Las Vegas Real Estate Blog

David Lereah, chief economist for the National Association of Realtors, is ready to call a bottom. But some markets still face corrections.

Equity-addicted homeowners have long hung on David Lereah's every word. As chief economist for the National Association of Realtors, he's responsible for tracking the closely watched sales of existing U.S. homes.

He's also seen as a booster for the housing boom. But after five years of record volume and price growth, sales dropped by 8.4 percent last year while prices rose by a measly 1.1 percent nationwide.

With his latest book, "All Real Estate is Local," due out in April, Fortune's Ellen Florian Kratz talked with Lereah about where the market is headed and how an angry blogger almost made his mother cry.

Nope. It's amazing isn't it? People thought we'd get it because they thought the bubble was going to burst, but it never happened.

Do you think it will happen in 2007?

I don't because we're already seeing some parts of the real estate market picking up again. It looks like we've bottomed out. The worst was the fourth quarter of 2006.

For the past two months now the inventory numbers actually improved for the country. Mortgage rates are still low. The Fed is going to behave. So there are a lot of good signs that the worst is over for housing.

So when it's all said and done, this contraction in housing is probably going to be the least severe contraction we've ever had, which is going to surprise a lot of people.

But many think we still have a long way to go.

If you look at local areas, that statement is true. California has a long way to go. I expect them to continue to experience pain all throughout this year. Southern Florida, same thing. Las Vegas is probably going to take a little longer to correct as well.

A quarter of the country is still feeling pain, and I can't guarantee that it's going to be over by the end of 2007 for some of those areas.

So they could decline into 2008 or longer?

They could. It's hard to tell right now. The real key for some of these areas that are having problems is prices. Prices need to come down to bring buyers back to the market. And until they do, they're going to experience drops in sales. California is experiencing some serious drops in sales - 30 percent drops in some places.

So when we talk about real estate are you talking about local or national? If you¹re talking about national, I think we've bottomed out, and it looks like we're going to come back very modestly throughout this year. And then in 2008, it will be back off to the races again in my opinion. But for a quarter of the country, that's not the case.

What do you predict for price appreciation for 2007?

My forecast is 1.4%

So you don't think California and Florida could bring the whole country down?

They'll bring themselves down. But will it bring the whole country down? No. The real key here is the economy. The difference between the contraction today and any other contraction we've ever had is that the economy is healthy.

But Robert Shiller, author of "Irrational Exuberance," says we might have gotten so far out of whack that it has to come down no matter what.

I know. That's Bob. That's what he says. We disagree. He thinks psychology will play a major role here, and my view is no. We haven't strayed from the fundamentals. The only part where we strayed from the fundamentals was the speculative investors coming in during 2005. And that exaggerated everything in real estate.

What about the problems in the subprime market?

I was giving a speech in Atlanta about two years ago. During the question and answer period, someone asked me something about interest-only loans. I said, they're kind of dangerous and you have to be careful. Someone rose their hand and said, Did you know that in Atlanta, the percentage of interest-only loans in 2005 was 40 percent of the market? Atlanta didn't even have a boom.

That's when I knew we were in trouble. Regulators and the big lenders need to get together and work out some arrangements to accelerate refinancings. They need to take people out of these crazy loans and get them into longer term loans that work for them over the next 10 or 15 years.

Will problems with subprime have any effect on your sales numbers?

I think in some areas yes. Foreclosures are going to happen in California.

You may see a rise in Las Vegas or Phoenix or Washington DC and parts of Florida, but it's not all over the country. The big problem right now is borrowers with a loan balance that may be greater than the value of their home. They have no incentive to make the mortgage payment. They'll say, I don't need it, take it. That's going to occur in some of the real unaffordable areas, like San Diego and San Jose.

What surprised you about the boom?

The share of second home buying. It was 40 percent of the market in 2005. I was in shock. When you have a lot of second home buying, that's volatile, whereas when people buy a primary residence, they're buying it to live in.

I never anticipated that type of market share in second home buying. That proved to be the end of the boom.

