Vegas Market Nearing Bottom

Home prices peaked in the Las Vegas valley in early 2007. As the year progressed, foreclosures rose at a rapid and steady rate, but median home prices stayed relatively stable. This was a result of home owners and investors who, not wishing to face the reality of a declining market, left their homes on the market without lowering their listing prices, even as very few of them actually sold. Inventory grew until the flood gates finally burst. Since then, median price highs of around $300,000 at the end of 2007, have fallen at the rate of approximately $10K per month to the current median price of near $184,000.

High foreclosure rates nationwide have created excellent buying opportunities across the U.S. But Las Vegas is truly leading the pack. 1 in 76 homes is currently in some stage of foreclosure in the Las Vegas market. (RealtyTrac) This is more than double the amount of the nearest rival, Florida at only 1 in 173 homes. Arizona, California, and Michigan round out the top 5. Of all home sales in the Las Vegas valley in October, 86% were foreclosures or short sales.

Steve Bottfeld, a real estate analyst with Marketing Solutions discusses a 3 point theory of how to gauge the bottom of a real estate market. First, he looks at the inventory of homes listed on the local Multiple Listing Service (MLS). Second, he evaluates the volume of business which is simply the number of homes being sold in the marketplace. Lastly, he considers the average median price of homes. Bottfeld states that once the inventory stops increasing, the volume begins trending upward and the median price stabilizes… you have found the true bottom of the market. From the data we are now considering for the Las Vegas valley, it appears that the elusive bottom may be right around the corner if not already here.

POINT #1: INVENTORY STOPS INCREASING

Rick Shelton of ReMax & Associates and 2010 president–elect of the Greater Las Vegas Association of Realtors (GLVAR) spoke recently at the Real Estate Insiders Club of Las Vegas and pointed out that the inventory of homes on the Las Vegas MLS has held steady for several months at around 22,000 units. This inventory stabilization represents the first point needed for a bottom to be reached.

POINT #2: VOLUME OF SALES PICKS UP DRAMATICALLY

The number of units sold monthly has been increasing all year from lows in late 2007. Sales volume in November, 2008 was nearly double that of November, 2007. Of course the sharp decline in home prices is largely responsible for this rise in sales. In some cases homes are selling for just 35% of their inflated highs in late 2006. As an example, I just put an offer in on a home for one of my investor clients at $96,000. The home sold in July of 2006 for $300,000 as is now listed for only $109,000. Even at current full asking price, this house is selling for just 37% of its 2006 value. You can read in the paper that Las Vegas has experienced a 30% drop in home values, but I can personally attest to the fact that in some cases we are looking at a 70% decrease. With prices adjusting this low, it is no wonder that the volume is starting to pick up.

POINT #3: DROPS IN MEDIAN SALES PRICE SLOW TO A CRAWL

After dropping nearly $10,000 per month for the last year, home prices fell only about $2800 last month, landing near a $184,000 average median price. This change in price decline is significant and may indicate that the bottom is only a couple of thousand dollars away. As the three elements necessary to recognizing the bottom of a market take shape, the savvy investor realizes that now is the time to start buying these low priced homes.

Investor money that has sat on the sidelines is now flowing back into the market to snatch up the homes lost by other, less savvy investors and owner occupants who could not afford the homes they purchased at those inflated levels. Many of these recent transactions are cash purchases as investors forgo the credit crunch and lending melt down entirely. The key turning point for these investors to reenter the market came as homes in Las Vegas once again reached a price point where they could cash flow as rentals. Cash flow can be simply defined as the point at which the income (rent) from the property exceeds the costs of ownership (mortgage, taxes, insurance, property management, and maintenance etc.)

Anyone that is looking to buy a home in Las Vegas should note that the timing may not get better than this. Interest rates are at historic lows in the 5 ½ % range. Even the national builders are getting into the game to compete against the foreclosures. Melissa Schmidtberger of Richmond American Homes in Las Vegas is promoting a 4 ½ % 30 year fixed mortgage special on homes starting from $139,000. I never thought we would see national builders building again at levels under $100 a square foot… but they are.
Over 18 builders, both local and national, have homes starting under $100 per square foot. With the government offering first time buyers tax credits up to $7500 and mortgages under 5%, it is actually cheaper to own than to rent. It also appears that new home prices have also reached a bottom as only 399 building permits for new homes were issued in October. This is the lowest level in decades.

I am actually quite surprised that more owner occupants, second home buyers, vacation home seekers, and baby boomers looking to retire are not already in this market buying homes at 35 cents on the dollar. The people have known for the last year that we’ve been in a recession, but it took the government that entire time to realize it and “officially” report it. The same will be true of the bottom of this real estate market. If we wait until the news reports say that the bottom has been reached (or was reached a year ago) we will be paying a lot more for the foreclosure we could be buying now. “Buy when the blood is running in the streets.” Now is the time.