Q&A: Dennis Smith

Steve Marcus

Dennis Smith, president of Homebuilders Research Inc. in his home office, says the new-home market will remain flat through 2010.

By Buck Wargo

Fri, Jul 16, 2010 (3 a.m.)

Dennis Smith never figured his career would be dictated simply by who his college roommate happened to be.

The 59-year-old Smith, president of Home Builders Research who along with SalesTraq’s Larry Murphy are the go-to guys for Las Vegas Valley housing statistics, got indoctrinated to the industry while a student in Iowa in the early 1970s. His roommate’s father, one of the biggest homebuilders in the state, asked if they wanted to work at a sales office one weekend.

It turned into a regular job dealing with bidding, production and even research, which is the skill set he has today.

Before he finished college studying business administration, Smith went on vacation in Arizona and liked it so much that he stayed and worked as a salesman for a homebuilder.

“That is where I got the bug to examine the numbers, because you had to do it,” Smith said. “I already had some experience with that in Iowa, but this took it to the next level.”

Smith talked with In Business about the local housing industry.

How did you end up in Las Vegas?

I had a friend who was my old boss in Phoenix, RL Brown. He has a company in Phoenix similar to what I do. He asked me if I was interested in going to another town. We went to Denver, but it was in one of its worst recessions ever in the late 1980s. He was getting some calls from builders in Vegas and he asked me to check it out. I had been to Vegas maybe twice and didn’t know anything about it when I got here. I went to the Clark County offices, specifically the recorder’s office, and started asking people how do you collect data. Back then, Vegas was 650,000 people. I will always remember that (in 1987-88). It was the same as Tucson at that time.

What happened?

I asked how did they keep housing numbers. At that time, there was only a few builders here. There wasn’t the big publics. You had Lewis Homes, Signature Homes and American West, and there were some others that are no longer here. Those were the three big boys. There was one guy — his name was Carl Stonebreaker. Carl collected the data from the deeds and put them on index cards. Computers were just starting. I asked if he would be interested in selling me that data. He said sure. He was using it for appraisal clients. He sold me six months of data. It wasn’t much (money). He had the data in shoe boxes in his garage. He took the index cards and copied them. He sent me a week at a time. I took the index cards and went through the sales and sorted them. I had just gotten a computer. I printed up maybe six to 10 reports. I got in my car and drove to Vegas. I met with Randy Black of Black Gaming, (builder) Eric Horn and Roger Nix of Durable Homes. They were my first three clients. I went to their office and dropped off some of my books and the Las Vegas sales report. I gave them some data free and told them to check it out and call me with any questions. All three called me and asked, “How do I get this on a regular basis?” They signed up.

How much did it cost back then?

Today it is $75 a month for a sales-report subscription. Back then, it was $50.

What is it?

I take the data and summarize them into subdivisions. It is accurate. Prior to that, the only way to get any data was to call people up and ask them or go to the sales offices. It is hard numbers. It tells them what the other guys are really doing and their closings.

What would they do with that?

It helps them position their product. Anytime you are looking at a new potential subdivision, you have to know what the competition is and you have to know if they are selling and if so, what and how many and at what price. The way they used to do it is by having their salesmen go out and talk to their buddies.

How many subscribers did you have in the first year?

I would say 25 to 30 in the first year and it would grow every year. Once the builders had information, they had information that the banks wanted. The banks need that information, also. Then the subcontractors needed the information to see who they could go get business with. Originally, a majority of my clients were builders and then it grew. Today it is builders, lenders, investment companies, investors and some Realtors. I have never really gone after the Realtors. I wanted to go to the clients who had money who were going to be there consistently.

Have the services you provided over the years changed?

At first we were just doing the closing report, then we expanded it to a land report, which has another group of clients interested. It comes from the same data. We have the Las Vegas sales report. We have a market share analysis report, which is the same data but another step. We calculate the market share of every subdivision in town. We have the newsletter. The newsletter acts as an executive summary for all the reports. We had some reports such as grand openings, but I stopped doing them. The most popular of any of our reports is the weekly traffic and sales watch. That little report has grown into one of the primary sources of what’s going on today in the town because there is nothing like it anywhere in the country.

