Developer Services Blog

Incentives in Commercial Real Estate

2010-09-02T09:13:10-07:00

National commercial real estate trends continue to reflect weakness. Housingwire.com (Gaffney, 8/26/10) notes that 88 percent of respondents to a development survey stated that development was almost non-existent in their markets. Such is the case here in Las Vegas as well and while there is still some construction in office, retail and industrial, there is almost no planned product and no planned product that we are aware of in industrial.

Similarly, on REIT.com, Green Street Advisors analyst Steven Frankel also notes weakness in the industrial sector with "subdued net absorption." Rents are also expected to remain weak. A rebound may be a way's off. This is also the sentiment of many in the Las Vegas market. While Las Vegas' industrial market is very small compared to coastal cities, it is an important component of our economy and is very connected to the hotel & casino sector, since that is the key driver of activity in the region and since industrial space is often absorbed or vacated depending on the level of convention activity, slot machine manufacturing, food storage and whatever else you can think of. Until we see a stronger rebound in the hotel sector, we can expect some muted responses in net absorption.

Nevertheless, there has been leasing activity, often to lower occupancy costs by existing firms. There have also been investor deals. As always, as long as things are priced right, buildings can still sell. It has just been difficult to obtain a meeting of the minds between buyers and sellers, whose expectations about the future of the sector has been a wide chasm.

Overall, tenants are the ones who have been finding deals, sometimes within sublease space and have been able to drop their costs by substantial amounts by either finding cheaper space or smaller space that better suits the level of their current business activity.

More on Repeat Sales Indices

2010-08-09T17:17:11-07:00

We have a bit of a fascination with real estate price indices. This is simply because of the disparity in different measurements. At Market IQ, we tend not to like average prices since averages are sensitive to outliers. However, when we go out with buyers and look for homes, we tend to "feel" the average more than any other number so it does have its utility in describing the market. Medians are useful but imperfect as well since like averages, they are affected by the changing mix of home sold in each sample period, such as size, age, finish level, location.

We find repeat sales measures to be more realistic in explaining the trend since median prices have masked a lot of the same home price changes, especially as builders began making smaller homes on very compact lots. These are indices however so they are a little esoteric for folks who are not numbers junkies. In addition, Morgan Stanley has noted that an increase in the prevalence of short sales, which we find to sell for higher prices than bank owned homes, are causing the Case-Shiller, RPX and Morgan Stanley's own index to jump so severely in some metros that it just didn't seem realistic. The Morgan Stanley analysts question the validity of these measures for looking at national trends (from housingwire).

The Las Vegas area has had enough REO (bank owned) activity to keep pressure down on the indices so we never noticed anything as severe as the changes in the San Francisco trends, for example. I am considering building a "constant quality" index that will attempt to control for whether or not the sale was a short sale, REO or equity seller.

CoStar has also developed repeat sales indices for Commercial real estate. This is a very welcome development and I am glad CoStar has taken this mission since it is certainly not easy work. Previously, we had noted the Moodys/REAL Commercial Property Price Index and it is nice to have an alternative to check against. These indices tend to be a little bit too regionally broad for our local use since our CRE is so related to the gaming industry rather than international trade or manufacturing, however, institutional investors might find this useful.

Source: CoStar.

Sources:

http://www.housingwire.com/2010/08/04/for-investors-sake-morgan-stanley-questions-power-of-home-price-indices

http://www.costar.com/about/article.aspx?id=7719

Top Cities for Absentee Buyers

2010-07-09T12:02:35-07:00

On this blog we have discussed several times about the amount of investors absorbing inventory in our market. We've bought a lot of homes for investors in the past year but it has really piled up in the past few months. Many of these properties obtain solid returns, especially among older properties which are often getting 8-14% ces. It is difficult to find these returns in any asset class in today's world. Inman News has a great article on this phenomenon in Las Vegas and elsewhere.

http://www.inman.com/buyers-sellers/columnists/stevebergsman/top-cities-absentee-buyers

Contingent and Pending Activity

2010-06-07T08:40:00-07:00

Everyone has been curious about the impact of the tax credit on sales. We are seeing a dip but no cliff diving. We have expected that some demand would be pulled forward from the latter months of 2010. Since about half of our market has been investor sales that are not qualified for the credit, the effect may be muted more in Las Vegas than in other areas. The ultimate effect on sales post tax credit may end up being a popular question but with an academic answer. It is going to be hard to disentangle. So far continued low mortage interest rates have kept some in the game. Other macroeconomic factors may trickle down in some form to local housing sales and a lot of this may be mistakenly tagged to the expiration of the tax credit. We know that the expiration will have an effect but by how much is hard to estimate.

Here are the contingent and pending numbers up to May. Don't forget, a lot of the contingents are based on a short sale approval, so many of these will not convert to closings anytime soon.

Single Family Home Sales
.
Source: Mlxchange.

Housing Derivatives

2010-06-02T09:09:46-07:00

It is very common in the United States and elsewhere to use markets to hedge risk. Farmers, who are long whatever they grow, often sell futures on those same products. That way if prices slide by the time they harvest and bring to market, they have already sold at the higher price if a price decline indeed occured.

I have been surprised that in the United States that futures products like the S&P/Case-Shiller are still thinly traded on the Chicago Mercantile Exchange. Property derivatives are much more popular in the UK. After all of the misery associated with poor risk management in the past couple of years you would think interest would increase. Nationally, home prices may still have some slack towards the downside, although I think bubble areas like Phoenix and Las Vegas are already trading at discounts because they fell faster (with annual rent/sale price ratios higher than 10). Commercial appears to have even more slack and needs to reset lower. Right now some sellers are trying to price in a recovery, but it will take at least several years to fill the vacant existing space. You really shouldn't see price increases in a widespread condition for some time. Having an efficient method to hedge these risks would be great.

