Mind the Gap

Mind the Gap

You know you've arrived in London when you step out of the "tube" and hear the oft-looped pleasantry over the loud speakers, "Mind the Gap!" The announcement is referring to the gap between the subway platform and the train. In the current Las Vegas real estate market, we must mind a gap of a different sort. Let me explain.

As a full-time real estate investor and investor agent (of my 80 sales so far this year, only 3 were to owner occupants) I am used to observing market trends first hand in my hometown of Las Vegas. As our market began to reach bottom 6-8 months ago, investor money from all over the country and internationally began flooding back into the valley looking to snatch up bargain priced Las Vegas real estate. For months, it was relatively easy for me to find great REO / bank-owned deals for my visiting investor clients. 85% of my clients were (and are) all cash buyers and I entertain an average of 4-6 investors each weekend. Las Vegas was (and continues to be) the foreclosure capital of the world, and for months REOs were in great supply.

But over the last several months, things have steadily begun to shift. I have had to work harder and harder to find good deals for my clients. I have repeatedly found myself in multiple bid situations and the competition for REO / bank-owned foreclosure properties has begun to drive up prices. September saw the first increase in median home price in Las Vegas in over two years. More and more investors are fighting for the properties that are available and potential owner occupants are becoming increasingly frustrated as banks accept one of the multitude of "sure thing" cash offers that seem to be present at every REO listing.

The reason for this feeding frenzy is simple: Demand is far exceeding supply. In the month of September 2009, nearly 3500 single family homes sold in Las Vegas. By contrast, only around 1800 homes went back to the banks through the foreclosure process. This creates a large "gap" between supply and demand. At first glance, one would think that this gap represents good news for primary residents struggling to sell properties through the "normal" sales process. For the last two years, it has been virtually impossible for normal listings to sell in Las Vegas as they had to compete with the overwhelming numbers of foreclosure properties that were making the market. So now that the supply of foreclosure homes is beginning to slow and the demand for properties is increasing, we should begin to see more homes selling through traditional listings right? Maybe not.

In order to understand this phenomenon, we need to be mindful of another "gap." The gap between the prices of bank-owned foreclosure properties and the prices at which owners can afford to list their homes. Prices have dropped so sharply in the Las Vegas valley over the last three years, that many properties have lost 70% of their value. Homes that were selling for $300,000 in 2004, are coming back on the market as foreclosures now for $110,000. This means that anyone who purchased property in Las Vegas in the last 10 years is probably upside down on their home. Those who purchased 3-5 years ago are drastically upside down.

This gap means that even as demand for property in Las Vegas increases, and supplies of bargain-priced foreclosure / REOs decrease, we are still likely not to see many traditional listings and closings for quite some time. The gap between what is owed on the homes and what the market will pay is just too great. The exception to this might just be the short sale, which is making a comeback as I addressed in my two previous articles.

Will Cash Flow For Cash

Over the last five years I have sold a lot of real estate in many different markets nationwide. In 2003, droves of investors came into the Las Vegas market and purchased single family homes and condos. In 2004, the scene repeated itself in the Phoenix market. In 2005, towns like Albuquerque and Austin saw investors moving in to snatch up large quantities of new construction homes. Finally, in 2006, the Carolinas became hot and certain areas on the Gulf Coast enjoyed profitable buying conditions.

