Home prices still far from affordable

Sunday, Aug. 12, 2007 | 7:38 a.m.

Prices for new and resale homes continue to slowly but steadily drop - bad news, maybe, for people who hoped to make a quick profit on home sales, but a glimmer of good news for champions of Las Vegas as a town of blue-collar homeowners.

Just how far the prices will drop is the topic of much speculation. No one expects homes will be as relatively affordable as they were in the '80s and '90s, when home ownership flourished across the Las Vegas Valley. In fact, there's discussion that the prices will bottom out and begin to rise again within a couple of years, with the next wave of Strip resort openings.

But the price correction is allowing at least some measure of relief to those who have been waiting to buy a home.

Las Vegas had long been the place where jobs were abundant and decent credit ratings could pave the way to home ownership. Newspapers from coast to coast wrote about how Strip hotel maids could even buy a home here - as much a testimony to union wages as it was to reasonably priced housing.

On those two pillars, this town quickly grew. The American Dream was visible in the rooftops stretching far into the desert.

But the real estate market overheated.

By spring and summer 2006 Las Vegas had priced itself out of reach of the very people who run this town - teachers, rank-and-file cops, hotel maids, food servers. The people who were needed to work here couldn't afford to buy a home here. Or they got in over their heads with seemingly attractive mortgages that came to haunt them, and they had to bail. That's one of the reasons Las Vegas has one of the highest foreclosure rates in the nation.

Just look at what's happened during the past year: for-sale signs everywhere, nobody is buying and prices are dropping.

Some analysts consider this a reasonable correction to home prices - and say that prices may finally end up 25 percent less than at their peak last year.

The median price of homes sold on the Multiple Listing Service (which primarily reflects resale homes sold throughout Las Vegas but also includes Mesquite and Pahrump) fell to $295,000 in July, according to the Greater Las Vegas Association of Realtors. That's a 3.3 percent drop from June and 6.3 percent below the all-time high of $315,000 in June 2006.

A correction has long been under way in the new-home market. Median prices have dropped to $315,990, or 11 percent, since the April 2006 peak of $355,435, according to SalesTraq, a local housing tracking firm. (In 2000 the median new-home price was $155,000. Ten years ago it was $130,000.)

On the resale side, the median home price in the Las Vegas Valley was nearly $278,000 in June, SalesTraq reported. In 2001 it was $136,500.

By some accounts, prices would have to come down 33 percent from their peak to be affordable.

In the first quarter of 1999, 78 percent of homes for sale were within reach of a family earning the median income, according to real estate economist John Restrepo. By the end of 2006 only 14 percent of homes were affordable to those families.

So the Las Vegas real estate market would have to undergo a lot of correcting to help many first-time homeowners.

A downward correction in home prices should be good news not just to Nevadans who have delayed or abandoned hope of buying a home, but to employers struggling to recruit workers. The resort industry will add more than 30,000 workers during the next three years.

The question is, at what point will a correction level off, and will it be enough of a price drop to open the market to a significant number of wage earners?

"I think you would have to have a huge drop for a lot of people to be able to afford a place to live," said Somer Hollingsworth, head of the Nevada Development Authority. "When you are making $30,000 to $35,000 to $40,000 a year, there is not much they can afford."

But as Hollingsworth noted, even as home prices are dropping, there are other complications facing would-be home buyers. Qualifying for a mortgage hasn't been this difficult in nearly a decade, a reaction to the sub - prime loan industry crisis that has sent lenders reeling.

Unless purchasers have a credit score of at least 680, they can't get a loan with zero percent down, said Steve Schauer, president of National Lenders Service, a Las Vegas mortgage broker. That has eliminated many people from consideration, and the credit guidelines are going to get even tighter, he said.

What has especially hurt Las Vegas are guideline changes for stated-income loans, which are used by tip earners who don't declare all of their income. Lenders are now requiring a down payment of 10 percent when no down payment or 5 percent may have been required a year ago, Schauer said.

"That makes a huge difference," Schauer said. "The qualifications are tightening, and it is getting increasingly difficult every day."

Indeed , for some prospective home buyers, the greater difficulty in qualifying for a loan is offsetting the dip in home prices.

"It has the potential to reduce some of the benefits that those seeking home ownership were hoping for with reduced prices," said Brian Gordon, a principal with Applied Analysis who tracks the housing market for the Nevada Association of Realtors. "The days of getting financing with 500 to 600 credit scores are gone."

In March the Nevada Association of Realtors predicted a "modest correction" in the statewide housing market in 2007 by projecting prices would fall 7 to 10 percent from their 2006 peak by early 2008. Its prediction was based on the oversupply of homes in the market and soft demand, and was made before the sub-prime mortgage industry crisis.

Housing industry analyst Dennis Smith said he wouldn't be surprised if prices corrected 15 percent or maybe more based on problems in the mortgage industry.

But come 2009, he says, prices might have bottomed out and will start rising again, as new resorts open on the Strip and prospective buyers enter the market.

And then, here we go again.

A version of this story appears in In Business Las Vegas, a sister publication.