REIT magazine recently interviewed Robert Shiller about some of these concepts. Its a quick read and worthwile. Please click to find it.

Pricing Update, Case-Shiller & RPX

2010-05-27T14:04:00-07:00

Recently the Case-Shiller numbers for March were released. The low-tier index (under $125,000) continues to be show an apparent improvement. The middle-tier ($125,000 to $192,000) and the high-tier (over $192,000) continues to be flat or slightly downward bias. The Radar Logic RPX demonstrates a similar pattern. Median indices, which we can calculate more currently, demonstrate continued flattening.

Who knows how much of this was market held up by the tax credit that expired in April. In the Las Vegas market, we have had so many investors purchasing that they don't really factor in to the tax credit portion unless they planned to flip. Thirty-six percent of the MLS single family sales from January to April were closed with cash. Another twenty-four percent was conventionally financed, which requires a higher downpayment than FHA loans. FHA composed 31% o the financing on sales so that is really the proportion that may have needed the tax credit carrot to make their deals make sense. It may be a while to see the effects of the tax credit and it will also be hard to disentangle. Anecdotally, we are personally seeing even greater investor traffic, especially from foreign buyers. This may offset the weaker demand from the tax credit type buyers. In addition, banks have never released as many REO's as they said they would. Anyhow its hard to ignore 1990's pricing and often 10+ cap rates on rentals.

Source: Standard & Poors.

Economic Indicators

2010-04-08T09:41:00-07:00

This post dovetails off of a Wall Street Journal article printed today called "New Ways to Read Economy." I've seen the diesel fuel sales and the counting of train passengers but I think one of the neatest indicators (or at least a gauge of interest) is Google Trends, which shows trends in visitor traffic by search term.

Here are some examples.

You can see that the housing tax credit is still on an upward trend, though spikes occur around news releases.

The search for Las Vegas hotels has jumped substantially from the latter months of 2009 and then leveled off. The vertical jump in December was most likely a result of CityCenter's debut, although it looks like there is some sustained interest.

Short sales are the new big concept following a couple years of "REO" dominating housing headlines. A lot of people want to know how to short sell a home.

Luckily, for all of those short sellers out there (of homes, not stock), there are homebuyers too. I used the term, "how to buy a house" because I thought that's what a first-time buyer would type in. It's a clear upward trend with some seasonality evident. Searches jump in the beginning of the year and taper off towards the end. 2009 was a little different, with a peak in the middle of the year. That's about the time we experienced really good sales in Las Vegas and an end to the big price declines.

Expansion in REIT values expected

2010-03-12T09:01:14-07:00

Ernst & Young recently released its Global Real Estate Investment Trust Report 2010: Against all odds. For U.S REITs, the report notes several key components that factor into their outlook. Firstly, after a horrible 2008 and a choppy 2009, REITs have been able to raise significant capital, mostly through the sale of shares. Another aspect of this sector is deleveraging, although many REITs still have significant debt. I would guess that many of these REITs will have to pay down some more of this debt before they can't begin aquiring more property.

Ernst & Young believes that in the 1990's commercial real estate had an excess supply problem. That is, myopic builders overestimated demand for commercial properties and way to much space was available based on current demand. In the current period, demand simply evaporated, causing an exodus. We saw this in our local market, Las Vegas as well. Not long ago we had record low vacancies in industrial and retail, almost to the point where only the obsolete space was left (one could argue that office was overbuilt). Now we have high vacancies in each main sector, office, retail and industrial. Ernst & Young believes that with a rebound in the U.S economy, absorption should be absorbed quickly. I think it will take a fairly broad national recovery before we see significant absorption in the Las Vegas Valley.

The next big feature of REITs today is the targeting of distressed assets, although some companies have been hesitant to purchase other firms with "legacy" issues like large debt obligations. In addition, banks have been slow to write-down values and dispossess themselves of commercial assets. Its not always that they don't want to, it is that they just can't. it will hammer their ratios too much and they need to raise capital to offset the loss. Nevertheless, M & A activity may increase as another avenue to acquire assets, along the lines of Simon Property Group's attempt to acquire General Growth Properities.

It's not all about distressed assets however, as performing properties are sought as well. Even these appear to be on sale, especially by foreign investors as noted by Reuters:

We see a pretty significant amount of interest by foreign capital into US real estate -- not necessarily foreign REITs, but private equity, sovereign wealth funds," Roth said. "There is a general belief that after the significant decline in values that now is the time if you have capital to (chase) risk-adjusted returns." (Reuters: Global REIT values to grow in 2010-Ernst & Young, March 2010).

So far in Q1, we've seen a lot of genuine interest in assets in the Las Vegas Valley, not so much by REITs (although General Growth has a lot of exposure here) but by foriegn investors big and small, as well as by hedge funds and schooled, large investors raising money in private channels. If Q1 is any indicator for the rest of 2010, its going to be an interesting year.

For the Ernst & Young Report Click Here

For the Reuters article Click Here

Fundamental Values

2010-03-01T11:46:55-07:00

We've discussed trends in median prices and Case-Shiller as well as IHS Global Insight's view that Las Vegas is the most undervalued large metro area but fundamentally, where are Las Vegas home prices? While fundamental values are unobservable, we can use proxy indicators such as the price-to-rent ratio. One can think of this like a price/dividend ratio in stocks.

