There were flickers of hope this summer in Nevada, but the consensus within the state’s real estate community remains that at least another stagnant year looms for homebuilders.
Despite two consecutive months of surging existing home sales and a handful of intriguing new communities coming online, the specter of impending foreclosures and surging unemployment continues to dampen enthusiasm for the potential quick return of Nevada’s sidelined small builders and the growth of slowed larger builders.
“For the overall trend, a year is a pretty reasonable assessment,” said Tyler Jones, principal of Blue Heron, a local custom homebuilder founded five years ago. “It’s better in the upper-end of the market, but it’s still extremely difficult. We’re just working a lot harder,” he continued.
“You’re not going to see many changes in terms of new homes and new home permits because there are too many negative factors,” said housing analyst Dennis Smith, president of Homebuilders Research in Las Vegas.
Homebuilders are shifting their strategies, building more energy-efficient homes to meet demand for “green” technologies and smaller homes with fewer upgrades to fit pinched budgets. Builders and realtors also believe dwindling inventory of suitable bank-owned homes, along with buyers’ frustration with heavy competition for them, could increase demand for new homes.
All of this eventually will lead to a rebound, experts believe, but not a sustained one until the second quarter of 2010 at the earliest. Even amid indicators starting to slowly creep upward, new residential permits pulled in Clark County in May were down 60 percent from last year.
The toxic brew stopping homebuilders from starting homes at rates anywhere near the boom period of the past decade looks familiar to Nevadans. Contributing to the brew is the fact that overall demand remains constrained by Nevada’s record 12 percent unemployment rate, flattening population growth and extremely tight credit requirements for prospective buyers. This is despite strong resale numbers driven by bank-owned sales in Southern Nevada in June and July that had provided hope that both potential homeowners and investors are jumping back into the market.
In addition, new home supply sits in only the hundreds and builders are struggling to compete in price and attention with the resale market of bank-owned properties. Only the largest builders have the cash flow to build while smaller builders are frozen out by lenders.
Home prices are trying to hold onto their soft bottom as the first wave of foreclosures continues to trickle out of bank inventory while the real estate community anxiously awaits a long-rumored flood of real estate owned (REO) properties from the banks and a second crush of foreclosures. Builders and realtors both feel dated appraisal methods that compare new homes to REO’s also hold down pricing.
Speculation of a potential bottom and an easing of tough times for Nevada’s homebuilders hit a pitch recently. According to the Greater Las Vegas Association of Realtors, the total number of local existing homes, condominiums and town-homes sold in July was 4,602. That’s 100 fewer sales than June, which set a record for local home sales in a single month. The number of sales in July still ranked as the second highest monthly total ever recorded by GLVAR.
The median price of a single-family home sold in the Las Vegas area in July was $138,800. That’s down 0.9 percent from $140,000 in June and down 36.9 percent from $220,000 in July 2008.
The median price of new homes closed in June was $205,490, according to Homebuilders Research, and a total of 476 new homes sold. That’s a jump of nearly 100 new homes from May, but the year-to-date total of 2,329 still lags last year’s pace by 60 percent.
In Northern Nevada, combined sales of new and existing homes in Washoe County surged 72 percent in the second quarter of 2009, including a remarkable jump of nearly 240 percent in new home sales. Behind that pristine number, however, is an underlying truth that gives pauses to analysts and builders alike: that 240 percent surge represents a jump from 63 first-quarter new home sales to 214 second-quarter sales.
“It’s good, but the pace is about as far down as it’s ever been in the Reno-Sparks area,” said Brian Kaiser, housing and real estate analyst for the Center for Regional Studies at the University of Nevada, Reno.
Kaiser notes that while previous years brought between 3,500 and 4,000 new home sales, last year saw just 700 and he believes there will be even less in 2009.
“Over the next six months, we’re talking very, very slow,” Kaiser said. “I wouldn’t see anything changing drastically. It’s going to take quite a while for all these foreclosures to work through the market. I wouldn’t expect any real positive change for the next year. By the middle of 2010, you might start seeing some positive movement that’s solid.”
Little of this is news to the homebuilding community in Nevada. Irene Porter, the longtime executive director of the Southern Nevada Homebuilders Association, said job loss started in 2006 and many large builders are down as much as 90 percent in staffing and smaller builders are working with a skeleton crew.
“I’ve seen a lot that have closed and a lot that have one or two people, but all of their developments have gone — the banks have taken them all,” Porter said. “They’re just trying to keep a presence.”
Tom McCormick, president of locally owned Astoria Homes, has said earlier this year that his company would be in “hibernation” from building new homes. In addition to the tangle of unemployment claims and foreclosures, local builders find banks extremely reluctant to lend. A handful of entities including Rhodes Homes, Kimball Hill Homes and Concordia Land have filed Chapter 11 bankruptcy. Without access to capital, Porter said, many are hamstrung and face uncertain futures.
