Analysts disagree on falling house prices

By Buck Wargo

Fri, Aug 6, 2010 (3 a.m.)

Analysts agree that Las Vegas home prices will keep falling, but disagree on how much.

The median price of existing homes in Las Vegas will fall 5 percent at most by the end of this year, but should start to appreciate by 2012 after remaining flat next year, said Larry Murphy, president of Las Vegas-based SalesTraq.

Murphy told a group of Realtors and builders July 28 at his Crystal Ball seminar at the Tropicana that the potential exists for another wave of foreclosures to contribute to falling prices. More people are late with their house payments than are late with their credit card or car payments, he said.

Since the market’s peak in 2006, prices of existing homes locally have fallen 58 percent to $123,000 in June, Murphy said. In the past 14 months, however, prices have dropped only 2 percent and traded in a range of $120,000 to $125,000.

“I will maintain the bleeding has stopped, and (the market) has stabilized,” Murphy said.

He said he expects prices to be flat in 2011 and not start to increase until 2012. That’s when they could start a yearly run of 2 to 7 percent, he said. Other analysts said they expect home prices to fall slightly the rest of the year because of the expiration in April of the federal homebuyer tax credit.

But no one is as downbeat as Fiserv, whose predictions on the Las Vegas housing market have sparked debate from analysts over their accuracy.

The Wisconsin-based research firm said Las Vegas’ existing-home prices will decline nearly 15 percent by early 2011 and another 3 percent by early 2012.

Fiserv, which produces the nationally prominent Case-Shiller Indexes, calculates its prices differently than local analysts. It compares the median prices paid for homes to what they sold for the last time they were on the market.

Other analysts compare combined sales during a month and don’t analyze what homes sold for in the past.

From the first quarter of 2010 to the first quarter of 2011, Fiserv projects the existing-home price in Las Vegas will decline 14.6 percent. By the first quarter of 2012, prices will fall another 3.3 percent, Fiserv reported.

Fiserv Chief Economist David Stiff said high unemployment in Las Vegas and a large number of foreclosure properties will prompt prices to fall further.

“There is still a huge number of foreclosure homes and preforeclosure homes and demand is weak because of the local economy and high unemployment,” Stiff said. “The supply overhang has an effect on prices.”

Stiff said there won’t be an increase in Las Vegas until the fourth quarter of 2012 when prices will have risen 6 percent compared with the fourth quarter of 2011.

Fiserv does the Standard & Poor’s/Case-Shiller Home Price Indexes that show prices of existing homes in Las Vegas fell 6.5 percent from May 2009 to this past May. Again, those indexes track the same homes over time.

The report contrasts to one by Las Vegas-based SalesTraq that showed May prices fell 1.4 percent to $122,847 from 2009 to this year.

Steve Bottfeld, executive vice president of Marketing Solutions who works with SalesTraq in sponsoring seminars on the Las Vegas housing market, said he doesn’t think Fiserv’s numbers are an accurate barometer of the Las Vegas housing market.

“The problem with (its) method is it does not reflect current market conditions,” Bottfeld said. “It is a lagging indicator rather than a predicting indicator.”

Stiff said the company’s methodology, which relies on data from the Clark County recorder’s office, works well because it isn’t skewed based on whether a higher number of luxury homes are sold in any month, he said.

“This tends to be less volatile,” Stiff said.

Bottfeld disagreed, saying at the most he could see the housing market decline 6 percent.

“To say another 14 percent based on where we are, they either have a crystal ball that the economy is going to explode or they are wrong,” Bottfeld said. “I think their numbers are baloney.”

Dennis Smith, president of Home Builders Research in Las Vegas, said Fiserv’s method might be a better way of measuring the price increases and declines of the housing market, but he said he’s not buying that prices will decline in double digits next year.

Smith said there would need to be a large influx of foreclosure properties for home prices to decline sharply.