What has the latest report told you?

It has told me what I thought it would be. The new home activity was tied to the federal tax credit. Before it expired at the end of April, the highest we got in sales per subdivision was one per week. Prior to that in January and February, the number of net sales per subdivision per week was 0.2. We knew the one per week was artificially induced demand. I knew that was going to fall, but … to what? I was hoping that it would fall back to at least what it was prior to — 0.2 or maybe more. What we have seen (in early June) is that it was 0.4 and 0.5. Now it is back to 0.2. Is it something to be concerned about? I would say yes and no. It is concerning because it is a soft number. But it is the time of the year, too.

What do you mean?

The summer hot months are here. We go through this every year. The seasonal trends say that when the heat hits, it slows down. That is the beauty of this report. Instead of talking about quarterly results or annual results or monthly results, you can talk about this report weekly. That is what you need to know. It tells you what the consumers are looking at. If we see by the first of August, that the 0.2 is still 0.2, I am going to be disappointed. I think it will go up to 0.3 to 0.4.

Why?

Just because based on the general picture of what is going on with demand, including the resales. You have to look at the resales to get a sense of the public’s demand of what they are doing. I think that is going to be our stability number for the rest of the year. I am looking at an average of 0.3 through the third quarter and hopefully it doesn’t get much less than that in the fourth quarter.

Has the economy affected your business?

I can tell you in early 2009 I went back and looked at the accounting and was surprised. I knew I was losing a bunch of clients, primarily contractors. My business dropped year to year from 2008 to 2009 about 70 percent.

In 2009, I knew I had to give it a spurt so I had to come up with some new products, which I did. It generated some revenue. Another thing I anticipated happening was the large publics, which were downscaling, that they would have to outsource work or hire people. Corporations aren’t going to start hiring people until they have to. I knew they were going to start outsourcing. The last year or so, I have been doing a lot of custom reports for the big builders. I have done work for banks and investment companies.

What kind of work?

Banks, for example, have questions on values of lots. They had appraisals, but the appraisals weren’t any good. They were based on numbers 6 months old.

What about the reports for builders?

Just pricing analysis and internal data collection.

Do you guys sometimes get blamed for what you do?

Absolutely. I have been accused of being on drugs and everything else when I suggested there might be a leveling of prices and prices might even go up by the end of this year. I said that in January, and I took a beating from the blogs. Do we like to have that happen? No, but that is part of it. You have to have thick skin.

Do you get beat up for being too optimistic or too pessimistic?

Both. It is usually being too optimistic. I don’t know if that’s all bad. Nobody likes to sit and listen to somebody talk about being in the dumps all the time. I try to be realistic. If it is bad news; it is bad news, but there is good side to that bad news. It could be worse.

Do you get clients who say you are pessimistic?

Yes, I do. I hear it from homebuilders, especially in 2009 when things were going down. Some would say that if you write good things in your newsletter, things would be better. My response is, “You show me something that is good to write about, and I will be sure to write about it.” We get blamed for a lot of that. It is unfortunate, but it is part of the deal.

Looking back, should housing analysts have seen this coming?

I certainly didn’t see it as being deep as it was going to be, and I don’t know anybody that did. From what I have experienced over the past couple of years, nobody saw the lending situation what is today — that loans were going to dry up for new projects. Nobody saw that level of foreclosures. Should we have seen it? We have never seen this situation before. There are no models because nobody thought the lending institutions would take the hit they did.

Weren’t there any signs?

In 2004, I can remember a price list from Pulte of a subdivision it had in Summerlin. It showed the prices at that subdivision went up $150,000 in one week. I remember saying that is dangerous. We knew that couldn’t be sustained, but nobody thought it would drop by $350,000 after that. Who do I blame? The banks for doing it. You don’t think the public is going to take it. Of course they will. Could it happen again? Of course it could if they start dangling dollars in front of people.

What lessons have we learned about what has happened to Las Vegas?