I was on the move throughout this time period, visiting all of these markets and helping my investors find deals there. All the while, I was sitting on the sidelines at home. After 2003, home prices in the Las Vegas valley became too high to cash flow and purchasing here no longer made sense to investors. Of course, that all began to change in the summer of 2008 as the real estate bubble burst abruptly and prices began free-falling throughout much of the West. As home prices plummeted, Las Vegas began to make sense again for investors because the point of cash flow was once again reached. The "point of cash flow" is a simple equation in which the amount of money an investor can make from renting a home exceeds his/her costs of ownership. These costs of ownership include the mortgage, taxes, insurance, repairs, and property management. With a 20% down payment (or in many cases less), positive cash flow can now be achieved in the Las Vegas market for the first time in several years. This is due primarily to the rock bottom prices of the foreclosures that have been flooding the market. Not only has Las Vegas lead the nation in foreclosures for well over a year, but the amount of foreclosures coming on the market now are near triple the amount from just a year ago. Currently, in the Las Vegas valley, nearly one home in 40 is in some stage of the foreclosure process. The median home price has come down approximately $10,000 per month, every month for the last year and a half from a high of near $300,000 to a new median price of only $140,000. These drastic price reductions have created a new buying boom.

Local newspaper articles and analysts talk about a 30% declines in home values here in Las Vegas. But as a full time investor myself and a licensed Realtor, I can tell you the reality is that we are seeing prices that are being discounted 50-70% off of where they were just two years ago. Many of my deals over the last couple of months have been coming in at well below 50% of older, higher values from 2006. I recently sold a one bedroom condo at $31,000 that sold for $148,000 two years ago. That is nearly 20 cents on the dollar! Three bedroom homes, only two years old, that sold new as high as $300,000 are now priced under $120,000. I recently closed on a three bedroom, 1300 square foot home for $75,000. This same home sold for $244,000 just three years ago. Deals like these are typical of what I have been getting for my investors.

These incredible prices open the door for virtually anybody to step back into the Las Vegas market and begin buying once again. Utilizing the government's Housing Recovery Foreclosure Bill, 1st time buyers have a $8000 tax credit to take advantage of and Baby Boomers and retirees looking to relocate to a warmer weather destination do not have to head south of the border as the Southwest has become affordable once again. The vacation capital of the world now makes sense for second home and vacation home buyers, and, of course, investors are delighted to be able to cash flow on their investments in Las Vegas once again. All of these groups will also benefit from price appreciation over the next several years as the market continues its recovery.

The only bad news, as we all know, is that lending guidelines have tightened up considerably over the last year. But, to offset this, prices are ½ of where they were two years ago. If you have a good job, and good credit, it is a great time to be buying a home. Interest rates are at historic lows and now is a great time to lock in a good rate on a 30 year fully amortized note, rates literally have no place to go but up. Current reports show that nearly 85% of closings in this market are being financed through a lender. So it is clearly still possible to get a loan. However, of the nearly 50 deals I have closed this year, only five of them were financed. Nearly 90% of my deals have been all cash. Not only am I getting more deals accepted, but I am getting them at or near list price in most cases and getting them pushed through rapidly. I just had a lender for a bank owned property countact me stating that they were willing to accept our lower than list price offer as long as we could close in 10 days with all cash (as we had stated). They had two other offers on the table for more money but banks do not want to fool around with financing either. They want to take the sure cash sale even if it is at a huge discount. This just goes to show that even though financing is available, cash is still king right now in this market.

June and July of 2009 have seen record sales in Las Vegas with 4702 and 4602 closes in each of the last two months. After 18 months of declines we have seen 3 months of holding steady on pricing. Investors have sensed the bottom has been reached and are coming in droves to pick up homes and condos at the bottom of the market. So, folks, if you have been able to save some money, or if you still have a line of credit open, I suggest you come back into the Las Vegas market and start looking around for some real bargains. The banks are ready to deal and the timing to buy a great foreclosure is as good as it gets.

Feel free to contact Glenn Plantone at 702.938.8888 or email at gsplantone@gmail.com for more information about great low priced foreclosed homes in the Las Vegas market.
You can learn more about real estate investing by visiting our website at http://www.viewpointequity.com

False Bottoms - Or When the Tail Wags the Dog

For the last 18 months real estate investors, market analysts and other experts have speculated as to when the long awaited bottom for the beleaguered real estate market would finally arrive. Rather than offering guesses as to how long the down market would last, I have tried to focus on identifying the signs of a bottom approaching, so that myself and my investors would be able to identify this buying opportunity as it arrived.

