Expert: Some residential lots have virtually no value

By Brian Wargo (contact), In Business reporter

Fri, Feb 27, 2009 (2 a.m.)

Some Las Vegas residential land has no underlying value, and it’s only going to get worse, one land expert says.

The slowdown in home construction that saw builders close on 284 homes in January and fewer than 10,000 in 2008 is depressing the market to the point some residential land in essence already has no value once improvements are excluded, says Craig Cherney, director of Western operations of Philadelphia-based American Land Fund, a private equity land acquisition group that buys raw land and entitles it.

Cherney says he’s seeing finished residential lots sell for $25,000, which is a 20 percent to 30 percent discount to the underlying land improvement costs. What that means is that finished lots are trading at a discount that gives it a value of zero, he adds. The underlying land values on many of the nonprime locations for residential land has virtually no value in today’s distressed market, Cherney says.

“Until the valley works off the immense overhand of foreclosures of resale properties, I see no reason why residential land demand would improve or otherwise increase in value,” Cherney says.

In addition, the large public homebuilders only add to the problem with their new-home inventory, which must be discounted and priced to levels that can compete with foreclosures, says Cherney, who calls it the perfect storm.

“If you’re not in the marketplace every day, it may be tempting to believe that this is only a temporary problem,” Cherney says. “To the contrary, the land market is far from finished with respect to wringing out the excessive speculation and greed that put us into this situation to begin with.”

Cherney says he wouldn’t be surprised by another 50 percent decline from the current market values. Declines of that magnitude are already happening in Phoenix, where finished lots are trading as low as $11,000 — more than one-half lower than what lots are currently trading for in the Las Vegas Valley.

“The last I checked the median sales prices of homes in both Phoenix and Las Vegas were very similar in the mid-$150,000 price range. If houses are more or less selling for the same amount in both markets, why should Vegas finished lots be priced at twice or more of the values trading in Phoenix?” Cherney says. “The answer: They shouldn’t be.

“There is more pain to come in this Vegas land market. The fundamentals of supply and demand are alive and well and will ensure further declines into 2009. This washout is far from over.”

Most land loans coming due relate to inflated transactions that occurred in 2005-07. Any equity that had previously existed in these land assets has been wiped out compared with today’s drastically reduced prices, he says.

Land report

Research firm Applied Analysis released its fourth-quarter land transaction numbers that show sales continue to slow and prices continue to fall.

When only calculating land sales outside the Strip, 320.9 acres sold at $391,877 per acre. That’s down 15 percent from $459,708 in the third quarter and down 58 percent from $939,357 in the fourth quarter of 2007.

Although there were no sales of Strip land in the fourth quarter, for all of 2008, land on the Strip sold for an average price of less than $500,000 — $300,000 below where it was in 2007, Applied Analysis reports.

The lack of sales and where they are located can affect prices, but the numbers set the tone for what’s happening in the market.

For all of 2008, 1,223 acres sold, including Strip property, down from 2,354 acres sold in 2007 and 4,468 in 2007, according to Applied Analysis.

The overall price per acre was $1.35 million, which is a 3 percent drop from 2007, but Strip transactions can skew the numbers. Excluding the Strip, the 1,077 acres sold in 2008 was less than half of that sold in 2007. The price per acre of $478,544 was a 39 percent drop from 2007, the firm notes.

The tight capital markets and sharply declining profit margins translate into fewer sales to speculators and end users and lower prices, says Brian Gordon, a principal at Applied Analysis. The lack of demand has forced some property owners into foreclosure, he adds.

Gordon, meanwhile, says the increase in commercial vacancy rates will continue to limit demand for that property.

“We expect these conditions to continue into the foreseeable future as unemployment rates remain above 9 percent, office vacancies extend beyond 17 percent, gaming and sales activity are down significantly from the prior year and consumer confidence levels remain at all-time lows.”

Applied Analysis Principal Jeremy Aguero says that while the focus of the land report is on vacant transactions, the underlying value of office building and retail centers in addition to homes has been reduced significantly.

“There are few signs market conditions will improve significantly during 2009, and we expect an increasing number of vacant land sales to come from distressed and bank-owned transactions,” Aguero says.

There were 200 parcels sold in the fourth quarter, which points to the sale of many small lots. There were 123 parcels sold in third quarter.

Home construction

Las Vegas is not alone with the weakness in the home construction market. The Commerce Department reported that construction of new homes and applications for new projects plunged to record lows in all parts of the country in January.

Last week, SalesTraq released its Las Vegas numbers that show sales of new homes plunged to 284 in January, down from 633 in December. That number of sales hasn’t been seen in decades in this market, the firm notes. There were only 183 permits for new homes issued, as well.

Brian Wargo covers real estate and development for In Business Las Vegas and its sister publication, the Las Vegas Sun. He can be reached at 259-4011 or at wargo@lasvegassun.com.