You've been accused by the blog David Lereah Watch of being too bullish. What's it like to have an online antagonist?

At first I was kind of laughing. And now, it's enough already. This is a 26-year old that could not afford a townhouse and blamed it on the boom. And then he said, Who's talking about the boom and my name kept coming up. So I became Satan to him.

The worst was that my mother read one of those things, and she almost started crying. And I had to say, Mom, you have to have thick skin. I'm going to be in the public and make statements about real estate, and if someone doesn't like what I'm saying, they have every right to say something opposing me.

Now should they go so far as to call me Satan? I don't understand where that's coming from. That's just weird.

The only thing missing from real estate consultant Steve Bottfeld's presentation Thursday at Crystal Ball 2007 was his cheerleader outfit.

Bottfeld, principal of Marketing Solutions, predicts that median new home prices in Las Vegas will increase 7 percent to 9 percent this year and existing home prices will rise 3 percent to 7 percent, most of it coming at the end of the year.

Those forecasts contradict what housing analysts and business sources such as Fortune magazine and Moodys.com have forecast. They're calling for price declines ranging from 6 percent to 30 percent.

"I don't care what anyone says, prices in Las Vegas will continue to rise," Bottfeld told 1,100 real estate professionals at Crystal Ball, which was held at Texas Station. "Here's the challenge. This is Las Vegas. We can bet, right? I'll make my maximum bet on the percentage over or under (price appreciation), I'll take the over. So Bottfeld gets paid on the over. I'll bet Moody's, Fortune, I don't care."

Las Vegas struggled in 2006 after a couple years of 40 percent and 50 percent appreciation. Sales of new homes dropped 8.5 percent to 35,484, but median prices rose 7.9 percent to $341,924 at year's end, Larry Murphy of SalesTraq said.

In 2003, Las Vegas was about even with the national median home price of $171,000, he said. Now the national median is $221,000, and Las Vegas is at $328,000.

The median existing home price in Las Vegas remained level at $284,000. Despite a 24 percent drop in resales to 41,771, 2006 was still the third-best year on record.

"A lot of people were predicting a collapse after 40 percent appreciation in '04, but we stood up here at Crystal Ball and said, 'No, they'll be flat,' " Murphy said. "It drew investors to this market like a moth to a flame. We called it the perfect storm and we said it couldn't be sustained."

Murphy said developers took steps to avoid a storm in the future. Park Highlands, a 2,600-acre master-planned community being developed by Olympia Group in North Las Vegas, requires that owners live in their homes for 24 months before they can be rented.

The Howard Hughes Corp. takes back 10 percent of the sales price from developers who buy a lot and then sell it without building on it. One Queensridge Place has a stiffer 25 percent payback on luxury condo units that are "flipped" by investors.

Murphy said a "scary stat" is that 44 percent of the 20,000 listings in Las Vegas are vacant homes.

"Who lists a vacant home? Predominantly investors," he said. "That's one thing that's going to moderate real estate prices this year. Without these vacant investor homes, prices would be through the roof again."

Anyone who thinks Las Vegas' housing construction is in the dumps needs to look around, Murphy said. He counted 542 active subdivisions in the valley with a total of 86,000 lots. His charts showed slightly less than 100,000 new home closings in the 1980s, less than 200,000 new home closings in the 1990s and a projected 325,000 closings in the 2000s.

For the first time, the No. 1-selling subdivision was a high-rise condo project, The Residences at MGM, which had 979 closings in 2006 at an average price of $593,192. Sun City Anthem was second with 856 new home closings ($401,224). Solera was third with 492 closings ($277,208).

Metrostudy, a Houston-based housing research firm, expects the Las Vegas housing market to remain highly competitive for the foreseeable future as consumers continue to be presented with many similar options when it comes to buying a home.

"In the face of reduced demand at current price points, builders have pulled back on production in an effort to move units off of their balance sheets," said Josh Seime, manager of Metrostudy's Las Vegas division. "On the bright side, the Las Vegas economy is strong and the fundamentals of demand remain in place, both of which are positive indicators for the home-building industry."

