I just came across this article, thought it was interesting.
PRICES REMAIN ABOVE LAST YEAR
August prices are down slightly.
The median price of a new home slipped $7,500 from July's record high to $329,897. That's still 12.9% ahead of August 2005. The median price of an existing home also slipped $2,500 from July's record high to $286,500. But, that figure was 2.3% above August 2005.
This was achieved in a period in which:
1. Inventory is at all-time high; and
2. Demand appears to be cooling.
Under ordinary circumstances, rising prices in the face of those two factors would not make economic sense. But, this is Las Vegas and there is always more than meets the eye.
Critics argue, for example, that "incentives" inflate new home prices. That's not true. Incentives detract from a builder's bottom line. But, no matter what the builder gives the buyer -- cash back, options, upgrades -- the price of the home is still the price of the home!
THE DEMAND FACTOR
Sales of new homes in August slid 13.1% compared to last year. Yet, at the end of eight grueling months, we are about even with where we were at the end of August, last year (+0.2%).
Sales of existing homes have slipped 19.7% for the year and were off 36.3% from last August.
This sounds terrible until you consider this one fact: Vertical is siphoning off investor/second home buyers.
Remember that investors and second home buyers purchased 20-25% of all homes in this market through the second quarter of 2004. Last year, they only accounted for 4% of the sales. This year, they are up to 8%. In other words, approximately 12-15% of the market that would have purchased new and resale homes are now purchasing Vertical product instead.
What does this mean? Vertical has siphoned off about 15,000 sales from the traditional markets.
WHAT THIS DOES TO "TRADITIONAL HOUSING" INVENTORY
As noted in our last edition, Vertical impacts inventory in two ways:
1. Those who buy Vertical product as an investment want to resell it. Inventory goes up.
2. Those who buy Vertical product as a residence have a home to sell. Inventory goes up again.
At the end of August inventory was at record levels in both the new and resale markets.
The resale market was at a record 21,155 homes. That's about 8,000 homes above last August.
The number of new home subdivisions reached a record 521. Let us put that in perspective. That's the highest number of subdivisions per capita of any city in the United States. That's about one quarter of the number of active subdivisions in Southern California -- an area that boasts a population 20 times larger than Las Vegas.
WHY WILL PRICES BE STABLE IN THIS MARKET?
The answer lies in New Home Permits.
For the fourth consecutive month, new home permits were off more than 30% from corresponding months in 2005. For the year, housing permits are down 17.1%.
New lots in final map were off 19.8% in August and have declined for two consecutive months.
Builders are rapidly reducing the number of new homes entering the market.
This is beginning of market stabilization.
The key word in that sentence is "beginning." This process will take at least nine months.
There is no question in our minds that economic conditions are not favorable for a rapid turn-around. Nor do we think we will see the bursting bubble in this market that so many "national analysts" have predicted.
But, we will give them one bone to gnaw on. The median price of a vertical residence (hi-rise/mid-rise) did decline significantly in August ... because lower priced mid-rises were closing units.
It will rise again in September.
A final thought: We're not telling you that prices won't dip nor are we suggesting that inventory will be significantly reduced anytime soon.
We are saying that there are sound reasons why prices will be stable, if not rising, over the next few months.
The argument that current prices are the result of a psychological euphoria similar to the one preceding the stock market crash of 2000 is balderdash as well.
The plain, simple truth is that prices are the result of market action. It's the law of supply and demand. The problem with "national analysts" is that they are so focused on inventory that they can't see the demand.
Respectfully Submitted,
Larry Murphy Steve Bottfeld
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