‘The Market Is Making Its Own Correction’ In Las Vegas
In Business Las Vegas has this update from Nevada. “Renters worried about losing their apartment to a condominium conversion or looking for an apartment in a tight market with rising rents might be able to breathe a little easier in the coming months.”
“Condo conversion closings have fallen sharply during the last three months. It’s part of a trend in which apartment complexes are more likely to remain as rentals rather than be converted into condos, analysts said. The limited supply of apartments should increase as some condos under construction or conversions will be put back on the market as rentals, according to an investment brokerage firm.”
“That additional inventory should create competition for traditional apartments and slow rent growth for the next 12 to 18 months, according to the brokerage firm. In addition, developers will bring on 2,315 apartment units in 2006, more than double the 1,040 brought on line in 2005. Another 1,800 units are scheduled to come on line in 2007.”
“SalesTraq reported condo conversions between April and June fell 44 percent in comparison to the first quarter. Conversions are off 29 percent from the second quarter of 2005. That drop is evidence that the Las Vegas City Council was correct in not implementing a moratorium on condo conversions, said SalesTraq President Larry Murphy.”
“‘The fear was they were going to convert all of these, and there wouldn’t be any apartments left,’ Murphy said. ‘The market is making its own correction. I don’t think you need any legislation prohibiting apartments to condos. The demand has slackened.’”
“Consultant John Restrepo said as the housing market cooled, the demand for conversions cooled as well. ‘Right now we have a weird market. You are better off renting a single family home because of a shortage of apartments. You can find a house in the southwest with 2,600 square feet and a yard for $1,400 a month in a nice neighborhood. You can’t find an apartment for that right now. Right now, it is definitely a renters’ market,’ he said.”
“Because of the improvements, the rents will be higher than what was charged when they were apartments, but the growing supply in the coming months could create some bargains if people don’t pay the higher rents demanded. ‘There could be some deals if owners are looking to bring in any kind of revenue,’ Nadji said. ‘For condos already in the pipeline, it is too late to stop them from coming in the market. Some developers will end up with a combination of units.’”
“With the added supply, Chris Lobello, Marcus & Millichap’s regional manager, said he wouldn’t be surprised if at some point apartment owners return to the days when they offered the first month free as a way to attract tenants.”
The Review Journal. “Already reeling from slowing housing sales and worries about the economy, home builders face another issue: the value of the land on their books. Land values are becoming a flash point for investors and analysts who watch the building sector. Bears say the companies’ land might not be worth what they paid for it, which could lead to painful write-downs.”
“‘People are looking at book value as a possible floor for the stock prices,’ said Banc of America Securities analyst Daniel Oppenheim. ‘The question is, should that be a floor? There could be some risk to that book value from land recently acquired or put under option contract.’”
“Write-downs are ’starting to happen,’ says Credit Suisse analyst Ivy Zelman. ‘I don’t think you can define what (the scope) is today and capture the risk.’”
“Builders operating in Las Vegas wouldn’t discuss whether their local property portfolios are shedding value, and they said federal disclosure laws prohibit them from talking to the media about potential write-downs.”
Talked briefly with my brother about the “boom” in low-cost condo conversions in LV early last summer. Glad I blew that idea off!
…Sold my house in SoCal instead.
whooooooaaaoooo
take the money and run
woohoo
http://www.bbc.co.uk/bbcfour/audiointerviews/profilepages/maharishi1.shtml
1 month free yea right try 3 to 6. Time to round up some investors.
“Builders operating in Las Vegas wouldn’t discuss whether their local property portfolios are shedding value, and they said federal disclosure laws prohibit them from talking to the media about potential write-downs.”
Anyone know if this is B.S. ? Can’t they cite these laws instead of hiding behind them ?
Two words: Sarbanes Oxley
“federal disclosure laws prohibit them from talking to the media about potential write-downs.”
Rubish… their talking about public held corporations as govern by SEC full disclosure rules. Many I would say are private or partnerships. If they did disclose they are afraid the banks may lower their borrowing rating.
“There could be some risk to that book value from land recently acquired or put under option contract.”
I am curious what y’all know about these builder option contracts; all I have read suggests the builders purchased call options to protect themselves against the risk of land prices spiraling upwards. But if prices fall below the strike price and stay there (as I believe it has / will in LV), these call options will prove riskier than owning the underlying land, as an out-of-the-money call expires at a total loss.