Metrostudy continues to hold a "cautionary view" for Las Vegas, Seime said. The double-digit growth and appreciation that Las Vegas experienced recently will not return for a while, he said.

Bottfeld of Marketing Solutions said none of the naysayers are talking about the vertical market in Las Vegas, some 23,000 high-rise condo units that are going to redefine the market.

"We're creating this atmosphere of fear from nonsense, from negative national press," he said. "Everybody will say 2006 was a bad year, sales were off, prices went down. Wrong.

"What happened is we started the transition from a suburban market to an urban market and with transition, certain things happen. Twenty percent of all Vegas home sales go to investors and second-home buyers, which are one in the same. I don't separate them. In the last two months, investors have fled from resale (homes) to vertical. The sky is not falling. In 2007, we're going to have 38,000 new home sales, 50,000 existing home sales and 7,500 high-rise sales."

Cick image for enlargement. Graphic by Mike Johnson.

Home appreciation in Las Vegas has slowed dramatically from the torrid pace of two years ago and turned negative in some areas of the valley last year, a local housing market analyst said.

Median existing home prices increased 3.6 percent valleywide to $285,000 in 2006, based on more than 90,000 existing home closings recorded by the Clark County assessor's office in 2005 and 2006, Larry Murphy of Las Vegas-based SalesTraq reported.

Murphy's breakdown of 52 ZIP codes in the Las Vegas Valley showed 35 areas with positive appreciation, seven unchanged and 10 on the negative side.

The largest declines were 4 percent in ZIP codes 89044 and 89085, while gains reached 18 percent in 89030 and 89103.

"These results fly in the face of the doomsday sayers who only a year ago were predicting that property values in Las Vegas would drop precipitously when the real estate bubble burst in Las Vegas," Murphy said. "It also flies in the face of local analysts who have been declaring all year long that property values are dropping. The fact is that following the boom of 2004 when we saw appreciation rates of 40 percent, the only thing that has dropped has been the appreciation rate itself."

Murphy has had to make adjustments over five years of reporting appreciation by ZIP code, "tweaking" his calculations to account for factors that can skew the numbers. For example, he separated luxury high-rise condominium sales in ZIP code 89109, which includes the resort corridor east of the Strip, from single-family home sales to come up with 5 percent appreciation for 2006.

Some ZIP codes were omitted due to small sample sizes that would result in unreliable calculations, he said. New ZIP codes that were created in 2006 but did not exist in 2005 were also omitted.

One of several boundary changes came in 89011, which was exclusively Lake Las Vegas in 2005 and was expanded west past Boulder Highway in 2006. The median home price for that ZIP code is $399,000, or $310.99 a square foot, and the average home age is 11.6 years. A year ago, the median was $894,750, or $440.94 a square foot, and average age was 3.1 years.

Murphy had to compare only sales at Lake Las Vegas from 2006 to the numbers from 2005 to come up with 4 percent appreciation for 89011.

"Otherwise we'd have the erroneous conclusion that prices dropped 40 percent. It would look like a disaster and it wasn't. It was ZIP code changes," he said.

Murphy said people need to keep in mind when they look at the ZIP code appreciation map that a 2 percent increase in 89134, for example, does not necessarily mean that their specific home appreciated by 2 percent. It means that half the homes in 89134 appreciated by more than 2 percent and half the homes appreciated by less than 2 percent.

With nearly 18,000 homes for sale on the Multiple Listing Service and sales of existing homes down 24.1 percent in 2006, prices started to slide at the end of the year. The Greater Las Vegas Association of Realtors reported a 2.6 percent decline of median home prices in January to $302,000.

Kurt Lehman of Realty One Group found it "hilarious" that consultant Steve Bottfeld predicted positive home price appreciation at the Crystal Ball 2007 housing seminar in February. Lehman said prices have to come down after the spikes of the past few years.