One of the things that we all learned is that I never did believe Las Vegas was an island that it couldn’t be affected by what goes on in the country. They would say we were recession-proof. I have learned the public is so easily swayed with things that are based on greed. It is a dose of reality. Myself and others have became aware of the importance that this town is too focused on one industry. I don’t think anyone will dispute that. It needs a broader base if it’s going to grow. We also learned that Vegas will never grow to the extent it did in the late 1980s and late 1990s in terms of in-migration.

What is going to happen with diversification?

I think a lot of the diversification is going to take place because of a lot of the maturing process in Vegas. I think the growth will be there. But it will be at a slow and sustained pace until there are more jobs. More jobs will come from a broader base in the economy, which will take many years to establish. There will be growth, but it will be different. It won’t be like anything we have ever seen, because it won’t be California based.

What will it be based on?

It is going to be based on the world. We still have this attraction where people around the world want to be in Las Vegas. It will be more second homes and retirees.

What lessons have you learned as an analyst?

I would have to look at what the banking industry and lending industry are doing and then how they are being regulated and their effect on the housing market. We have demand here. There is a ton of demand, but people can’t get financing. If the requirements are as strict as they are today, people aren’t going to be able to qualify.

What do you see happening the rest of the year to the housing market?

I think the new-home market will be flat at best with a slight uptick by the end of the year. I think new homes will continue to struggle, up and down and week to week. The good thing is the affordability factor is there. That is going to draw people from outside of our borders. We know that because it has happened in the past. The resale market will be steady. It will be potentially less than the prior year because of the number of investors that have backed off — not because they don’t want to buy, but because they can’t find the product at the price they want to pay. There is a lack of foreclosures for the investors to go out and buy.

How is there a lack of foreclosures on the market?

The indication now is all that silent inventory that we have all heard talked about — my guess from 25,000 to 35,000 — the banks are holding them back and not going through foreclosure. They don’t want to see a sudden decline in prices. They want to see a consistency. They don’t want to hurt their numbers. I would rather take the hit and get it over with and move on. Then, it won’t drag out as long.

What do you see happening in 2011 and beyond?

In 2011, I think we are not going to see much of a change in the numbers of new homes. I think we will see a slight uptick in permits, maybe a few hundred year to year. Most people don’t comprehend how much building is going on today. We peaked at more than 30,000 permits a year. For many years prior to the peak, we were at a level of 18,000 to 20,000 per year. Now we are at 5,000 a year. We are not building new product. When I hear the suggestion that we are overbuilding, that gnaws at me. We are not. Some people want to live in a new home. As for the resale market in 2011, there is no reason for banks to release more inventory. What could really bump the sales is if they start the pressure to do more on the short sales. But I don’t think we will see a decline in prices.

How do you see it going for smaller private builders?

The private builders that are left, I don’t know how they do it. They are down to just one or two people in the office. They are trying to do what they can to keep their doors open. I don’t see that changing much over the next two to three years until the lending industry changes. That won’t change until the banks see that there is demand and that takes a lot of convincing.

What about the public builders?

I don’t see any signs of them pulling out of Vegas. They have cash. They have the access to cash the private builders don’t have.

How is the land market playing out?

There is a huge demand for finished lots by public builders. There is little demand for raw land. By the end of this year, we should be out of the finished lots that are available. We are seeing the price of finished lots go up from $30,000 to $40,000 per acre. Now you have the public builders looking at unfinished lots and those prices are starting to creep up a little bit. How can you suggest that prices will go down when the costs are going up?

When will building start to rebound?

We will be at 4,000 to 5,000 new-home permits over the next couple of years. For us to get to 10,000 permits a year, which is a small percentage of where we were at, it will take a huge change in demand. Five years from now, we can talk about getting to 10,000 permits. It will take that long to go through the resale inventory.

When will prices return to their previous levels?

I hope I am alive that long. Just to go up another 50 percent, it could be 10 years or longer. If we have problems with a lack of water or something that causes production to shut down, prices will go up. We still live in Las Vegas, and people want to move here.