April 14th, 2011
Guest Author: Keith Jurow, a nationally known real estate expert, who has launched a paid subscription real estate newsletter service at Minyanville. The newsletter will be published twice-monthly and contain comprehensive national data on residential real estate and include actionable items for investors, home buyers and sellers. This article is an excerpt from the first issue of the newsletter.
The Greater Las Vegas housing market is perhaps ground zero for the housing bubble and collapse. In 2003-2004, speculators swarmed there like locusts looking to make easy in what was becoming the hottest market in the nation. Follow up:
According to a little-known 2005 study by CoreLogic, flippers were playing a major role in the Las Vegas market as early as 1999. Take a good look at this revealing chart from that study.
Notice that in 2004, more than 40% of all sales in Clark County (where Las Vegas is situated) were by flippers who had bought the property within the previous two years. Two other charts from the study showed that nearly 20% of all sales were properties which had been purchased by flippers within the previous six months.
Although the median sale price of homes rose an incredible 40% in 2004, warning signs started to appear in early 2005 when the percentage of six-month flips began to decline. The market was beginning to run out of buyers at those elevated prices and speculators started to dump condos and single-family homes onto the market. One flipper interviewed for the CNNMoney article had sold five of his seven properties by the spring of 2005. The reason was that he was seeing the same investors at each new development site. This convinced him that the bottom was about to fall out of the market.
Although median prices continued to rise nearly 20% in 2005, that statistic hid the fact that inventory on the market was soaring and that thousands of speculators were trying to cash out before it was too late. By the spring of 2006, sales volume started to plunge and the market has never recovered. The chart below from mortgagedataweb.com shows what happened to prices and sales volume.
This chart needs to be explained. To read it correctly, you must understand that it captures only sales which were financed with a . I learned this when I checked with a reliable source at mortgagedataweb. While the chart gives us a good picture of what has occurred in Las Vegas, it does not portray the entire story.
The median sales price and sales volume numbers in the chart exclude all the low-end properties bought as all-cash deals because no mortgage was involved in these transactions. So keep this in mind as you review the chart.
What Is Really Going on in Las Vegas?
To truly understand the Las Vegas market, it is necessary to dig beneath sales volume and median price figures. What I found is that the housing market has been kept from collapsing by investors purchasing most of the low-end distressed properties with cash. The Greater Las Vegas Association of Realtors (GLVAR) reported that in January of this year an incredible 51% of all resales were bought with all cash. They pointed out that this percentage had been rising steadily for a year.
Cash buyers have been focusing on the thousands of bank REO properties and short sales hitting the market each month. The website dqnews.com is a widely read and highly regarded source of data for major housing markets. They reported that 56% of all December sales were bank-owned or bank-serviced foreclosures. It was the third straight month that this percentage had risen.
These foreclosed properties were overwhelmingly sold at prices substantially below the median price level and roughly 36% were under $100,000. Also, the GLVAR reported that more than 26% of purchases in January were short sales. Taking these two reports together, only one out of four purchases is what we might call a normal sale.
This enormous appetite of cash buyers for could not prevent the median sale price for single-family detached houses from dropping to $72 per square foot in December. That figure was at the lowest level since November 1996.
Although the median price of $130,000 for single-family homes in December was only 4% lower than a year earlier, it was $5,000 lower than the previous month. Back in June 2006, the median sale price had peaked at $312,000. That is an incredible collapse.
The median price for condos in December was down a whopping 14% from the previous year to $62,700. Why? It was partly due to the supply, but largely because it is much harder for investors to find tenants for a condo than for a detached house. Most homeowners who have lost their property to foreclosure or a short sale prefer to rent a house, not a condo.
Is It Time to Leap Into the Las Vegas Market?
With median prices having plunged so far since mid-2006, many investors are probably thinking that now may be a good time to invest in one or more properties in Las Vegas. Surely we must be near the bottom.
It isn’t really that simple. In order to make an informed decision, you need to have a good sense of what is coming down the pike. To do that, it is essential to consider the so-called “shadow inventory.” As I’ve written in a previous Minyanville article (see ), this shadow inventory is very real and extremely important.