As the exhibit below demonstrates, the recent price/rent ratio is far below the baseline, which we've established based on the 2001-2002 years before the ridiculous run-up in prices. We have experienced severe declines in prices, driving the ratio down. The mechanism of the market can bring this ratio back into line by a combination of rent and price adjustments, which we are seeing now. Rents appear to be declining due to the amount of available inventory as well as weak employment and diminished household formation. However, rental prices have been quite sticky. Home prices have not been sticky and we saw massive adjustments.

Currently we have been settling and have observed median prices bounce between positive and negative on a month-to-month basis. Based on the price/rent measure, it is reasonable to expect that when employment rebounds and in-migration resumes with force, we will again see home price appreciation and a return to fundamental values. When could this happen? Thats difficult to say. When prices were above our measures of fundamental values it was pretty easy to make a forecast. For a monthly forecast, as long as it was in the single digits and had a negative in front of it, that was a reasonable forecast. Now that prices are undervalued but you still have underlying economic weakness, its difficult to forecast. Monthly forecasts have not been what our investors are looking for however. A typical strategy (not by flippers of course) is to hold with the expectation that you will own it for at least five years. What do you think will happen in five years? Ask yourself that, frame it in the context of your risk tolerances and carry costs and take a look at some of the residential assets in the market today. It might be very worthwile.

For a slightly academic discussion of price-rent ratios Click Here.

Source: Mlxchange, Coldwell Banker Premier Realty.

S&P/Case-Shiller Update

2010-02-26T00:00:00-07:00

The S&P/Case-Shiller home price index came out this morning. Unfortunately it is so popular that the site crashes and I have just obtained the data. We do observe seasonality in prices in Las Vegas so I like to use the seasonally adjusted indices. Interestingly, the most current observation, December 2009, registered a month-to-month increase in all price tiers. A positive change has occurred for both November and December. Was this a purely organic increase? Probably not. The tax credit has been a relevant motivator of purchases and we have probably brought some demand forward. Nevertheless, pricing has appeared to reach an inflection point away from declines. This is encouraging, even if we do skip along a bottom characterized by positive and negative month-to-month changes.

As we have noted before, there are several encouraging characteristics of today's market that point to a good time to purchase homes. The tax credit does provide a lot of folks the necessary financial buffer to make the downpayment outlay hurt less. Yes, you fork out some cash now but if you are qualified you get a check in several months. Further, the tax credit buffers any posible price declines. If you buy a $120,000 home, that home could decline in price by 6% a are still net positive. But that is not a reason to buy but is an offset in risk. There are other reasons to buy. Mortgage rates are low, however many mortgage market observers are predicting rates to increase, especially after the completion of the Fed's program of purchasing mortgage backed securities (if they spiked prices could decrease, however a massive spike is unlikely). Go with what you know and not with what you hope. You know rates are historically low so wishing for lower rates is probably going to lead to disapointment.

In addition, you can often buy cheaper than you can rent. The decision to buy may not be a consideration for everyone since some households are still in a transitory position, unclear of their job prospects or where they would like to spend a significant portion of their lives. But for households that choose to make Las Vegas their home for a longer-term, purchasing may be a reasonable option.

Another feature of the Las Vegas residential market is the high returns that you can get on rental properties. Returns this high should not be sustainable and implies that sale prices are way out of wack. While we see a softening rental market, sale prices and rental prices should move to where these returns are lessened. Part of that will likely come from appreciation. Significant appreciation may not happen tomorrow or even months from now but for investors; they can get positive cash flow, then appreciation later on. Would I tell everyone to buy a home? No, because renting make sense for some people. However, for stable households or investors, the data points to a really opportunistic time for buying. Buying this far below trend is another attribute that makes this era encouraging for home purchases.

Source: Standard & Poors.

The Fed, Inflation Expectations and Real Estate

2010-01-28T10:00:32-07:00

Recent remarks by the Federal Reserve suggest that they believe that inflation is likely to be subdued for some time. The committee stated yesterday that they will continue the target range for federal funds at 0 to ¼ percent. Naturally, since not all indicators point to a full economic rebound, the Fed has to be careful not to prematurely apply the brakes.

However not everyone in the world markets has this same view on inflation expectations. Many bond traders have the view that inflation will not be subdued in the coming years. Many observers prefer to use gold as an indicator of inflation and gold recently hit highs in several currencies, especially the dollar.

In an recent article in the Wall Street Journal, Tom Lauricella notes that investors do not believe that the Fed will be able to reverse its giant money infusion without instigating inflation. He describes that Treasury Inflation Protected Securities (TIPS) are a good measure of gauging investor’s inflation expectations. Nice readings can also be obtained from the 5yr5yr breakeven which employs the 10-year TIPS to guess about inflation 10 years hence. An excerpt from the article:

Barclays Capital's 5yr5yr measure now reads 2.9% aso on a par with levels in late 2003. Then, "these measures increased because the Fed was keeping rates low" as it's doing now, says Michael Pond, inflation market strategist at Barclays.

What's causing this? Not expectations of rapid economic growth. "Investors appear to be concerned that the Fed may not have the right tools to put quantitative easing into reverse or get the timing right," says Jeffrey Schoenfeld, co-head of fixed income at Brown Brothers Harriman.

Still a tough call on inflation and it really depends on the strength of the rebound because we do have flat or declining prices on a lot of things people use, especially housing. Further, I see hidden inflation in many products. Have you bought a candy bar or some other food goods lately? I think they’ve gotten smaller. I also notice poorer quality in a lot of stuff. I wish I could grab a caliper and measure candy bars from the same company but in age differences of 10 and 20 years. Perhaps some well stocked bomb shelters from the 80’s will have some candy bar artifacts. I’m guessing that there is a noticeable decrease in size.

