Foreclosure inventory bolsters sales of existing homes

Feb. 21, 2010
Copyright © Las Vegas Review-Journal

REAL ESTATE: Home prices down in all ZIP codes in 2009

Foreclosure inventory bolsters sales of existing homes

By HUBBLE SMITH
LAS VEGAS REVIEW-JOURNAL

From affluent suburbs to inner-city neighborhoods, no part of Las Vegas was left unscathed by the precipitous drop in home values last year.
Some suffered more than others, but everybody lost ground.
Overall, the 12-month median price for an existing home in Las Vegas fell 38 percent in 2009 to $128,108, the firm reported. The average ZIP code drop was 23 percent and prices have fallen just 4 percent since April, bouncing between $125,000 and $120,000.
I think we're tremendously undervalued right now," SalesTraq President Larry Murphy said. "One reason I say that is because you can't replicate a home today for what you can buy it for. Nobody's going to build a home if they can't get their money out of it. That's why nobody's building.
New-home sales in Las Vegas hit a 24-year low in 2009 with 5,184 closings, a 48 percent decrease from the previous year. Residential building permits fell 32 percent to 3,766, SalesTraq reported.
Anyone who looks at a graph of where existing-home prices have gone in Las Vegas over the past 10 years can see how the market might be construed as undervalued, Murphy said. Prices peaked at $285,000 in 2006 and then dropped to $120,000 in August.

Again, intuitively, if you look at this graph, a 10-year history of prices, you tell me if something in your gut doesn't tell you it's undervalued today," he said. "But I could be wrong. We all missed obvious signs of the bubble itself and I'm at the center of it.

Somebody must see value. Sales of existing homes jumped 57 percent to 48,075 in 2009, much of it investor-driven by deals on foreclosed homes. About three-fourths of the sales were foreclosures with a median price around $116,000 and roughly 40 percent were cash transactions.

That's another reason Murphy says homes are undervalued. Cash flow on rental homes is strongly positive, he said. A savings account or certificate of deposit on $150,000 might yield $1,500 a year, or $125 a month. Buying a house for $150,000 and renting it for $1,000 a month brings in $12,000 a year.

True, there are maintenance costs and property taxes on the rental home, but $1,500 versus $12,000: "Which do you prefer?" Murphy asked. In the 1980s, investors were happy to break even on a rental home while deducting interest and taxes, he said. Maybe they'd make a decent profit if they held it for four or five years and then sold.
Realtor Rob Jenson said home prices are "unbelievably low." Many homes are selling for well below replacement costs in all sectors of the market.
Pricing bottoms are clear when looking at sales in specific neighborhoods, Jenson said. He sold two homes in January in The Ridges at the edge of Red Rock Canyon for $500 a square foot.
"When I look at comps (comparable sales), I look at a price that will move," he said. "One of the homes was $1 million and the other was $900,000. When I met with them, I told the million-dollar homeowner we might get $700,000 and the $900,000 home, not as upgraded, might get $650,000.
"Prices aren't coming down, they're already down and sellers are in denial. It's very hard for a seller to be objective about the price of their home because it's their last chance to get something back on their investment. Either sell it, rent it or take it off the market," Jenson said.
Murphy thinks 2010 will be much like 2006 when home prices ended the year about where they started. The median will fluctuate between $120,000 and $125,000 this year, equal to price levels of 10 years ago, he said.
Marta Borsanyi, principal of Newport Beach, Calif.-based Concord Group, said housing prices are bottoming out in Las Vegas, but a full recovery in the housing market won't occur until first quarter 2012. She defines full recovery as three to four new-home sales a month in each new subdivision and low
REO rates in Las Vegas and Phoenix continued their upward trend, albeit at a slower rate, with 17.4 and 12.2 REOs, respectively, per 1,000 properties.
Banks foreclosed on about 26,000 homes in Las Vegas last year, and Murphy is predicting the same amount this year. The top foreclosure ZIP code was 89131 in northwest Las Vegas with 1,167 homes taken back by the bank.
Although some experts have been predicting a second wave of foreclosures for more than a year, Murphy is sticking by his 26,000 estimate.
"I don't disagree that we'll see more people get notices (of default) than last year, but the outcome will be different," the local housing analyst said.

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