Builders anticipate economic recovery

By Buck Wargo

Friday, March 19, 2010 | 3 a.m.

The Las Vegas homebuilding industry hopes 2009 was the bottom and 2010 will be the beginning of the recovery.

Despite an $8,000 federal tax credit to first-time homebuyers, sales of new homes locally fell 48 percent in 2009 to 5,184, down from 9,965 in 2008, according to SalesTraq.

That’s a far cry from the 38,705 homes that Las Vegas builders sold in 2005 at the peak of the market.

The industry is looking to the economy to boost the demand for homes, but it also serves as a canary in the coal mine to the economy as a whole, experts said.

“It is difficult to foresee a long-term recovery (of the economy) without single-family (homes) doing very well,” said Cliff Brewis, an economist with McGraw-Hill Construction. “It is a bellwether of how the marketplace will do because if you are building homes, you are going to build schools; if you are building homes, you are going to build retail; and if you are building homes, you will build roads. It is an extremely important player in terms of overall economic performance for construction activity.”

The decline in home construction in 2009 was evident among the top builders list released by SalesTraq. It was dominated by large public builders with the money to build while smaller private builders have been on the sidelines.

An anomaly in 2009 was DR Horton, which was No. 1 with 836 homes, 82 more than it had in 2008 when it was ranked No. 4.

“Horton is the biggest public builder in the primary entry-level lowest price range in the market,” said Dennis Smith, president of Home Builders Research. “During 2009, almost all of the new homes that were sold were in the lowest price ranges. They were trying to be the most affordable.”

Others in the top 5 in 2009:

• Pulte/Del Webb — 597 in 2009 compared with 1,462 in 2008.

• KB Home — 574 in 2009 compared with 1,134 in 2008.

• Richmond American — 466 in 2009 compared with 772 in 2008.

• Lennar — 379 in 2009 compared with 659 in 2008.

Ryland was sixth with 282, followed by Woodside, the private builder that fared the best at 253. Pardee followed at 212, Rhodes Homes at 155 and American West at 138.

McGraw-Hill projects the value of single-family home construction in Nevada will increase 24 percent in 2010 — from $851 million in 2009 to $1.05 billion this year. Builders constructed $5.7 billion in homes in 2005 and $2.7 billion in 2007. The projections for 2010 puts it on par with 2008.

“We expect to see housing construction start to take off here,” Brewis said. “We were building high-end homes, but they are no longer appropriate. The demand is at the low end from people new to the marketplace. They are going to demand a different type of home.”

Brewis said Las Vegas and the rest of the Nevada face challenges that other Sunbelt states had to deal with when speculation shot up home prices. Those markets that didn’t have that high of a run-up such as Texas are turning around quicker.

The problem in states such as Nevada is a larger percent of the homes are underwater: Homeowners owe more on the mortgages than the homes are worth. Those people won’t be in a position to buy for quite a while, Brewis said.

“They are waiting for home prices to come back before they participate in the housing market, and that means 40 percent of the market is waiting for the market to recover,” Brewis said. “Places like Texas, 95 percent of the market is participating in buying homes.”

The local homebuilding industry is excited about prospects of a slight recovery this year.

Bill Hoover, immediate past president of the Southern Nevada Home Builders Association, said the industry is in the process of trying to put itself back together after dealing with the downturn.

“We are fundamentally broken right now, and we can’t function any more like we have in the past,” Hoover said. “Homebuilders are basically optimists. We believe we can fix anything, and things will get better in the future. While that served us well in the good times, I think it is one of the reasons that we are in the situation we are in today.”

Hoover said summer 2005 was the tipping point in the market when prices and demand started to level off and decline at a gradual rate. That’s when builders were constructing homes with upgrades on small lots because of the high cost of land and buyers were able to borrow money for more house than they could afford. Builders mistakenly thought the answer to the slowdown was to throw more incentives at buyers, he said.

“When market prices started to slow and demand slacken, we didn’t accept it as a reversal but a temporary adjustment,” Hoover said. “We kept building throughout 2006 as the market continued to slow and prices declined. It took us two full years until 2007 before the industry realized that the highly upgraded product we designed was at such a low price that it didn’t make sense for us to continue to build.”

The industry has taken a hit from the elimination of subprime loans that four out of five buyers were using during the boom and the elimination of down-payment assistance offered by builders, Hoover said.

“This is the first point which we have reset the market,” Hoover said. “We have a resetting of the economics and foundation of the homebuilding industry in Las Vegas, and we can now start to rebuild. The economics, with the low price of land, start to make sense.”

Hoover said Las Vegas won’t see any more new three-story homes with one-car garages on small lots when land cost $600,000 to $1 million an acre five years ago.

“You will see more traditional two-story houses and good-quality houses, but not highly upgraded,” Hoover said.

Despite the market lull and prices that have fallen 50 percent, Hoover said he’s concerned that a recovery will be stifled because a lot of subcontractors have gone out of business.

Once there is an increase in demand, the industry won’t be able to meet the demand, he said. There also may be a shortage of materials such as lumber, he said.

The availability of lots for builders is another problem, Hoover said. Builders aren’t willing to pay the $600,000 to $1 million an acre and there must be a willingness to sell it for far less.

Smith said there is plenty of undeveloped residential land for $60,000 to $125,000 an acre. Today, unfinished 4,500-square-foot lots are selling for $8,000, and it will cost $30,000 to $35,000 to improve the lots to prepare them for construction. About four years ago, the same finished lot cost $100,000, Smith said.

A lingering challenge will be the ability of the private builders to compete with the large builders that are able to finance developments with their own cash, Hoover said.

Financing had dried up for private builders who want to buy land, improve the property and build homes.

“Until we engage the private builders back into our industry, I don’t think we will be hitting on all cylinders,” Hoover said. “We will not come back with the velocity or time frame many would like to.”