“these call options will prove riskier than owning the underlying land”
As a percentage return on investment a derivative may be riskier than the underlying asset. But in terms of absolute dollars at risk and operational flexibility for the HB’s they make a lot of sense. The motivation for a HB to purchase an option is not to turn around and sell that option for 10 or 20x what they paid for it, although that happens no doubt. The motivation is to have the flexibility to commit capital to the most promising projects and walk away from the unpromising ones. Better to walk away from a $500k option than to commit $10 million to a project only to write that down to $5 million later. As a % ROI the option is a loser but to the builder that’s just a cost of doing business.
“Because of the improvements, the rents will be higher than what was charged when they were apartments, but the growing supply in the coming months could create some bargains if people don’t pay the higher rents demanded.”
How will landlords facing a supply glut in the rental market manage to recover the cost of their luxury upgrades through higher rents? They may wish they could find someone else to pay for the cost of their own stupidity, but competitive pressure may prevent them from doing so.
Not going to happen, that statement was wishful thinking at best. They will be lucky to maintain a 20-30% vacancy factor. That’s the problem with investing in apartments in those area’s. Rents float along the bottom because it typically cheaper or not that more expensive to buy for the credit worthy. Lipstick on a pig comes to mind.
They have put loads of lipsticks on the pigs in my ‘hood, and now they are employing dancing human directionals to locate greater fools to buy them…
“Write-downs are ’starting to happen,’ says Credit Suisse analyst Ivy Zelman. ‘I don’t think you can define what (the scope) is today and capture the risk.’”
Thanks for the analysis, Ivy. It’s good to see you’re earning your fat Wall Street salary. Of course you can define the scope and capture the risk. Begin by asking HB CFO’s where, when, and how much they paid for land on their books. If they won’t tell you check what’s listed in public records offices. But if that’s too much work then just tell everyone the magnitude of risk is undefinable.
(Not everyone, however, sees the condo conversion market continue on its current course.
Ken Baxter, chief executive of Performance Marketing Associates, which handles sales and marketing of condo conversions, said that even though sales are down 60 percent from last year, the market isn’t dead. With a growing population, the demand will remain, he said.
“Up until now, we have had a lot of fun,” Baxter said. “All the flippers are gone for good. We are relying on owner occupiers. I am optimistic and expect it to be over quickly. This market will definitely be coming back because there is a huge need for entry-level housing.”)
what a moron, I saved that realtorspeak to my list. are we really supposed to think that end users are going to make up the slack for the speculators who were at least 25% of the market? if so, why haven’t they picked up the slack so far? this is a disaster. and if you haven’t noticed, this disaster is happening all over the US even though there is no recession. the market wasn’t supposed to be a disaster w/o a recession.
another bubble myth that is busted.
“are we really supposed to think that end users are going to make up the slack for the speculators who were at least 25% of the market?”
Yes we are — after 50% reductions to bring prices back into line with fundamental demand.
but but but, home prices don’t decline unless there is a big loss of jobs. the economy is strong. business investment will pick up the slack from the slowing consumer. corporations are flush with cash. anyways, people are just waiting on the sidelines. they’ll jump in with slight reductions. david lereah told me so! did you read his book? the boom won’t bust. we’ve got retiring boomers, then echo boomers.
I might buy one or two SFHs once we have a 50% correction - but only for my own use. They’re simply too much trouble to manage as rental properties, unless they happen to be located very close to other multifamily holdings or otherwise clustered to achieve economies of scale.
But do you really think that there will be enough demand from financially solvent buyers to absorb 25% of the supply after a 50% correction? Or were you being facetious (wouldn’t be the first time, eh?
SM-
You’re (happy) braver than me, I won’t touch a single family unless it’s my personal residence. I would rather be castrated than have a single family as a rental. I don’t care where it is.
Oh yea, I’m sure he was being facetious
True, single family rentals are mediocre cash flow vehicles. But they don’t attract quite as much attention from city inspectors, fair housing busybodies, and various sales people and pitchmen.
They also don’t need the on-site management a ‘plex does. I’d rather handle tenant calls and talk with subcontractors, than manage employees… Yuck.
