suspend foreclosures in 23 states in the wake of the "robo signing" scandal, Senate Majority Leader Harry Reid, D-Nev., has called on major loan servicers to follow Bank of America’s lead in halting foreclosures and sales of foreclosed properties in Nevada and other non-judicial foreclosure states.)

In the Las Vegas-Paradise metro area, 1 in every 73 properties received a foreclosure filing in August, according to foreclosure data site RealtyTrac. That’s a 25 percent drop from August 2009, but still the highest foreclosure rate in the nation. The average foreclosure sales price was $125,569 — an average discount of $25,035 compared to non-foreclosure properties.

"A major concern is how much inventory is being put on the shelf to be brought to market at a future date. We highly suspect that there is a ghost inventory that could range anywhere between 20,000 and 40,000 units," Shelton added.

At the end of September, 11,887 single-family homes and 3,151 condos and townhomes were listed for sale without any sort of pending or contingent offer, according to GLVAR. For single-family homes, that’s a 4.9 percent month-to-month increase from August and a whopping 50.3 percent jump from September 2009. Available inventory of condos and townhomes rose 4.1 percent from August and 53 percent from September 2009.

Short sales accounted for 46.5 percent of available listings and 79 percent of contingent sales (primarily those pending bank approval), according to a report based on GLVAR data by local business advisory firm Applied Analysis. Total short sale inventory stood at a more than 15-month supply, according to the report. Bank-owned properties made up 19.8 percent of available listings and 12.4 percent of contingent listings. Non-distressed homes made up 33.7 percent of available listings.

The average Las Vegas for-sale home has been on the market for 149 days, according to the latest figures from real estate information company Altos Research.

The Las Vegas metropolitan area hit a new low in the latest Case-Shiller Home Price Index with a drop of 4.9 percent in July compared to the same month in 2009. The index overall rose 3.2 percent year-over-year, though half of the 20 markets studied showed decline. The Las Vegas market has experienced a 57 percent decline since its peak in August 2006, with index drops in 44 of the past 46 months.

In April, just before the expiration of the federal homebuyer tax credits, the region experienced its first year-year-year increase in median single-family home price since February 2007, according to GLVAR.

After April, year-over-year median home prices rose again in May, remained steady in June, and — as the Case-Shiller index shows — fell again in July. Median price rebounded some in August, but fell again in September when the median single-family home price dropped 2.2 percent from September 2009 to $135,000, GLVAR said. That’s also a 57.1 percent drop from a $315,000 peak in June 2006.

Condos and townhomes sold for a median of $65,000 last month, down 1.1 percent from September 2009 and a 68.5 percent plunge from a $206,500 peak in August 2006.

"We saw nation-leading price appreciation during the boom years and Southern Nevada’s been equally penalized during the downside of this economic cycle," said Brian Gordon, principal at Applied Analysis.

In March, total home sales rose 11.3 percent year-over-year — an increase GLVAR attributed partially to the homebuyer tax credits but also to seasonality, decreasing inventory, and growing consumer confidence. But total year-over-year sales have fallen every month since then. Total home sales fell 14.6 percent year-over-year in September and dropped 23.4 percent from a June 2009 peak of 4,702 units, according to GLVAR. The previous record month was June of 2004, when 4,414 units were sold.

Absentee buyers — those who indicated at the time of sale that the property tax bill would go to a different address — purchased 43.3 percent of all Las Vegas–area homes sold in August, up from 40.2 percent in August 2009, according to a public records-based report by real estate information service MDA DataQuick. Absentee buyers paid a median $110,000, up from $100,000 the year before. "Absentee buyers are often investors, but can include second-home buyers and others," the report said.

Cash deals — transactions where there was no indication of a purchase mortgage recorded at the time of sale — made up 48.9 percent of all August sales, up from 45.8 percent a year earlier, the report said. The median price paid was $100,000, up from $95,000 in August 2009. According to GLVAR, cash buyers made up almost half, 45.4 percent, of sales in September. Shelton estimated that most of those purchases were made by investors.

Home "flipping" — where a sold home had previously been sold on the open market within the prior six months — has become more common in Las Vegas in the past year. Such homes made up 4.4 percent of all transactions in August, up from 2.9 percent in August 2009, but a much smaller share than the area’s peak of 8.9 percent in September 2004.

"The upside to our bad news is that (home values have) lost so much that (they have) fallen far below replacement cost, so therefore (they have) become a bargain. In the middle of a recession, you can drive past a regional shoipping mall and there’s no cars in front of Nordstroms, but drive in front of Marshalls or Nordstrom Rack and there are cars out front," Shelton said.

For the rest of the year, Shelton expects total sales to stay around 3,500 per month.

"We’ve definitely been bouncing along the bottom. The problem is the external forces. (It’s) so unpredictable. We need some honest viability of the marketplace and once we have that, then people can take a deep breath," Shelton said.

Membership in GLVAR (which includes Clark County and part of Nye County in its territory) peaked in January of 2007 at 17,478. Since then, membership has dropped 28.5 percent to about 12,500 members. That figure has held steady through all of 2010 so far, the association said. The association has responded to the downturn with budget cuts for the past three years as well as a hiring and pay freeze, Shelton said.

