Las Vegas building boom? There is no building boom

By Buck Wargo

Friday, May 28, 2010 | 3 a.m.

In case anybody is wondering, Las Vegas doesn’t have a building boom when it comes to new-home construction.

A May 16 New York Times story generated a lot of buzz in the Las Vegas homebuilding industry and even from out-of-state housing analysts.

The story said building was booming in a city of empty houses, which was a surprise to many who follow the housing industry. The article said “there are 9,517 spanking new houses sitting empty,” and yet builders are putting up 1,100 homes and buying lots for even more at a time lenders are foreclosing on existing homes.

“Las Vegas is trying to recover by building what it doesn’t need,” the article said. “It is an unlikely pattern being repeated in many of the areas where the housing crash was most severe.”

That would be a correct assessment if local builders were overbuilding, but they’re not, according to analysts who follow the Las Vegas housing market. The market for building single-family homes has been slow to recover because the median price has been more than $80,000 higher than existing homes.

The source of the numbers used in the Times article, Florida-based Metrostudy, a housing research and consulting firm, told In Business Las Vegas that the 9,517 new houses sitting empty includes 215 in Pahrump and some in Northern Arizona, which are in the Las Vegas metropolitan area. But only 1,017 of the total are single-family homes in Las Vegas. The rest, 8,285, are already built and unoccupied condominiums and condo-hotel units at places such as CityCenter, Trump International and other high-rise developments on the Strip and downtown.

The analysts agree that none is competing against the single-family home market in Las Vegas and can’t be lumped in that total. And the inventory of existing homes has dwindled to less than a three-month supply.

Gregg Gross, director of Metrostudy for Las Vegas and Northern California, said Las Vegas was overbuilt and builders had 10,516 homes under construction in the first quarter of 2006 when the market started falling.

By the end of 2007 and the beginning of 2008, construction slowed dramatically as builders focused on selling existing inventory.

That is evidenced by new-home permits tracked by Las Vegas-based SalesTraq. Builders took out 30,149 permits in 2005, 20,999 in 2006, 12,836 in 2007, 5,551 in 2008 and only 3,776 in 2009.

Activity has picked up so far this year, but the 1,918 permits through April are less than 500 a month on average — hardly classified as a building boom by historic or any other standard in Las Vegas, analysts said. It’s more like a slight rebound that might be attributed to the $8,000 first-time homebuyer tax credit, they said.

“Even though there are 1,000 (empty new homes), that is not much supply,” Gross said. “They are managing their levels. They are not overbuilding. That is about a 2 1/2 month supply. Construction of new homes is definitely not booming.”

Strip condos can’t be compared with new homes because prospective buyers of single-family homes in Las Vegas aren’t considering them, Gross said. Those condos are geared for second homes or investments, he said.

But even the 1,000-plus new homes sitting vacant can be considered overstating the inventory.

That total includes homes under contract for buyers who have yet to occupy them. In addition, that number includes model homes, and according to SalesTraq, there are 850 model homes as of the most recent count.

When not counting homes under contract, Dennis Smith, president of Home Builders Research, another housing analyst, said Las Vegas has 300 to 400 new homes sitting vacant.

Gross said the last thing homebuilders want to do is build homes that sit empty. They are building based on demand because it is expensive to have money tied up in a home. They may be paying interest on a construction loan or the corporate office from which they borrowed the money is charging them, he said.

Many builders, especially smaller, private ones, have remained on sidelines for the past year or two because they can’t obtain construction loans or can’t compete at the current price level, analysts said.

It’s unrealistic for every builder, even the large public builders who are doing most of the building, to remain on the sidelines. That’s because some people want a new home in a particular style or location and don’t want to buy a foreclosed home or existing home that requires repairs.

“Builders have to build houses to stay in business,” Gross said, citing overhead and land costs they are carrying. “They are not building houses to build houses. It is based on demand.”

The article referred to the opening of a subdivision in Coronado Ranch by American West homes owned by Larry Canarelli. That was the first subdivision opened this year by the builder.

“American West is an example of being in business to sell houses,” Gross said. “Bakeries are in business to bake. Larry Canarelli has been in business a long time. He knows what he is doing by opening a new product.”

Gross said there’s nothing wrong with all the land transactions by builders acquiring lots to build the next batch of homes. Land prices have come down, and builders are taking advantage of that and positioning themselves for when the economy improves.

Richard Plaster, founder of Signature Homes in Las Vegas, says Las Vegas has too many homes given the thousands of foreclosures that banks have yet to put on the market — but says builders are trying to keep a presence until the housing market returns.

Tom McCormick, president of Astoria Homes — a builder that has been on the sidelines for more than a year because of the economy — said the article could make people looking to invest in Las Vegas more nervous, but anyone who’s sophisticated knows builders aren’t building unless people are buying. No speculative building is taking place, he said.

“There are some private-equity groups that are intrigued about getting involved in real estate, and it may look like we are cutting our own throat, when we are not,” McCormick said.

Smith said his biggest concern is appraisers might be influenced by the article, and that would prompt them to lower prices even more and make it difficult for buyers to finance homes for their full cost.

“There are some builders who are upset because that article put out some bad information about Las Vegas,” Smith said. “They are tired of bad news. If it is bad news, it better be right.”