Anyhow, with the sheer size of the Fed money injections, if the velocity of money does increase, I am a mild hawk on inflation. Perhaps not this year and maybe not even next year but I don’t see how this can be unraveled smoothly. That’s why I still like residential real estate and some well bought commercial properties. Just imagine having a fixed rate of 5.16% o a mortgage when inflation is 7%.

WSJ article

Case-Shiller for Las Vegas...Up

2010-01-26T18:25:15-07:00

Today the Standard & Poors Case-Shiller home price indices were released. There are always a lot of articles that come out after this release. Many are focused on year-over-year changes and few consult the seasonally adjusted figures. Further, many people don't know that Standand & Poors also calculates tiered price indices. These are homes grouped by price tiers, that way we can make even better comparisons. Like granny smith apples to granny smith apples versus comparing granny smith to Blenheim (yeah I had to look that one up). While they are all apples, each variety of apples tastes different. That's one reason I like repeat sale indices over median indices, which are less robust given the different mix of homes in each sample, often like calculating a median of apples and oranges.

I find that residential real estate prices do exhibit seasonality; therefore I think it’s appropriate to use seasonally adjusted indices. The interesting thing about the seasonally adjusted Case-Shiller indices for Las Vegas is…it confirms flattening in each price tier. In fact the October to November observations showed an increase in the low and middle tiers. After months of month-to-month declines (since 2006 and 2007 actually) you would think this would somewhat newsworthy. Further, as you can see from the trend I’ve drawn for the low-tier index, prices are deeply below trend. The trend I drew does not incorporate appreciation from the 2000’s either, even though the early 2000’s did have some organic price increases due to heavy inbound migration and a booming job market. Further, we ignore the whole bubble period; therefore my trend line is really not that generous for long-term appreciation. Nevertheless, the low-tier index appears to be 28% below trend.

Overshooting on the downside from a bubble is not a surprise since a lot of assets have exhibited this in the past. You can see the arcing in each series for the recent few months observations and that is the flatting I mentioned. Hopefully this is an inflection point and that prices will at the least remain stable (although I am curious about how the finality of the tax credit will impact prices, I’m still comfortable around the prices we’ve been seeing). Below trend can be good for several reasons. Take the reverse scenario of buying above trend. Often prices return to long run trends, implying a bad decision in purchasing above trend. Buying below trend is a lot easier case to make if you’re not emotional. Additionally, these below trend prices often result in a lower mortgage payment than rent (can be thought of like a low P/E ratio in equities). I also find it curious that folks who bought way above trend during the bubble don’t think it’s a good idea to buy now even though we are way below trend. One last note, low interest rates should not last indefinitely and this should be a factor for many potential buyers.

Source: Standard & Poors.

Seasonally Adjusted Index

Case-Shiller Update Las Vegas

2009-12-29T12:35:00-07:00

Today the Case-Shiller October numbers were released. It takes a couple months to process the data for these indices, hence the December release of October data. Importantly, the measure is confirming what we have felt at the ground level with many homes receiving multiple offers and inventory levels falling to less than four months. We have seen median prices bouncing between positive and negative month-to-month changes for several months. Now one of the most watched repeat sale measures is also demonstrating flattening.

How organic is this price leveling? Some measures we employ attempt to gauge where prices are relative to fundamental values. This includes, price/rent ratios, price/income and the amount of homes present in the Valley relative to the employed population. Employment is a wildcard, although we believe a lot of this is already baked into current prices. So should many of the vacant homes on the market and the amount of homes in default, although significant guesswork is involved. By these measures, home prices have returned to fundamental values (locally, though nationally it looks like some more room for decline). When prices are at levels that make sense, it makes it difficult to forecast. Last year, we had good predictability in house price declines. Currently thats hard to say.

The other primary ingredient in recent months has been the tax credit. This probably has served to hold up prices. Thats not a very organic component. What we need long-term is greater household formation.

Nevertheless, we see that based against the long-run, pre-bubble trend, prices are deeply, deeply below trend, embodying a serious correction and probable over-correction. There still is a potential for further house declines as information often arrives randomly and can quickly alter behavior. But many believe we will have higher interest rates staring us in the face in 2010. That implies that there is a pretty good chance that this is one of the best opportunities to seek out residential real estate, even though there are some artificial ingredients in the recipe for housing prices. The key is to buy smart and if possible below where you think the market is. Then you have a built in buffer on a downward slide or built in equity if prices flatten or bounce up.

Source: Standard & Poors.

Four CCIMs Receive Grant for GIS Innovations

2009-12-08T00:00:00-07:00

Ron Opfer, CCIM with Coldwell Banker Premier Realty was recently recognized with three others. ESRI, the CCIM Institute and the CCIM Education Foundation announced the first recipients of a $1 million grant program. Grant money will be distributed to up to 50 recipients per quarter through next summer. The first quarter recipients are:

Benjamin R. Baldwin, CCIM (Innovation) — Baldwin will design and implement a geospatial mapping and data subscription service for Socialserve.com, a North Carolina 501(c)(3) with a mission to increase access to information about affordable rental housing.
David L. Bode, CCIM (Workflow) — Bode will identify trends and forecast the impact of the potential loss of Harley-Davidson in his community with the ultimate goal of empowering individuals, businesses and community and government organizations to make informed decisions that produce stable economic growth and minimize the impact of a potential economic downturn.
Ron Opfer, CCIM (Workflow) — Opfer will develop analytical tools to help bank officials and credit risk managers analyze distressed commercial real estate, thereby providing value to their overall goals for property management and disposition.
Ben Poh, CCIM (Innovation) — Poh will improve processes for quantifying the gap between supply and predicted demand for senior housing products for different income segments by analyzing demographic data and trade areas for different product types.