In Clark County (where Las Vegas is situated), nearly 33,000 first liens were seriously delinquent by 90 days or more at the end of the third quarter of 2010. An additional 32,000+ properties had been placed into default by the banks but had not yet been foreclosed. That is a total of more than 65,000 properties which are almost certainly going to be thrown onto the market as either foreclosures or short sales -- 18.1% of all properties with first liens.
Let’s not forget to add in all the bank-owned properties. Most of them are not currently on the MLS active listings. It is not easy to determine the full count of bank-owned properties since the banks don’t like to publicize that number. The website foreclosure.com, listed a total of 15,486 foreclosed properties for Clark County on February 20 of this year. Adding this number to all those not yet foreclosed gives us a total of more than 80,000 distressed properties that will be hitting the market in the next few years.
Do you think the Las Vegas housing market can absorb that many properties without a further decline in prices? No way. Keep in mind that only 3,214 existing single-family homes, condos and townhouses were sold in January according to GLVAR. To clear so many distressed houses not yet on the market will require prices to drop.
What’s more, as I mentioned earlier, all-cash investors have kept prices from completely collapsing. Who are these investors? In mid-November, I talked with Glenn Plantone, a , investor and major player in the Las Vegas market. He stated that he had a database of roughly 2,000 investors thinking of buying. More than 90% of his investor deals were with all-cash buyers. Roughly half of them were from other countries. Many were from Canada and a considerable number from India. He told me that the American investors were looking for a better return on their money.
His focus was on distressed properties. Because investors had run up the prices of low-end foreclosures, he had shifted into more short sales. His strategy was to buy distressed properties, do light rehabilitation, and then resell them to eager all-cash investors. Before he sells the property, he brings in a tenant under a lease/option-to-buy arrangement. Many had lost their own home through foreclosure or short sale. He explained that they willingly paid several thousand dollars for the option because it was credited toward the purchase price if they decided to buy. The tenant was also willing to pay an above-market because a few hundred dollars would also be credited each month to the purchase price if they bought the house.
Now you may be wondering that if it is possible to and find tenants willing to pay above-market rents, why not do this? That is a good question.
It is not too difficult to locate a decent house to buy in Greater Las Vegas for $100,000 to $150,000 if you do some careful searching. Foreclosed properties under $100,000 are also plentiful. But you certainly want to avoid the trustee sales on the courthouse steps where you would end up bidding against other investors. That’s not smart.
The important question is whether you can find a quality tenant in a reasonably short time. And what kind of rent will your property command? Be very careful talking to brokers or property managers with the hope of getting accurate market data. They are not an unbiased source of information. So where can you turn to get reliable numbers?
Before deciding whether a single-family house or condo makes sense as an investment for you, it is imperative to examine comparable properties which actually leased within the last three months.
I’ve done some digging and discovered that you can make use of Las Vegas realtor Renee Burrows’ terrific search tool on her website. Just and press #8 to search for house rentals that have recently-signed leases. You can then input whatever parameters you want to look at including geographical area and the date on which a signed lease was closed on a property. You will learn both the listed rental amount asked by the owner and the actual amount agreed to by the tenant. I tried the search tool and it works great. She also has some good statistics and charts.
After obtaining this up-to-date rental market information, you can then put pencil to paper and use conservative rent, vacancy and expense estimates. Make sure that the on the property will be positive.
Advice for Investors
If you are comfortable with the scenario I’ve been painting for the Las Vegas housing market and the likelihood that prices could decline 10% or more in the next year, then do your due diligence work. Run a cash flow analysis with the tools I’ve provided. If you want to make an offer on a property, I suggest that you go in with a low-ball bid. Here’s why.
I had been closely following a decent foreclosure property in New Haven, Connecticut offered by HUD. The price had been lowered to $98,000 in August 2010. I lost interest in the property but then recently learned that it had been sold in October for $55,000. Some smart buyer went in with a low-ball bid and guess what -- HUD said okay. Fannie Mae, Freddie Mac and mortgage servicing banks might do the same.
However, if you’re likely to toss and turn worrying about how low prices might go, here is my advice. Sit tight for now. Wait about 12 months and see whether the huge shadow inventory has been whittled down. You can then revisit the situation and decide whether it is finally time to invest in Las Vegas. I will be updating the Las Vegas market.