"Simple economics says that 25 (percent) to 35 percent appreciation in housing asking prices doesn't work when wages and salaries only go up maybe 3 percent," he said. "It's an oversupply and an inability-to-buy thing. The market cannot bear these prices."

A January report from the Washington, D.C.-based Heritage Foundation ranks Las Vegas-Paradise near the bottom in its Housing Opportunity Index by Affordability. With 2006 median family income of $58,200 and median home price of $306,000, Las Vegas is No. 174 in housing affordability out of 203 U.S. metropolitan statistical areas.

The percentage of people who could afford a median priced home in Las Vegas dropped from 79 percent in 1999 to 14 percent in 2006, John Restrepo of Restrepo Consulting Group said.

"We've had (price) adjustments here, but it's not making homes any more affordable," he said. "That's our challenge. There's no magic bullet."

Lenders were bending income-to-expense ratios three and four years ago to get people into 100 percent mortgages, literally more house than they could afford, Lehman said. Now Las Vegas has the second-highest foreclosure rate in the nation, he noted.

U.S. homeowners are seeing a slight decline in home values on a year-over-year basis for the first time in years, according to home value data from Zillow.com. The appreciation rate is measured by the Zindex home value indicator, which measures the value of all homes in an area, not just those that sold.

Despite a surge in values in many regions over the past several years, national home values are down by 0.5 percent year-over-year and 4.8 percent quarter-over-quarter.

A local homeowner who asked not to be identified put his home on the market last year at $430,000 when comparable homes in his northwest neighborhood (ZIP code 89131) were $450,000. It sat for months. He kept lowering the price and recently sold it for $350,000. His home appreciated 37 percent in less than three years of ownership.

"I still do not know why this home did not sell in the $400,000 range," he said. "I have just about every conceivable upgrade in this house. We did make a lot of money in a brief period of time, which of course I am thankful for."

Debi Averett of Phoenix-based Housingdoom.com said home sales will increase in the next few months, but it's only a seasonal thing and won't say much about the market.

"The inventory is going to grow faster though and that is going to continue to put a damper on prices," she said. "At the current rate of sales, it would take 13 months to sell all of the current single-family inventory, assuming no other homes are listed. Given all the homes taken off of the market last year, 2007 may be the year of deferred pain as sellers return to the market and the market continues to transition down."

Median prices for existing homes in Las Vegas have more than doubled from $125,000 in 2000 to $285,000 in 2006, Murphy said. The smallest increment of dollar increase came in 2002 when prices rose $9,000 from the previous year to $145,000.

ZIP codes with the highest appreciation are in more mature areas of the city and had median prices substantially below the valley's median.

West of Interstate 15 between Flamingo Road and Tropicana Avenue, 89103 had 758 sales at a median price of $215,000, compared with 966 sales at a median of $192,750 in 2005. Average age is 24.8 years.

In the middle of North Las Vegas, 89030 had 842 sales at a median price of $195,000, compared with 939 sales at $160,000 in 2005. Average age is 40.4 years.

The largest declines were in 89044, a new development south of Henderson Executive Airport, where 212 homes were sold at a median of $358,000, compared with $372,450 in 2005; and 89085, a new ZIP code north of the Beltway in North Las Vegas, where seven homes were sold at a median of $376,515, compared with one sale for $441,000 in 2005.

Clark County Assessor Mark Schofield said appreciation and depreciation throughout Las Vegas Valley will have "zero impact" as it relates to property taxes.

Even with the market correction, home values didn't drop enough to get to the relief level of the 3 percent property tax cap on owner-occupied, single-family homes, Schofield said.

"If for some reason values dropped to reach the 3 percent cap, then we all ought to move out of town," he said.

Home owners saved $245 million on property taxes in 2005-06 and will save an estimated $790 million in 2006-07 with the cap, Schofield said.

The Office of Federal Housing Enterprise Oversight ranks Las Vegas 79th out of 275 metropolitan statistical areas with 9.8 percent appreciation as of third quarter 2006. Nevada is 23rd among states at 8.63 percent appreciation. The office uses mortgage lending data from Fannie Mae and Freddie Mac.