Inventory Update

2009-12-01T14:39:00-07:00

Its hard to believe but another month has gone by. Reviewing the current single family inventory being marketed, we are posting about 1,800 REO homes and 3,700 short sale homes that are not under contract. Relfecting on the year so far, we have witness abrupt changes in the marketplace, from slow sales at falling prices to strong sales at leveling prices. We have observed a switch in the inventory levels from REO's dominating to short sales dominating the inventory. Inventories in both categories went cliff diving in the spring and have leveled off since this summer. We expect short sales to continue to be an increasing proportion of sales, partly a function of what is available and partly due to refined processes accellarating the approval times.

Source: Mlxchange. Coldwell Banker Premier Realty.

We are still seeing a large amount of inventory under contract. There is as many single family homes under contract as there are on the active market. Many of these are awaiting short sale approvals. Not all of the sales for November are in, so we should see an increase in sales throughout this week, however preliminary numbers indicate that sales remained strong into November. These months are traditionally slower so these figures are reassuring. Pending sales remains flat but elevated so December may enjoy above average sales as well. The ratio of homes sales to active inventory is slipping a little, but we expected that for the winter months.

Source: Mlxchange. Coldwell Banker Premier Realty.

Market Status Update

2009-11-03T11:33:00-07:00

October numbers continued to reflect the fractured housing market, where short sales continued to make up a greater proportion of the active inventory but for which the failure rate (falling out of pending or not meeting a contingecy for sale) is still high. We have essentially two different product types on the market, either REO or short sale. The mechanics of getting the deals done is distinct for each type.

REO inventories are moving quite well and in a more orderly fashion. However, valuations are still hard to peg given the multiple offer situation. Nevertheless, a high proportion of the REO properties that go under contract close. This is not so true short sales. This market is better understood as having two many parties to the transaction. Many of these transactions are not that orderly but without chaos there can be no order I suppose. Agents in our office are managing to get these deals done though, and if there was anytime where a commission is really, really an earned commission, that time is now.

The current recession has forced changes in many aspects of business and culture. I was hoping that the recession would lead to hip hop having its "grunge era" and returning to its roots on the street. I was also hoping that rock and roll would go back to some more introspective and original writing. Unfortunately those things haven't appeared. What has happened has been housing returning to its roots as a place to call home. This has been something that has made sense, where housing has returned to affordable levels (although it may be overdoing it in some home segments).

Changes in the market have also lead to some rigidities we didn't have before. Over 70% of the contingent sales on the market are still awaiting short sale approval and this can be very sticky as banks attempt to squeeze as much as they can from the seller, killing some deals.

The exhibit below shows that while much of the SFR market is tied up, the proportion that go to pendings still stays pretty flat. This implies that most of the contingent offers really are just tying up the property.

Source: Mlxchange, Coldwell Banker Premier Realty.

Where the foreclosures are

2009-11-02T09:34:00-07:00

Here is a graphic from the Las Vegas Sun showing where the foreclosures have been taking place. Foreclosures are more directly tied to high purchase prices rather than employment only since once a household is deeply upside down, especially when they owe 40% or more than the home is worth, there propensity to pay the note falls dramatically. This is irregardless of their employment situation.

The areas like Mountains Edge, Aliante and Providence were recent masterplans and naturally anything built during the 2004 to 2007 years is going to have a lot of walking away. The age of the homes is also a reason why some good buys are available in these areas. These are modern styled, recently built homes and there are several configurations to choose from. I always recommend a home inspection but there are certainly fantastic homes out there.

S & P Case Shiller Begins to Confirm Flattening

2009-10-27T14:00:00-07:00

The S & P Case Shiller numbers came out today, which reflect August numbers. This is a repeat sales index and it takes time to process the numbers. In a couple places, including our monthly real estate reports, we noted the flattening occuring in the median indices. Also, Radar Logic's index for Las Vegas demonstrated an increase in prices.

We won't say that yes, we are at a bottom until several indicators demonstrate that. One of those indicators is the Case-Shiller index. The other indicators include notices of default and trustee sales, which remain elevated. However, as we have stated in other posts, you don't need to time the bottom exactly if you frame your purchase decision within the bounds of well informed risk-reward parameters. Further, if you know the market well, you can buy smartly and find real estate that is below the market. You can think of this as built-in upside in the short-term and a buffer against a possible decline in the overall market in the longer-run.

In the Case-Shiller exhibit, you can see the index arcing towards a flattening. Additionally, the index is far, far below its long-run trend. That long-run trend does not incorporate all of the appreciation during the 2002-03 period, in which housing did participate in some strong employment driven growth. This period was slightly uncommon, so we leave it out. Nevertheless, strong fundamentals were in palce ahead of the boom and that was part of why the boom took place in Las Vegas. Investors responded to the strong employment and population growth. What the initial investors did made sense. The ones that followed were part of the herd mentallity.

We have given all of the bubble gains back. Today we sit below long-run fundamental values and part of this is due to knowledge of dark homes not yet on the market, as well as weak employment. For those working, you can buy (according to the Case-Shiller Index) a home at early 2000 values. For a lot of folks, that served to shrink their costs substantially. There is a lot of opportunity in todays market and after a strange decade, some things do make sense, like having a mortgage at a fraction of your income.

Source: Standard & Poors.

What to expect when purchasing a home today

2009-10-23T15:06:10-07:00

What to expect when you’re expecting to purchase a home in the current “Buyers Market” when applying for a loan…

A play on a book title but an appropriate subject to discuss… the first word(s) that comes to mind is extra scrutiny if you are applying for a mortgage. Gone are the days of “I have good credit rating and I have a million dollars in the bank I want to state my income. All lenders are turning a critical eye to the haves as well as the have not’s and will continue to do so for the foreseeable future.