“Some of them will [come back] and some of them won’t,” Porter said.
Northern Nevada’s small builders also cling to whatever they can as area prices fall while sales rise in Washoe County.
“We’ve actually seen a lot of the smaller builders trying to get through this and they’re committed to this community,” said Michael Dillon, executive director of The Builders Association of Northern Nevada. “They’re going to be the ones building most of the homes in Northern Nevada. We have several local builders putting a couple of houses up every month to keep people.”
Publicly traded builders such as Pulte and KB Home don’t face the same cash flow issues as smaller outfits, and they continue to build homes, though at a greatly reduced pace and with adjusted targets. Jim Widner, regional president for California and Nevada at KB Home, said his company will produce just fewer than 600 homes between the Las Vegas and Reno markets this year, and just more than 600 are slated for next year.
While true for KB Home, which traditionally focuses on first-time buyers, the reality throughout the industry is: value trumps all else.
“People are much more focused on what they need as opposed to what they could have,” Widner said. “They’re way more focused on functionality and practicality. In the homes that we’re building, there’s no wasted space.”
Scott Wright, president of Pulte Homes’ Las Vegas division, also said plans for current inventory and future projects are changing.
“In the Las Vegas market specifically, that has meant changes in some community product types and offerings,” Wright said. “At other communities, it means price adjustments and offering the buyer more flexibility and allowing them to purchase a home without upgrades that can add thousands to the cost of a home.”
While the Northern Nevada market for a time avoided some of the negative effects in the Las Vegas area, the two markets now show many similarities. Many developments begun in the past year or two are still trying to move inventory, but many others never got that far. Kaiser recently spent hours driving around Northern Nevada looking at stalled and dumped projects, many of which are now behind chain-link fences.
“It’s cheaper just to chain it up and walk away than it is to try to market it at this point,” Kaiser said. “A lot of builders are simply just walking away.”
This creates opportunities for larger builders. Pulte’s Wright, among others, continues searching for openings to acquire land for whenever his company can build and sell a home for a profit.
“What I can tell you is that times like this allow us to capitalize on the opportunities in homebuilding that are now becoming visible on the horizon,” Wright said.
That horizon, though, is not quite as long as in years past. The emphasis for many builders returns now to the months as much as the years.
“As a rule, our time horizons are probably a little bit shorter,” Widner said.
Like most builders, Widner said KB Home’s strategy is to look primarily for finished lots that have been abandoned or repossessed on which to build because it is “not economical” to start from dirt in today’s climate. With a donut hole in the middle of the market, buyers are at the entry level or high end right now, builders must adjust everything from their land acquisition to building to marketing strategies. Their prices in Las Vegas and Reno are already greatly reduced, many starting well below $200,000 and few creeping into the $300,000-$400,000 range.
There are positives to be found for homebuyers, however, that go beyond prices. Analysts and builders agree that the quality of homes being built now outdoes anything from the region’s boom period, with a particular focus on energy efficiency and “green” building.
For Jones and his partners at Blue Heron, this is where opportunity emerges. Jones describes how his company began with a mission statement focused on environmentally friendly building. Only recently did that become the type of distinguishing characteristic that allowed Blue Heron to sell nine of 14 lots on its Marquis project – with custom homes starting at $1.5 million – since January.
“In 2004, we didn’t talk about [environmentally friendly] as much because we didn’t want to be branded as the kooky, hippie guys,” Jones said. “The public consciousness has changed dramatically since then. In some cases, that’s been the reason people came through our door.”
Jones feels a niche such as green building is imperative to carving out a share of the market in a difficult economy. Even being ahead of the green curve, though, hasn’t kept away market pressures.
“We’re working three times as hard for each sale,” Jones said. “We’ll go through 10 hot leads for every one we sell.”
Elbow grease goes along with innovation in the new home market to compete with re-sales throughout the state. DR Horton utilized a massive advertising and public relations campaign to push its “Repo Myth” promotion last month, targeted at buyers dismayed at the difficulty of competing for bank-owner properties — some of which attract as many as 50 offers, according to Prudential broker Forrest Barbee.
It paid off with close to 100 sales, showing an appetite for new homes. Standing inventory of new homes in Southern Nevada stands just under 400 as of early August, Smith said, without hope of many more being built soon. Less than 400 permits per month have been pulled this year in Clark County and Smith said a total of 4,000 for the year is likely. The salad days saw up to 20,000 in a year.
“It’s better today than it was a month ago for homebuilders,” Smith said. “Now that’s not saying a lot, but it means the bottom for the homebuilders has come and gone. They are at the bottom, and they will be at the bottom for an extended period of time.”