If you have followed my articles and blog posts, you have noted that I consistently advocate using a three step process to identify the coming of the real estate market “bottom” and the possible beginnings of a recovery. This process involves analyzing three sets of variables: First, the standing inventory of homes for sale; second, the volume of existing home sales; and third, the median home price for a particular area. A few weeks ago, I confidently announced the arrival of the real estate market “bottom” in my local area: Las Vegas. I cited as evidence for this claim data from each of the three areas listed above.

First, the inventory of available single family homes in Las Vegas has decreased rapidly in the last few months after remaining relatively stable at around 22,000 homes through much of 2008. This inventory is now at a level of just under 12,000 homes. Inventory is nearly ½ of its 2008 levels. Homes under $200,000 have less than 4 months standing inventory. Homes under $100,000 have less than 3 months inventory. A normal healthy inventory is considered a 6 month supply of homes. This decrease in standing inventory was our first indicator that the Las Vegas real estate market was bottoming.

Second, the volume of existing home sales has exploded in Las Vegas in the last few months. In fact, sales of residential homes reached record highs in June. According to data published by the Greater Las Vegas Association of Realtors, sales of single-family homes and condos rose 87 percent in June from a year ago…to a total of 4,702 sales. This total breaks the previous record high set in June of 2004, during the peak of the housing bubble.

Finally, we must also consider median home prices, which after falling for over a year and a half in the Las Vegas valley have finally stabilized near $140K in the last three months.

I used all of this data to arrive at the conclusion that we have hit bottom in Las Vegas (and many other areas of the country as well.) And I stand by that assertion. However, unfortunately for many American home owners, we are beginning to witness the fact that real estate markets may create bubbles, but they don’t operate within them.

Two years ago, home prices cooled across the United States and as the real estate bubble began to burst it triggered the freezing of the credit markets, which in turn brought on the greatest recession this country has seen since the Great Depression. Since then, the general economic downturn has rolled on independently of the struggling housing markets. It has grown to encompass the stock market, the job market, the banking industry, and all other major economic areas. All the while, there has been no doubt that the catalyst which provoked this whole mess was the rapid decline of housing prices, accelerating foreclosures, bad loans and the accompanying problems surrounding the burst of the real estate bubble. Unfortunately, the cause cannot now bring the remedy.

In fact, the general economic malaise now threatens, in fact almost promises, to thwart the recovery of the housing market. Economists warn that rising unemployment rates will bring a fresh round of foreclosures as home owners, even those not burdened by questionable loans or upside down property values, lose the ability to stay in their homes. Also, to spite consistently low interest rates and government incentive programs for new home buyers, banks still seem reluctant to loan money. Instead of thawing, credit markets continue to tighten in many areas as banks raise rates and cut limits on unsecured credit lines and charge cards…even to good customers with perfect payment records.

These factors conspire to throw a bucket of cold water on the hot housing market that we are now observing. As the economy continues to decline, I would not be surprised to see our newly found real estate bottom begin to give way once again. Although I do not think that we will see declines that come anywhere close to the plummeting prices of a year ago, I do believe that rising unemployment and the continuing credit crunch may prompt home prices to begin another, more gradual, downward slide.

This doesn’t mean that the current market is not still a great time for investors to begin loading up on properties. Cash flow is always king when it comes to real estate investments, and the cash flow opportunities in Las Vegas and across the country are more promising than they have been in decades. But, as always, investors should proceed with caution and look to purchase for the long term. Naked appreciation plays are risky under the best of conditions, and they have no place what-so-ever in a volatile market such as this.

