Supply Side of the Las Vegas Real Estate Market
New homes are only being built right now because the market had an artificially low amount of homes for sale (available inventory). Over the past 2 years now you have heard people talking about their homes appreciating 30% a year! These are crazy numbers we have not heard since the bubble era. This artificial shortage was caused by AB284 which is an assembly bill that went into affect Oct 1, 2011. Prior to Oct 1, 2011 we were still in a buyer's market and we had about 14,000 homes for sale with about 5,000 REO's (foreclosures) hitting the market each month. After Oct 1, 2011 we started seeing a major decrease in foreclosures with only about 500 REO's hitting the market each month. With more regulations and potential fines hanging over the bank/lien holders' heads they opt to stop foreclosing. This changed the market and the inventory began to decrease month after month. In early 2013 we reach the 3,000 mark of available homes for sale and were in a HOT seller's market. With homes becoming so hard to find and bidding wars running up prices, new home builders began to jump in and slap up new neighborhoods again. The problem here is that they are adding to the supply side of the market because the inventory is so low, BUT the inventory is not low because of a free market with free supply and demand. It is ARTIFICIALLY low because of laws like AB284. Legislators amended AB284 by changing the "personal knowledge" clause in AB300. This should have allowed banks to start foreclosing again but at the same time they amended AB300 they amended SB321 "The Homeowner Bill of Rights". This change that went into affect Oct 1, 2013 (a few weeks ago). This SB321 set up new hurdles for banks to jump over in order to foreclose on the property so we are not expecting foreclosures to really increase in Vegas until later in the year in 2014. However, Sept 2013 had a spike of NOD's (Notice of Defaults which is the beginning of the foreclosure process) filed prior to the Oct 1st deadline.
SB321 also has a big change in regards to short sales. Before Oct 1st, 2013 banks would require the short seller and buyer to sign an "Arm's Length Transaction" disclosure. This was to ensure the bank that the seller was not short selling the home to a friend or family member that was going to let them rent it back or buy it back. SB321 has now made it illegal to require an "Arm's Length Transaction" disclosure, so now people can short sell their home to a family member or friend. (the bank still has to "Approve" the short sale though). Hopefully, this helps some of the default homeowners.
Another notable statistic is that even though the REO's stopped hitting the market after AB284, it doesn't mean that the home owners are not in default. We have over 80,000+ home owners in default that are not paying their mortgage and we have about 40,000 homes that are vacant. Eventually, these homes will hit the market one way or another. And when they do it will drastically increase the supply side of the market.
Since April of 2013 inventory has been on the rise week after week because of the decrease in demand explained below. We are now around 8,000 available homes for sale and we are on track to hit 10,000 by the end of the year. If this happens (which I am fully confident it will) we will then see the market shift from a seller's market to a buyer's market in 2014.
Demand Side of the Las Vegas Real Estate Market
Demand at that time was also VERY high due to hedge funds that moved into Vegas and started buying up everything they could get there hands on with cash. Often times paying above appraisal value and out bidding the little investors and owner occupant buyers. Hedge funds were interested in the great CAP rates these rental properties would provide. You could easily get 12% on your money annually AFTER expenses. Now that prices have risen and these CAP rates have dropped to around 5% the hedge funds are either holding the rentals they have for long term cash flow and no longer buying new rentals or they are realizing their properties have gone up around 30+% and are cashing out their profits and adding to the supply side of the market. This has in turn caused demand to decrease and at the same time added to the supply side.
In 2014, if the market shifts to a buyer's market you will see more homes than buyers and at that time buyers will begin to low ball again. When that happens you will see desperate sellers accepting these low offers which will in turn lower home values. Since you can buy more sqft for your money in a resale right now vs a new home, when the resale values drops it will force the new home prices to drop in order to remain competitive. For example if you pay $200k for a resale, that same home brand new will be priced around $220k. If the resale values drop to $180k no one will buy the new home for $220k so the builder must drop their prices to compete. AND the buyers that bought the home for $220k can now only resell for $180k. You can already start to see the home builders beginning to squirm as they are now offering -$15k towards down payment - Builder will pay your closing costs -Special low rates if you use their lender etc. Keep any eye out for price reductions on new home communities soon! People are not going to be very happy when their neighbor buys the same home for thousands less. It happened before when the market crashed and it will happen again. I am not saying the market is going to crash but it is going to soften.
What should I do if I want to buy NOW?
BUY SMART! This is the best advise we can give any buyers right now. I am not saying you should not buy right now. In fact, I have a SFR in escrow right now that I am buying. BUT you have to buy smart. Account for the market to soften. DO NOT be a buyer that is saying to themselves, "Prices went up 30% last year. It will go up 30% in 2014 too." Because it won't. Do not over pay for a property. If you can find a good deal under appraisal value then jump on it! But don't pay over appraisal value and then regret it next year. If you can be patient there are good deals to be had still. As you wait better deals will present themselves as the market softens. I would go after resales that do not have any offers on them and offer less than the comparables. Most people do not realize the market is softening yet so you will have to submit several offers to get one accepted below appraisal value but some listings are sitting and dropping their list price. Those are the properties you want to go after.
Thank you for taking time to read our October 17, 2013 market update. We hope it was helpful and informative.