As I said, “but only for my own use”. I don’t think I’m any braver than you are, probably less. Actually, I’m a chicken, bordering on paranoid. Sure things are my preference. And castration is not on my agenda, thankyouverymuch
Agree with that statement. The SFHs I owned were much more work as rentals than my small apt complex.
-
“I don’t want 10 houses. I don’t want all those kinds of things, they really turn out to be a pain. I don’t want possessions to rule me. But then again, anything I want, I buy.” - Warren Buffett - http://www.career-graph.com/gen_articles/investor/investor.shtml
The speculator that left the market will be replaced by the homeowner who just lost his house in foreclosure, and still has a job. 120 Notices of Defaults filed every work day (source Nevada Legal News)…these are the working middle class who overbought a house they couldn’t afford, and they still have jobs
(unemployment rate Vegas 4.3% US unemployment 4.8%) The largest property manager in Vegas is turning vacancies into rentals faster than ever in 20 years doing this.. The rental rates are still not growing because of so many out there, but the demand is strong for well located rentals. Repeat location, Location, Location…the condo conversions and apartments miles from the strip are not in the same catagory as those between the strip and summerlin. Please don’t put the spokesman for Performance marketing as a real estate bafoon. He gets paid for making sales, not doing seminars, and he is not a real estate mouthpiece. There is pain in Las Vegas real estate, but Vegas was the first with 50% appreciation, the first for losing the investor crowd, and with employment still strong, will hold its own in the crash.
all joking aside, as we’ve done is set up the echo boomers, that kids in HS and college right now, with affordable housing. they’ll probably be the force behind the recovery. I read there are 75 million of them. just as big as the boomer generation. I’ll have to look that up.
bottom line though, they’ll probably drive the next next housing cycle, but I’m not sure it’ll be a boom like we’ve seen in the past.
I don’t think we’ll ever see a boom like this one. This one was suicide.
After watching the stock market and the housing market this time, I’ve learned quite a bit. It’s amazing to see people throwing cash all over the place. But then again, when I go to casinos, I’m amazed with the money that gets sucked up.
More psycho-babble:
Deborah Sortino, a Realtor for Geoff Mountain RE/MAX Associates in Oceanside, Calif., said the last two months have been very slow in her market area. “It’s like someone switched off the light — (properties) are not moving one way or another. There are a lot of people looking but I don’t see a lot of sales pending.”
Those homes that are selling are priced realistically, she said. And when people talk about any price declines, Sortino responds, “That’s all relative — they only made 180 percent (since purchasing the home).”
While the San Diego market has hit a slow spell, Sortino said she expects the overall market will “just keep growing — prices will continue to go up.” Any price declines will likely be temporary, she said. “Whatever is happening now is just a lull.”
Well ,we all know that’s the realtor-speak right now. The big lull before the big comeback of spring/summer of 2007. Can the realtors explain why there will be a comeback ?
Well, because it always goes up, of course!!!
Assume 25% of the old market were speculators. Will that mean a 25% decline, now? I don’t think so.
Now that real buyers are only competing with each other, the synergy of speculator competitition is gone.
In addition, real owner-occ buyers are getting spooked by all the bubble talk, and how their friends are having trouble making ends meet. So the supposed “remaining 75% of the buyer pool” will shrink some more — to maybe 60% or 50% of what it was.
And, those remaining people will want a “great deal” to make up for the RISK of buying a declining asset.
That is why bubbles pop, and why blowoffs look like a spike on a chart.
I think it’s great so many clowns are willing to live in a desolate, dry, hot (and getting hotter) desert, away from other major cities, beaches, and usable farmland. What other good stuff do we have there in LV? Casinos, military bases, stripper-whores, junkies, casinos, gangsters, toothless trailer trash, sand, abandoned mines, and casinos. Sounds like just the place for me to raise my kids and retire! And I can do it all for the price of a mortgage on a $600k condo. Yippee!
And, those remaining people will want a “great deal” to make up for the RISK of buying a declining asset.
I wonder how many there will really be once this has gone through its cycle. It has to be bad enough for most of folks, even us to be sppoked, no?
Simmssasy…worst ways to keep cool
http://www.americaninventorspot.com/inventive_keep_cool