Even post-bust, however, GLVAR has nearly twice as many members now as it did in 2000, when there were 6,341 members.

Before the housing bust, GLVAR’s Realtor membership numbers had climbed steadily along with the Las Vegas population. Between 2000 and 2009, the U.S. Census Bureau estimates that the Las Vegas metro area, which consists of Clark County, grew 38 percent in population to 1.9 million.

California accounted for about one-third of both Nevada’s population in-migration and visitor trips in the past decade, according to a state economic briefing report by Applied Analysis.

"A number of (former Californians) have left the market during this latest downturn, but it’s important to note that overall population has been flat to down 1 percent. For Las Vegas, which is accustomed to 3, 4, or 5 percent annual growth, it’s challenging," Gordon said.

The Las Vegas-Paradise metro area had an unemployment rate of 14.7 percent in August — the second highest in the nation and a 1.7 percentage point increase from the same month in 2009, according to the Bureau of Labor Statistics.

"Las Vegas is struggling with its own employment issues, but many have opted to stay within Las Vegas. In many instances, people are … unwilling or unable to service the debt they’ve accumulated in the last eight years. Many people are stuck," Gordon said.

Jobs are going to be the most important factor driving demand in the Las Vegas housing market — both in the area and nationwide, Gordon said.

"With the tourism sector accounting for approximately one-third of the employment base, a national economic recovery will be a condition precedent that is expected to free up discretionary spending translating into revenues for the Las Vegas resort industry," Gordon said. Visits and convention spending are down 20 to 30 percent below peak, he said.

"Diversification of the employment base will likely continue as the construction sector, historically the second largest sector, has been severely impacted during this latest economic cycle with no near-term signs of improvement. Emerging industries, such as renewable energy, technology research and development, healthcare research and medical tourism, will be required over the longer run.

"With the latest boom-bust cycle in the housing market spanning more than seven years, the ultimate recovery will be measured in years, not months," he added.

Construction, which in 2006 made up nearly 12 percent of employment, is down to less than 6 percent, he said. Construction activity has virtually ground to a halt as a result of excess inventory in both the residential and commercial markets, Gordon said.

The vacancy rate for industrial space was at a record high of 16.2 percent in the second quarter, according to Applied Analysis. From a peak in 2007′s fourth quarter to 2010′s second quarter, non-resort land prices have fallen 83.5 percent, the firm said in a report.

"The decline is attributed to oversupply of residential and commercial product," the report said.

"The elevated unemployment rate also signals that businesses have yet to invest significantly in human capital, which will likely occur first in the broader recovery, followed by investments in physical assets including property," Jake Joyce, Applied Analysis project manager, stated in the report.

The office market vacancy rate stood at 24.1 percent in the second quarter, down for the seventh straight quarter to a level not seen since late 2006, according to another report. Most of the 2.5 million square feet of office space that has been proposed for construction will likely remain unrealized until market conditions improve, the report said.

In the second quarter, the retail market had 51.9 million square feet of inventory, which does not include nearly 1.3 million square feet of space that has stopped development. Slightly over half a million square feet are currently under construction, while 5.1 million square feet remain on the drawing board, a separate report said.

A handful of condo developments were proposed before the housing boom, but proposed projects jumped after 2004, when prices started escalating, Gordon said. Out of more than 100,000 units proposed over the last decade, however, only about 14,000 were actually ever built. These include high-rise private residences, low-to-mid-rise luxury residences, and hotel condominiums. Most were acquired by investors looking to flip units in a relatively short time frame or to rent them out to third parties, Gordon said.

"It’s difficult to quantify, but the majority are vacant. A third of all inventory (is) still held by the developer on the project — not all were ultimately sold to third parties. Those are (also) vacant. Some have been rented out, but we haven’t seen rental activity in significant numbers," he said.

A few hotel condos are being rented out as hotel rooms, but "the Las Vegas Valley is already home to 150,000 hotel rooms. There’s significant competition in the market today," Gordon said.

There are between 40,000 and 50,000 vacant single-family homes in Southern Nevada — well above historical norms and market averages, Gordon said.

"A significant amount of rental activity is taking place in the single-family market and a significant amount of people are trying to divest themselves of these assets. Families being displaced as a result of foreclosure are looking for a rental alternative as opposed to an additional unit," he said.

In the second quarter, apartment asking rents were down 10.7 percent year-over-year at an average of $765 per unit — a price point not seen since the fourth quarter of 2004.

(Source: Applied Analysis)

The average occupancy rate was 90.7 percent, significantly below historical 5-and 10-year market averages of 93.2 percent 93.7 percent, respectively, according to an apartment market report.

"While the housing sector remains weak due to the severity of broader economic conditions, including stagnant population growth and a challenged labor market, conditions within the apartment market may be reaching a bottom. With the expiration of the homebuyer tax credit and interest rates expected to rise before the end of the year, the flow of renters to homeownership could slow allowing the multi-family market to flatten out by the end of 2010," Joyce stated.

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