Richard Lee Visits Las Vegas Real Estate Insider Club

The Las Vegas Real Estate Insider Club was pleased to host Richard Lee at our last meeting June 12th. Formally, Lee is Vice President, Public Relations Director, and a real estate consultant for First American Title Company of Nevada. But since 1989, Lee has also been the “go-to guy” for the Las Vegas community when it comes to development and growth. Developers, business owners, real estate investors and gaming companies rely on his insight for investment, lending and acquisitions. Simply put, Richard reduces a tidal wave of information into entrepreneurial opportunities.
At the meeting Richard spoke to the club on a wide variety of topics relating to real estate, the Las Vegas market in particular and the economy as a whole. He presented background information about what created this current economic crisis including insight into the sub-prime market, how notes are bought, debt is defused and property redistributed. And, although we may definitely be nearing the “bottom” of the real estate slide in Las Vegas, Richard explained how a factor called “Appraisal Drift” or “BPO Drift” may cause a continued downward slide in pricing of 1-2% over the next 12 months.
Richard offered his opinion, however, that Las Vegas is still a great place to purchase investment properties. He believes that jobs drive everything in local real estate economies by creating stability and growth. With sun, entertainment, great food and (now) housing prices below the curve, the outlook for the Las Vegas economy is strengthening. He also mentioned the fact that California may eventually approach a 60% total tax rate and, as a result, Las Vegas will continue to see population growth from those moving in from the west coast as well as baby boomers leaving other parts of the country.
Richard Lee also discussed an interesting phenomenon that is currently developing in Las Vegas real estate. As investors recognize the great buying opportunities that exist and rush to purchase properties at new, low prices…a certain “auction mentality” has begun to develop. Potential purchasers are finding themselves in multiple offer situations with properties selling above asking price. Those feeling that they have to get in now to avoid missing the boat are creating a dangerous over-bidding situation that could result in a second real estate bubble of sorts for the Las Vegas Valley.

The Las Vegas Real Estate Market Bottom is Here!!!

The moment we have all been waiting for…for the past two years… has finally arrived! You will not hear about this on the national news…yet…because the news sources are always well behind when reporting trends. You will hear it from me: a full time investor and “on the street” veteran agent that is seeing firsthand a dramatic change in the face of Las Vegas real estate.
I am here to announce that the bottom of the Las Vegas housing market is here. Let me explain why I believe this to be the case, and why now may be the best time since the great depression to be buying up real estate, especially in the Las Vegas market.

In late 2006 and early 2007 the Las Vegas real estate market hit its all time median price high of around $320,000. Shortly thereafter, the now infamous “credit crunch” began in late summer 2007 and the entire economy, especially the housing industry, has been reeling backwards ever since. Over the last 18 months, the median home price in the Las Vegas valley has dropped an average of $10,000 per month…settling in at around $125,000. Prices have literally plummeted by as much as 75% in some segments of the Las Vegas market. And guess what? The free fall is over. They are not going to go down anymore.

I understand that this is a bold claim. But there are several factors that you must evaluate when trying to determine the bottom of a housing market. I have quoted these factors several times over the last two years, and have always maintained that they did not all line up…until now. The factors are: 1. The inventory of homes listed on the local Multiple Listing Service (MLS). 2. The number of homes being sold in the marketplace. 3. The average median price of homes. Once the inventory stops increasing, the volume begins trending upward and the median price stabilizes… you have found the true bottom of the market.

Looking first at number 1: The inventory of available single family homes in Las Vegas remained relatively stable at about 22,000 homes through much of 2008. This inventory is now at a level of just under 12,000 homes listed on the market ready for sale. Inventory is nearly ½ of its 2008 levels. Homes under $200,000 now have less than 4 months standing inventory. Homes under $100,000 have less than 3 months inventory. A normal healthy inventory is considered a 6 month supply of homes. The inventory of available homes is getting scarily low as realtors are worried about what to sell if they do not get some fresh foreclosure inventory.

Foreclosures reached an all time high in March of 2009 with over 7700 new foreclosures announced in Clark County. A large factor in this number being so high was the moratorium announced by the Obama administration that ended in the first quarter of the year. In contrast, April 2009 totals are showing only 1289 homes were foreclosed on in Clark County. This is the smallest amount of foreclosures for the Las Vegas area in the last 16 months. As foreclosures dry up, this will continue to contribute to the huge decrease in standing inventory that we are now observing.