The national coverage of home price declines in Las Vegas isn’t good for the city, Smith said. For one, it influences local appraisers to be more conservative and price homes to the point where it makes it tougher to get financing for what the seller is requesting, he said.

It may also attract more investors to Las Vegas and create more competition with first-time homebuyers who are frustrated about getting shut out of buying homes, Smith said. It also portrays Las Vegas in a negative manner, he said.

“It gives the perception that we have all of these empty houses sitting around town, and we don’t,” Smith said. “That doesn’t help businesses relocate. We don’t look like a growing and vibrant city. It makes us look like Detroit.”

Since the housing downturn accelerated in 2007, Las Vegas analysts have been repeatedly off in their predictions about how much the local housing market would decline, but they have been right in the past year. A year ago, Murphy, for example, said prices of existing homes would hold steady in 2010, and they have, based on county data.

Fiserv overstated the decline in Las Vegas a year ago when it projected homes prices in Las Vegas would fall 25.7 percent from 2009’s first quarter to this year’s first quarter. By the firm’s calculations, the price drop was only 11.7 percent — less than half of what it projected.

Murphy said there is no indication that new home prices won’t decline more after falling to $182,440 in June, a 48 percent drop since the market peaked in 2006. It’s dropped 13 percent from June 2009.

“I didn’t think they could go much lower because they couldn’t sell for less than it cost them to build,” Murphy said. “No builder builds for practice, and we felt they had hit bottom. Apparently not.”

SalesTraq listed the average price per square foot of new homes in June at $101.12, a 6 percent decline from June 2009.

Fifty-two percent of new homes for sale in Las Vegas are priced at or below $100 per square foot, Murphy said.

“A year ago, I would never dream of making that statement,” he said.

Las Vegas-based Harmony Homes is selling one model for $65.53 per square foot, which translates into a 3,754-square-foot home for $254,000, Murphy said.

A key reason for the drop is builders have started constructing smaller homes, Murphy said. The average size has gone from 2,200 square feet to a little more than 2,000 square feet.

Construction costs have come down 25 to 30 percent from the peak because of competition among subcontractors, he said.

Land prices have also dropped as evidenced by report showing Richmond American paying $4.8 million for 208 lots in the Providence master-planned community. That reflects a price of $25,000 per lot, which is essentially the cost of improvements, Murphy said.

“With free land you are able to make projects pencil a little better,” Murphy said.

Lennar paid $3.9 million for 20 acres in Mountain’s Edge, which represents a price of $200,000 per acre

It was only four years ago that land in Summerlin sold for nearly $1 million an acre, he said.

“When land costs become reasonable, construction costs come down and the size of the home comes down, it is possible to build for a lower price,” Murphy said.

New-home closings have remained tepid compared with existing homes. There were 3,097 closings of new homes during the first half of the year versus 25,455 for existing homes.

Murphy said the price gap between new and existing homes must narrow further for demand for new homes to increase. The price gap is about $59,000, but needs to be closer to the traditional gap of $30,000, he said.

Other highlights from Murphy:

• MGM Resorts International has sold about 10 percent of its condominium inventory at CityCenter through the first six months of 2010. He said condominium projects start strong before sales slow, which was an ominous note about the project. Murphy said MGM is helped, however, because it can turn its condominium hotel units at Vdara into hotel rooms.

• Banks are holding 6,500 homes not listed for sale, but Murphy said about 18,500 homes are in default or in the preforeclosure process. He said the year’s foreclosure total will likely fall between the 20,000 in 2009 and 24,000 in 2008. Short sales, in which banks allow homes to be sold for less than is owed on the mortgage, continue to hold down foreclosure totals, he said.

• During the first half of 2006, the price per square foot of homes bought in an auction was $68.57. Homes sold on the market by banks in foreclosure sales went for $78 per square foot. Those sold in short sales went for $80 per square foot, and those sold by homeowners in traditional transactions went for $92 per square foot.