Bob Hamrick, president and chief executive officer of Coldwell Banker Premier Realty, said what happened in Las Vegas is not that properties are worth $100,000 less than they were a year or two ago, but they may not have been priced accurately then.

Contrary to predictions of falling prices, the National Association of Realtors showed Las Vegas average home prices actually appreciated 2 percent as of third quarter 2006, Hamrick noted.

"Our market continues to grow, our economy continues to grow and our population continues to grow," he said. "Those factors offset whatever hyper-appreciation that existed."

Forty-eight high-rise condos closed escrow in May, including 40 at SoHo Lofts, above, at Las Vegas Boulevard South and Hoover Avenue. Photo by Gary Thompson.

The housing market in Las Vegas is entering a period of extraordinary transition with the first real influx of high-rise condominium sales in May, a local researcher said Wednesday.

Larry Murphy, president of SalesTraq, said May's housing statistics offer "intriguing clues" as to why the much ballyhooed housing bubble has not burst in Las Vegas.

While the inventory of homes for sale reached an all-time high of 20,515 in May, about double from a year ago, it's a supply of six to seven months based on sales through the Multiple Listing Service. That's a relatively healthy market, Murphy said.

Prices have yet to diminish, as many predicted at the beginning of the year, he said.

Median resale prices are hovering around their all-time high at $284,950, a 5.5 percent increase from May 2005, and new home prices jumped 11.8 percent to $324,757. The number of new home subdivisions in the market declined for the second consecutive month.

Forty-eight high-rise condos closed escrow in May, including 40 at SoHo Lofts in downtown Las Vegas. That compares with 64 total sales in 2005 and 11 through April of this year.

"While the number was relatively small, it's a harbinger of things to come," real estate consultant Steve Bottfeld of Marketing Solutions said. "They're going to be closing all of building one at MGM Residences, 580-some units over the next two to three months. Panorama is closing, SoHo, Sky (Las Vegas). So suddenly this has all been coming and coming and now it's here. Start looking for that to be a regular and increasing number."

Combined with the slowdown in sales of lower-priced condo conversions, the uptick in high-rise sales will drive home prices significantly higher by the end of the year, he said. There were 352 condo conversion sales in May, a 29 percent decline from a year ago and less than half of January's sales.

Bottfeld forecast a drop in condo conversions at SaleTraq's housing seminar in January. He said the slowdown in conversions would push vertical construction, particularly midrise, to the market's forefront over the next two to three quarters.

The number of high-rise units coming onto the market will continue to rise as the first wave of new projects are completed, said Aaron Yashouafar, developer of the 45-story, 409-unit Sky Las Vegas condo tower on the Strip.

"Obviously, this is going to shoot up total sales volume in the Las Vegas area," he said. "This is a very exciting time for the Las Vegas residential market."

New home closings rose by a fraction in May from the same month last year at 2,933, according to SalesTraq. Year-to-date new home sales are up 8.9 percent. On the other hand, existing home sales are down 9.8 percent for the year. There were 4,163 resales in May, a 17 percent drop from a year ago.

Murphy said the big story is the number of incentives being offered by builders, including paying higher broker commissions, putting in free upgrades and paying for closing costs. "The list is getting longer every day, and for the last two months incentives are getting bigger," he said.

The first clue that there is no housing bubble in Las Vegas is price stability over the entire year, Bottfeld said. Price appreciation has dropped in markets such as Phoenix, Denver and San Diego, according to the Office of Federal Housing Enterprise Oversight. Over the fourth quarter of 2005 and the first quarter this year, appreciation in the Las Vegas market has risen.

Secondly, the new-home market in Las Vegas is beginning to compress in response to market conditions, he said. With fewer new home communities, the resale inventory will be absorbed quickly.

Murphy is less optimistic.

"This inventory will be with us for the rest of the year and will moderate the prices," he said.