To shed a positive light on an otherwise gloomy statement is that mortgage applications ticked up in the 3rd quarter as rates dipped again. Rates have slowly risen and applications have trickled off somewhat but there is still a healthy application rate as the looming deadline for the First Time Homebuyer’s tax credit approaches.

Investors cannot be left out of the equation and are making up a lion share of purchases below the $100,000 mark as they are able to purchase with cash and close quickly. With lending guidelines and turn times for loans increasing due to new legislation such as: Home Valuation Code of Conduct – lengthening the time it takes for appraisals being performed, “3/7/3” rule regarding disclosures and effectively ruling out a quick close if financing is required and lastly on the State level legislation regarding the “Nevada Good Funds” rule that puts holds of up to 10 days on certified funds physically brought to title companies at the time of close, you can see why sellers are often opting for cash buyers who are only slightly impacted and can close quickly in this price range.

Historically low interest rates are also headed to higher ground as the Fed begins to wind down their purchases of Mortgage Backed Securities and it will be left to the open market again to dictate interest rates. What that equates to is that the insulation from the Stock Market fluctuations will also come to an end because in a typical market (one without the assistance of the Fed buying the MBS’) stocks and bonds fight for the same dollar. So as the stock market goes the inverse happens to the bond market – a run up in the stock market means a rush of money out of the bond market and a byproduct of that money flow is higher interest rates.

So now you ask- I am looking to buy what can I do to position myself as a strong buyer? -Get pre-approved not pre-qualified the difference between the two is your documentation has been reviewed and the other is that you have simply had a conversation discussing your situation.
-Meet your lender and provide them all of your income and asset information so that the lender can write a stronger approval.
-Expect to re-submit up-to-date pay stubs and bank statements more than once throughout the process to show that you are still qualified.
-DO NOT MAKE ANY NEW LARGE TICKET PURCHASES during the process on your way to closing. Wait to buy your furniture and any appliances you may be eyeing until AFTER your Real Estate Agent slides you your keys.

There is a lot to digest here but the take away of this article is to get in the game NOW. If you are considering buying now is a great time to go and get pre approved. PHH Mortgage charges nothing for you to get pre-approved and you’ll be surprised how easy it is to accomplish. Investors are not the only people buying homes there are plenty of people just like getting in the game and winning some great properties at great prices with great mortgage rates. With all of the changes that are coming this may be the best chance you have to realize the American Dream of home ownership!

Dave Reichert CMP

PHH Mortgage

Home Sales Update - September

2009-10-02T10:09:00-07:00

Home sales continued to be strong in September. While not all of the numbers are finalized yet, from what has already posted we see single family sales nearly match August. We have had over 3,000 single family re-sales per month since April and this has served to keep marketed inventories low. Whether or not banks will place greater inventory on the market is still a wildcard.

A great number of homes are tied up with contingent offers and pending sales are still elevated, indicating that sales should be quite good through the remainder of the year. We do not know how many of these sales are effected by the first-time buyer tax credit so some demand may have been moved forward. The ratio of pending to active homes remains stable, hovering between 14% and 15% for the past four months.

Source: Mlxchange, Coldwell Banker Premier Realty.

Corus Bank Closure Could Help Establish Bottom for Condo Values

2009-09-17T00:00:00-07:00

Corus Bank Closure Could Help Establish Bottom for Condo Values

With Billions of Dollars in Failed Bank's CRE Assets Up for Bids by the Feds, Pricing Levels Could Be Established

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By Mark Heschmeyer

September 16, 2009

Corus Bank financed this condo project at 441 Stuart in Boston that sold in foreclosure auction in May 2009.

Last weekend's closure of commercial real estate lender Corus Bank by federal bank regulators certainly was not unexpected. After all, the feds turned down Corus' request for a bailout when they were busy doling out hundreds of billions of dollars to prop up other major lenders. Even the bank holding company's own auditors questioned its ability to keep going and surmised its takeover by federal regulators.

To view the rest of the article click here www.costar.com/News/Article.aspx

Some don't have to time the market

2009-08-26T12:36:00-07:00

While some of the voices that called for a potentially large decline in the housing market during the boom were not heard, there were a few standouts. Interestingly some of them are buying homes. One of these gentleman was Paul Krugman, who has been famous enough for people to listen to. According to a recent Wall Street Journal Article, Timing the Market: Krugman, Baker Buy Homes, Krugman has purchased an apartment in Manhattan. Baker, who observed the out of trend levels of housing prices early on, had sold his home five years ago. He bought recently but without attempting to perfectly time the market, stating (this quote from the Los Angeles Times)

Baker said he's psychologically prepared for his house to fall 10% more in value.

That rise, he said, was offset a bit by the 4.25% mortgage rate he obtained and an $8,000 federal tax credit. he also emphasided that a house isn't just a financial instrument but something one might decide to spend money on for enjoyment.

"I really value having a porch, a yard, other things like that," he said, and he's willing to pay a price for them - just not any price.

We have been noting the trouble with market timing for some time and have previously mentioned the psycological benefits of homeownership. We would not encourage anyone to buy an overpriced home but we have been finding that in Las Vegas there are a lot of homes that cost near or less than equivelent rent and that makes the financial part of the decision a lot easier. Further, as we have stated in this blog several times, keep an eye on the interest rates because that could effect your decision. I always advice folks to go with what they know rather than what they hope. You know that rates are low by historical standards so hoping they go lower is not my favorate strategy.

By the way, I am the Director of Research, not the movie star quality guy in the videos...I am camera shy.

