HOUSING:

Builders below $100 a square foot

Foreclosures — and need for cash — force dramatic price cuts

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.

By Brian Wargo (contact)

Sunday, Dec. 21, 2008 | 2 a.m.

LAS VEGAS SUN

Real Estate in Crisis

Street-level view of the foreclosure problem (12-17-2008)
Their dreams shattered, investors left to wonder (11-28-2008)
City works to prevent foreclosures (11-13-2008)
Those empty homes for sale are harming communities (10-28-2008)
State plan could ease pressure of ‘tsunami’ (10-23-2008)
Reid, Goodman tour foreclosed homes, present remedy (10-22-2008)
Bill to protect renters in foreclosure cases (10-20-2008)

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.

Discussion: 7 comments so far…

By Future2012

12/21/08 at 9:55 a.m.

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The financial and builders industries have induces a deflationary cycle.

Bankers and Builders are in a race to the bottom (selling or building at below $100/sq ft) to clear a housing inventory. Banker won the first round by selling foreclosures below replacement cost as witnessed by less than 200 new housing permits in November 2008.

In the LV R-J Letter to Editors 12-21-2008, By William Martin, VP and CEO of Service 1st Bank of Nevada, Martin threatened that "A word of caution: If borrowers". choose not to pay, they may well find that the lender will not only foreclose but then move against them for any deficiency balance that may result after the house is sold is sold. They may well lose a lot more than their credit.

There is an increasing paroxysm exertion by the financial industry to fault the upside down recently laid-off homeowners for the shape of mortgage collapse rather than their own collective abysmal failure.

Families have many short and long term personnel situations from death, loss of job, marriage, divorce, job transfer, retirement plans which play into their life choices.

When a family goes from a strong positive equity situation where in a mobile society they can sell their home, to a calamitous negative equity situation the financial stability and credit worthiness of that family is crushed.

The Las Vegas valley is seeing home values 50% of those 2 years ago, and 50% are reported to be underwater. 14.6 million Homeowners are now under water nationwide compared to 2.6 million in 2006.

It is with distress and dismay that an estimated 10% of homeowners have been subsumed by the failure of the mortgage brokers, banking, insurance and securitization system and lack of direct or indirect government intervention to help us out.
By laniac

12/21/08 at 10:44 a.m.

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I do have sympathy for anyone who loses their home due to any circumstances, but ultimately I believe accountability starts with the individual. Nobody forces anyone to buy a house or to take out a loan with poor terms.

You can draw a very close parallel between the dot com bust and the housing bust. People were under the illusion that prices only go up, whether it be stocks or houses. Buying anything that has risen in price by 2-3X in a couple years has to make you stop and consider if that trend is sustainable, or more importantly, likely to reverse.

Housing in Vegas was grossly over-valued for the last few years. There was nothing fundamental to support the prices other than speculation. Very sorry for anyone who bought a house in Vegas during the last few years.
By doogie

12/21/08 at 8:42 p.m.

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Wake up to the real world, laniac-

When we arrest someone for using drugs, a key is that the cops want to know who was dealing them. If caught, the dealer gets a much harsher penalty than the user. Sadly, if a person is sold a subprime, Alt-A, or other risky loan, we simply say "Let them rot for being so stupid". And the mortgage companies walk away with a tidy profit, knowing that they sold a loan that will most likely fail. A drug dealer and a mortgage company are one and the same-enablers. The dealer knows the bad effects of the drugs-as the lender knows the bad effects of their toxic mortgages. Yet the mortgage companies are allowed to skate. Nice system we have here.....
By azsk8fan

12/22/08 at 6:56 a.m.

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Pulte probably couldn't build that cheap if they were using union workers and legal citizens. They save those people for the fix-up work, after the home is sold and the problems start to surface because of shoddy workmanship - then you start to see the people who know what the heck they're doing when it comes to home building - these are the people who come in to fix things and make them right.
By firedawg2000

12/22/08 at 11:24 a.m.

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Doogie - That was the worst analogy I've ever heard. Are you seriously comparing drugs to mortgages? Borrowers are addicted to houses and therefore can't avoid the temptation of loans they know they can't afford? I wonder how many people share your view and never take personal responsibility for any of their actions. I guess it's just so much easier to blame others. Dishonorable, but easier.
By redferret

12/22/08 at 4:20 p.m.

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What if those owners don't understand how bad the mortgage is? What if the lender did know, knew that he would make a profit, and STILL get the house back? Those are the questions we should be asking. While certainly homeowners and prospective homeowners should understand what they are getting into, it takes two to tango. Specifically a lot of lenders just wanted to put people onto subprime loans, even when some could've received a better deal.