New homes are only being built right now because the market had an artificially low amount of homes for sale (available inventory). Over the past 2 years now you have heard people talking about their homes appreciating 30% a year! These are crazy numbers we have not heard since the bubble era. This artificial shortage was caused by AB284 which is an assembly bill that went into affect Oct 1, 2011. Prior to Oct 1, 2011 we were still in a buyer's market and we had about 14,000 homes for sale with about 5,000 REO's (foreclosures) hitting the market each month. After Oct 1, 2011 we started seeing a major decrease in foreclosures with only about 500 REO's hitting the market each month. With more regulations and potential fines hanging over the bank/lien holders' heads they opt to stop foreclosing. This changed the market and the inventory began to decrease month after month. In early 2013 we reach the 3,000 mark of available homes for sale and were in a HOT seller's market. With homes becoming so hard to find and bidding wars running up prices, new home builders began to jump in and slap up new neighborhoods again. The problem here is that they are adding to the supply side of the market because the inventory is so low, BUT the inventory is not low because of a free market with free supply and demand. It is ARTIFICIALLY low because of laws like AB284. Legislators amended AB284 by changing the "personal knowledge" clause in AB300. This should have allowed banks to start foreclosing again but at the same time they amended AB300 they amended SB321 "The Homeowner Bill of Rights". This change that went into affect Oct 1, 2013 (a few weeks ago). This SB321 set up new hurdles for banks to jump over in order to foreclose on the property so we are not expecting foreclosures to really increase in Vegas until later in the year in 2014. However, Sept 2013 had a spike of NOD's (Notice of Defaults which is the beginning of the foreclosure process) filed prior to the Oct 1st deadline.
SB321 also has a big change in regards to short sales. Before Oct 1st, 2013 banks would require the short seller and buyer to sign an "Arm's Length Transaction" disclosure. This was to ensure the bank that the seller was not short selling the home to a friend or family member that was going to let them rent it back or buy it back. SB321 has now made it illegal to require an "Arm's Length Transaction" disclosure, so now people can short sell their home to a family member or friend. (the bank still has to "Approve" the short sale though). Hopefully, this helps some of the default homeowners.
Another notable statistic is that even though the REO's stopped hitting the market after AB284, it doesn't mean that the home owners are not in default. We have over 80,000+ home owners in default that are not paying their mortgage and we have about 40,000 homes that are vacant. Eventually, these homes will hit the market one way or another. And when they do it will drastically increase the supply side of the market.
Since April of 2013 inventory has been on the rise week after week because of the decrease in demand explained below. We are now around 8,000 available homes for sale and we are on track to hit 10,000 by the end of the year. If this happens (which I am fully confident it will) we will then see the market shift from a seller's market to a buyer's market in 2014.
Demand Side of the Las Vegas Real Estate Market
Demand at that time was also VERY high due to hedge funds that moved into Vegas and started buying up everything they could get there hands on with cash. Often times paying above appraisal value and out bidding the little investors and owner occupant buyers. Hedge funds were interested in the great CAP rates these rental properties would provide. You could easily get 12% on your money annually AFTER expenses. Now that prices have risen and these CAP rates have dropped to around 5% the hedge funds are either holding the rentals they have for long term cash flow and no longer buying new rentals or they are realizing their properties have gone up around 30+% and are cashing out their profits and adding to the supply side of the market. This has in turn caused demand to decrease and at the same time added to the supply side.
In 2014, if the market shifts to a buyer's market you will see more homes than buyers and at that time buyers will begin to low ball again. When that happens you will see desperate sellers accepting these low offers which will in turn lower home values. Since you can buy more sqft for your money in a resale right now vs a new home, when the resale values drops it will force the new home prices to drop in order to remain competitive. For example if you pay $200k for a resale, that same home brand new will be priced around $220k. If the resale values drop to $180k no one will buy the new home for $220k so the builder must drop their prices to compete. AND the buyers that bought the home for $220k can now only resell for $180k. You can already start to see the home builders beginning to squirm as they are now offering -$15k towards down payment - Builder will pay your closing costs -Special low rates if you use their lender etc. Keep any eye out for price reductions on new home communities soon! People are not going to be very happy when their neighbor buys the same home for thousands less. It happened before when the market crashed and it will happen again. I am not saying the market is going to crash but it is going to soften.
What should I do if I want to buy NOW?
BUY SMART! This is the best advise we can give any buyers right now. I am not saying you should not buy right now. In fact, I have a SFR in escrow right now that I am buying. BUT you have to buy smart. Account for the market to soften. DO NOT be a buyer that is saying to themselves, "Prices went up 30% last year. It will go up 30% in 2014 too." Because it won't. Do not over pay for a property. If you can find a good deal under appraisal value then jump on it! But don't pay over appraisal value and then regret it next year. If you can be patient there are good deals to be had still. As you wait better deals will present themselves as the market softens. I would go after resales that do not have any offers on them and offer less than the comparables. Most people do not realize the market is softening yet so you will have to submit several offers to get one accepted below appraisal value but some listings are sitting and dropping their list price. Those are the properties you want to go after.
Thank you for taking time to read our October 17, 2013 market update. We hope it was helpful and informative.