Source:

http://www.latimes.com/business/la-fi-bubble-timers17-2009aug17,0,6997492.story?page=2

WSJ: http://blogs.wsj.com/developments/2009/08/19/timing-the-market-krugman-baker-buy-homes/tab/print/

Home Buying Survey - Gender Differences

2009-08-18T15:11:00-07:00

A recent survey by Coldwell Banker LLC reveals some non-obvious differences between how the different genders purchase a home and provide quantitative evidence for some other features we intuitively know.

The highlights of the survey are summarized here.

America's 10 Best Undervalued Places to Live

2009-08-10T00:00:00-07:00

From a recent U.S. News and World Report article we find that Las Vegas is considered to be undervalued by 41%!

Las Vegas. After a dizzying run-up in prices, Sin City has become a cautionary tale for real estate investors everywhere. Since its 2006 peak, Las Vegas home values have plummeted by more than 50 percent. And today—at $77 a square foot—existing homes are actually priced below the cost of building materials, says Steve Bottfeld, the principal of Las Vegas-based Marketing Solutions, which specializes in real estate economics. "That's truly undervalued," he says. Although the market may be depressed today, several factors will support strong housing demand in Las Vegas over the long haul, Bottfeld says. The opening of MGM Mirage's CityCenter, which is expected later this year, will bring new jobs. The city's enviable climate—hot summers and mild winters—and its exciting downtown district will continue to attract residents. And the best-in-class architectural design of area properties will appeal to would-be buyers. "We are on the bottom of prices at this point," Bottfeld says. "There is no question that the residential market in Las Vegas is undervalued." The median single family home price in Las Vegas was $140,000, in the first quarter, which IHS Global Insight considers 41 percent undervalued.

We continue to see a frenzied pace of sales and buyers are realizing how attractive real estate values are in Las Vegas. One of our neighbors from SoCal purchased their second home in our community (one is for an investment and the other will eventually be a 2nd home). Even with the reduction in values in SoCal it shows that Las Vegas remains for affordable. Here's some fast stats as of today:

12,331 active listings with 40% short sales and only 21% REOs (more REOs are on the way)
13,599 pending and contingent sales with more than half (7,110) being short sales
Nearly 13,000 sold in the past 90 days.

For the complete article and the list of the top 10 most undervalued cities in America: http://www.usnews.com/articles/business/real-estate/2009/07/16/americas-10-best-undervalued-places-to-live.html

Index of Leading Economic Indicators

2009-07-20T09:45:00-07:00

The Conference Boards leading economic index pointed up again in June, registering 100.9, up from 100.2 in May. This is the third month that the index has shown increases. This is a welcome sign, however it would be premature to say that we are out of this mess. The coincident and lagging indicators still point downward. However, the coincident index is showing smaller declines than the beginning of the year.

Some observers point to this as evidence that the recession may end sometime at the end of this year. Housing starts have also been noteably higher, though still far less than June 2008, which makes sense since some areas still have excess inventory. I don't see these as signs that a "V" shaped recovery is possible but outside of the employment figures, the pace of decline looks like it is slowing. In local markets, we have to keep an eye on commercial real estate losses, which regional and community banks tended to have exposure too.

In Las Vegas, record home sales are a sign of confidence in the long-run potentials of the area. After a recent weekend in Los Angeles, I find it noteable how much better looking the infrastructure in the Las Vegas Valley is. I also find that compared to a lot of larger metros, Las Vegas looks quite clean and is reasonably efficient, despite years of trying to keep up with an increasing population. We look forward to the local population estimates this summer so we should have an idea of how the economy may have effected population growth.

Link to Housing Starts: http://www.census.gov/const/newresconst.pdf

Link to Conference Board: http://www.conference-board.org/pdf_free/economics/bci/begweek.pdf

New home sales...making a comeback?

2009-07-17T00:00:00-07:00

While the data still shows that single family new home permits in Las Vegas were below 500 for the 10th consecutive month, we did see an increase from May to June and sales activity at new home communities is also increasing. This trend is occurring across the country.

One of the advantages Developer Services has, being part of a highly successful general brokerage, is that we constantly glean information from our sales professionals who are making it happen every day. With the substantial reduction in resale inventory since the first of the year and many homes receiving multiple offers, some buyers are opting to purchase a new home to avoid the hassle of purchasing an REO property along with numerous other advantages.

Our friends at Wells Fargo recently provided us with some of the top reasons today's buyers are considering and purchasing a newly built home including:

Conforms to today's building codes and often have more safety features and fewer health hazards than older homes.
Offers warranties in case certain problems develop over time - - and the home's major appliances and systems are typically covered by manufacturer's warranties.
Reflects the latest in modern architecture and layout. Great rooms, bigger closets and additional bathrooms often replace the formal dining and living rooms found in older homes.
Is more energy efficient in design with better windows, more efficient heating and cooling equipment and a more extensive use of insulation.
Is built with materials requiring less maintenance, such as aluminum siding, vinyl windows and pressure-treated wood decks that resist rot and insects.
Has the ability to be customized more easily than a resale home, since you can often select many options and details ranging from floor plans and paint colors to faucets and light fixtures.
Boasts wiring for today's technologies such as multiple phone lines, high-speed Internet connections and extra cable outlets.
Provides additional opportunities to meet new friends as the neighborhood develops and new households move in.
With energy costs near the top of consumer concerns, it's good for them to know that today, new homes are more energy- and resource-efficient than ever before. Through the use of new materials and construction techniques, today's homes are built twice as energy efficient as new homes a generation ago, making them more affordable to own and operate.

New home construction has and always will be a key driver of GDP for the U.S. economy. Purchasing a new home supports local jobs and the local economy.

