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October 2, 2014

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HOUSING:

Builders below $100 a square foot

Foreclosures — and need for cash — force dramatic price cuts

Image

Steve Marcus / FILE

Carpenters Procoro Espejo, left, and Moises Cuevas work on a single-family home for Pulte Homes in Henderson. As the recession deepens, builders in the Las Vegas Valley are changing their focus to smaller, more affordable homes — and they are building far fewer of them.

Click to enlarge photo

The competition from foreclosures continues to force Las Vegas homebuilders to cut prices and build smaller, more affordable homes and in some cases not build any.

“This is the worst financial situation we have been in since the Depression, and what builders have begun to do is recognize the world is changing around them, and price is a reflection of that knowledge,” said Steve Bottfeld, executive vice president of Marketing Solutions. “This is a big reality check. This is the beginning of a major change in the kind of product developed in the Las Vegas market.”

Eighteen builders have more than 100 models priced under $100 per square foot, said Larry Murphy, president of SalesTraq, which tracks the Las Vegas housing market. The price per square foot of new homes sold through October was $126.01 — a 30 percent decline from $180.17 in 2007. That’s the lowest since $109.33 per square foot in 2003.

And many builders are choosing to stay on the sidelines, with SalesTraq reporting 187 building permits issued in November, the fewest since the mid-1970s.

“I think they have made an excellent decision to wait out this situation,” Bottfeld said. “Right now, nobody is lending. Rather than have inventory stuck on their books, they are just building what they are selling.”

SalesTraq released a list that shows KB Home, for example, offering a model in the Providence master-planned community in northwest Las Vegas for $75 a square foot.

In October the median price of a new home sold was $245,781, a 31 percent decline from the market’s high of $355,435 in April 2007, according to Sales-Traq.

Homebuilders are responding to market conditions, Bottfeld said. Homes are getting smaller, going from about 2,100 square feet to 1,600 to 1,800 square feet and within reach of the median income.

Bottfeld estimates homes costing $100 a square foot or less will constitute 20 percent to 25 percent of the market within a year, compared with about 7.5 percent now as estimated by SalesTraq.

The reason builders are willing to go so low is to make money to pay suppliers and employees and pay down debt, Bottfeld said.

Pardee Homes Division President Klif Andrews said builders aren’t making money selling at such low prices, but acknowledged it’s about cash flow to return to the parent company.

“You may have developments where they invested dollars in finished lots and have standing inventory they are trying to sell down,” Andrews said. “We have already spent a fair amount of money, and we are trying to recoup cash. At this time, cash is so critical.”

Breaking even and maintaining current operations is the goal of builders today, Andrews said. Pardee has 90 employees in Las Vegas today compared with nearly 300 two years ago.

Don DelGiorno, division president of KB Home, said the builder’s price reductions are driven by supply and demand. Buyers aren’t being drawn by incentives and granite countertops, and KB’s average prices are $90 to $95 per square foot.

“You can’t fool the consumer,” DelGiorno said. “Especially with the way prices have dropped and uncertainty with employment.”

Tom McCormick, president of Astoria Homes, said that if builders want to sell homes, they have had little choice but to lower prices to match the competition.

Astoria has no homes priced under $100 a square foot at this time, but McCormick said the builder is getting close. Competition from foreclosures is driving the market.

“We are going to have to lower as the market makes us go,” McCormick said.

Murphy said the average price of foreclosure sales in October was $99 per square foot, making many new homes more than competitive.

“We are matching the prices of the resale segment driven by foreclosures,” Andrews said. “It will probably surprise most home shoppers that new homes are competitive with foreclosures. They have a warranty, and they aren’t in a neighborhood with other foreclosures, but we struggle to get that message out.”

That appears to be case when it comes to the sale of new homes, which through October reached 8,830, according to SalesTraq. In 2007, 19,446 new homes were sold. Pardee reports sales are down 60 percent this year compared with 2007.

It doesn’t appear to be getting any better. Traffic is off by one-third compared with the summer because it’s difficult for many potential buyers to get loans, Andrews said. He’s hoping an improved credit environment and low interest rates will spark buying in 2009.

Andrews said he doesn’t know how much lower prices can go. That will vary by product and location, but he added he’s not seeing as many price reductions today as he was six months ago.

“It seems a lot more stable now,” Andrews said. “The biggest price correction seems to have already happened.”

DelGiorno said he thinks prices are close to the bottom, but he said he thought the same thing six months ago, and prices have come down.

The target is first-time buyers because mortgage payments of $1,000 a month are less than what people can pay in rent, he said.

“We are taking the extra step and going after first-time buyers to make it more affordable,” DelGiorno said. “We are cutting down on square footage and designing more flex space.”

The slump in the local economy continues to weigh on builders, but McCormick said a belief in Las Vegas and that people will move here for jobs provide some hope.

“Housing affordability will never be better,” McCormick said. “I don’t know how long people can sit on the sidelines and not take advantage of good deals.”

A version of this story appears in this week’s In Business Las Vegas, a sister publication of the Sun.

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