Moving on to #2: With each passing month since early 2008, sales volume has picked up in Las Vegas. There were over 4000 sales in the Las Vegas market in April of 2009. Because of the lower prices more people can afford to buy…and they are buying. More investors are entering the market as properties have not cash flowed like this in over 10 years, and home prices are now at 1998 levels. It does not take a brain surgeon to figure out that if you have 1300 new listings (new foreclosures), and you sold 4000 homes, your inventory is shrinking dramatically on a monthly basis.

The final factor to consider is median home price. The median home price in Las Vegas has dropped a TOTAL of $10,000 over the last three months…as opposed to $10,000 PER month…which had previously been the steady rate of decline for the last year and a half.

Inventory is getting smaller, prices have dropped to very affordable levels and appear to be leveling off, and sales are getting busier each and every month. The sheer numbers of foreclosures are finally decreasing from their highs also. All of this data helps to paint a clear picture of what is happening in the Las Vegas real estate market. But let me also share with you some non scientific observations that we can add to the equation.

As a full time investor and a licensed realtor I am getting shut out of properties left and right. Most properties both low end (under $150,000) and higher end ($300,000 and up) are receiving multiple offers and are now selling for prices above the list price. I am amazed at the amount of traffic I am coming across when I go out to look at properties. Some homes are getting 15-20 offers in the first couple of days after listing. More than 90% of all my purchases this year have been cash deals and I am still getting rejections in some cases even when we are coming in with full price cash offers.

Well, my friends, the cat is now out of the bag. Everyone now knows that Las Vegas real estate is cheap. Homes are well below replacement costs as the average foreclosed home is selling for around $78 a square foot. I just closed this week on a 2221 square foot home for $117,000 or $52 a square foot. It took nearly a month to negotiate this one down. Homes and condos are 50-75% off their highs and people are buying everything in sight. The good old days are back again. And, for the record, even if I am off slightly in my evaluation and we drop another 10% or so, it is still the best time to be buying real estate in Las Vegas. We have historically low interest rates of around 5%, great government incentives, especially for first time buyers with the $8,000 chameleon-like tax credit, and new lower comparable sales to justify banks accepting your lowball offers.

So if we have hit the bottom…as I suggest…how long will we be here? Will the market spike up or slowly trudge along the bottom until the economy as a whole begins to recover? I will explore those thoughts in more detail in my next article.

Does the Rise in February Sales Mean the Bottom is Near?

Home sales soared nationwide in February leading many market analysts to wonder if the bottom has finally come for the distressed U.S. housing market. But it is important to note that sales also rose in December and September without a bottom arriving. Another important factor to consider is that even as home sales have risen, median home prices have continued to fall nationwide.

Steve Bottfeld, a real estate analyst with Marketing Solutions presented at our Real Estate Insider Club of Las Vegas last year and outlined a three point test 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 sales data. (Sales rose in February.) Lastly, he considers the average median price of homes in the market...which, as of February, is still descending.

Bottfeld stated last year that the hold out factor in the data for the Las Vegas housing market was the median home price...and that appears to continue to be the case, not just in Las Vegas, but across the country as well. As soon as we see the median home price stabilize, according to Bottfeld, we will have found the true bottom of the market.

So what does all of this mean for us property investors looking to add to our portfolios? Should we hold off on purchasing property until the market reaches an identifiable bottom?

I think that the answer is a resounding “NO.” The key element to consider when purchasing investment real estate in a stagnate or declining market is cash flow. Cash flow is king. As long as an investment property cash flows at the time that you buy it, you will not have to count on appreciation to make your deal worth while. The property will continue to provide you with monthly income even if the value dips slightly before a bottom is reached. Any appreciation you do incur will be a bonus.

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.