While a large segment of the market will continue to be driven by foreclosures, the new home market, while having experienced its toughest test to date in its history, will survive and eventually stand tall again.

Home Supply In Las Vegas

2009-07-15T16:51:00-07:00

Last month sales of homes in the Las Vegas Valley were the highest recorded. Even higher than those go go years of the middle decade. The market for many types of homes appear to be below long-run trends, so in addition to giving back the gains made during the bubble, home values have extended that into an overcorrected phase. Supply was excessive from myopic overbuilding, exacerbated by credit constraints effectual demand hurt by unemployment. Currently, the affordability scenario has improved so much that many buyers are back in the market.

Months of supply of marketed homes is now at levels not seen in years. Banks are dribbling out the inventory and many buyers have to put offers on a lot more homes before they can get one excepted. There is a lot of inventory not listed for sale but they are entering the MLS slowly. It is likely that if more REO inventory was supplied, the sales figure would be even higher. The exhibit below shows how far we are below the peak of months of supply for single family homes.

Source: GLVAR, Coldwell Banker Premier Realty.

Renegotiation of Home Mortgages

2009-07-14T10:30:00-07:00

A lot of folks are asking why banks will not work with them in alleviating their mortgage burden. Statements like, "if they just knocked off a couple grand I would be happy to stay and pay the loan" or "please help me stay in my home" is nearly commonplace language for people who bought during the bubble. Some observers have blamed the banks for being incompetent or irrational or outright nefarious. If we understand that firms are profit maximizers then there must be other reasons for banks not working with struggling homeowners.

One of the popularized explanations is securitization. That you cannot modify a loan when it has been pooled with other loans. PSA's or pooling and service agreements dictate how modifications can be performed and sometimes a services can only perform modifications on a certain number of mortgages. While it sounds plausible that this would be an obstacle in working with borrowers, authors Adelino, Gerardi and Willen find evidence that this is not necessarily the culprit.

In a Boston Federal Reserve Paper, Adelino, Gerardi and Willen posit that the reason lenders do not work with deliquent buyers is that (direct quotes after the numbers):

1. lenders expect to recover more from a foreclosure than from a modified loan.

2. renegotiation exposes the lender to two types of risks that can dramatically increase its cost.

a. "Self-cure" Risk: 30% of seriously delinquent buyers make up the missed payments without a modification. This implies that money spent on the modification is simly wasted by the lender.

b. Borrowers redefault. In their sample, a large proportion of the modified loans went into default six months after the modification.

In a land of falling home prices, delaying a foreclosure actually costs more money. Further, as homeowners are aware that they may be walking from the home, they put less expense in maintaining the home or in some cases, they deliberately damage the property. This is a reason why banks would rather foreclose on a home and market it as soon as possible.

Currently, we are seeing banks use a short sale process more and more and this may be due to accounting requirements as well as Federal oversight or in some cases lenders may find that the servicing of short sale properties is more efficient than REO's. One thing is for sure, in a dynamic environment like this, we really have to be quick to educate ourselves.

The Adelino, Gerardi and Willen paper can be found at http://www.bos.frb.org/.

Home Price Indices

2009-06-23T15:46:00-07:00

With talk in some parts of the country about preliminary signs of a bottoming in residential prices (we seem to have passed it in terms of the number of sales in Las Vegas) folks are pulling out their favorite index to try to prove the point. In a previous white paper, we discussed the difference between median indices, S&P Case-Shiller and the FHFA index. Altos Research also has a nice one for price per-square-foot. At the time we wrote about this, defenders of high prices were using their pet index to convince themselves that all was well and that their overleverage condition would be just fine. Almost one year later, the issue keeps bouncing back like a bad case of stomach flu. James R. Hagerty hits this topic today in the Wall Street Journal which is a pretty good description of the indices and their issue within the current scenerio.

For our reporting, we discuss the S&P/Case-Shiller and the FHFA. We also segment our median price indices by their square footage range in or order to avoid distortions through larger or smaller sized homes. We also elimate outliers such as really old homes or homes that appear to be stripped out boxes just begging for a rehab or teardown. When each of these indices are at least bouncing month-to-month (or quarter-to-quarter for the FHFA) between the positive and negative plains than at least we can say that it looks like a bottoming is occuring.

For now, with at least some respectability, we can say that prices for many home classifications in Las Vegas appear to be below long-run trend. Valuations in the smaller home sizes appear to be in the 1990's and in the early 2000's for larger homes.

Here is an interesting map of the U.S showing price re-set. You can see that the CTRL-ALT-DELETE buttons were pressed on many of these areas, re-booting to the 1990's. Many thought that you needed a 1985 Delorean, some enriched uranium and a flux capacitor to get back there...but we're back there. A new issue is, do you want to wait for further home price declines or further mortgage rate increases?

This map comes from Harvard's Joint Center for Housing Research. It employs NAR median prices.

Median Days on Market - April

2009-06-16T09:41:00-07:00

The June report is out from Altos Research which summarizes April data (it takes a long time to compile). Las Vegas is still on the lower end of the days on market spectrum due to solid sales, especially for bank owned homes. This measure appears to use complete days on market (can substantially differ from DOM), which tracks the whole time a particular home has been on the market even if listing agents removed the home from the MLS for a while and then re-added it with a price change.

Interestingly, Miami is still showing the weakest turnover and not suprisingly, Detroit is still in the top five. By this one measure, Las Vegas is fairing a little better than its closest comparison city, Phoenix, which has experienced a similar pattern in inventory build up and price decline. Lately we have been finding that some of the nicer homes that are priced with the market have been going to contract in less than 30 days. A few of the ones I was looking at myself went into contingent status with cash in less than two weeks.

Source: Altos Research.