Feature Stories - October 2006

Homes Mean Nevada

Questions and Answers with Nevada's Home Builders

by Jennifer Rachel Baumer

Some things remain unchanged: Nevada is the fastest-growing state in the nation. Job growth remains healthy in Reno and Las Vegas, Nevada’s cost of living remains more reasonable than in neighboring states, and people keep moving here.

What’s changing is the housing market. In early 2005, houses were flying off the market. There were waiting lists for new homes, resales were selling in a matter of days and homes were appreciating at a startling 20 percent to 30 percent a year rather than the normal 4 percent to 6 percent. Investors were diving in and driving the market higher, while buyers were treating homes as short-term investments rather than places to live.

By fall 2005, things were changing. The buying frenzy was cooling, prices were still rising but not at the same dizzying pace, more product was coming onto the market, and everyone was concerned we were in a housing bubble that was about to burst.

In fall 2006, the market continues to adjust. Experts say it’s not so much a downturn as a return – for the most part – to normal.

Nevada Business Journal brought together a handful of top builders to get the scoop on what home-sweet-home means in fall 2006. Home ownership is the American dream – we wanted to know if it’s still a possibility for Nevada residents.

The Players

In the south we talked with Klif Andrews, division president for Pardee Homes, founded 53 years ago; Don DelGiorno, division president, KB Home, which came to Nevada six years ago by acquiring Lewis Homes; Matt Koart, area president for Pulte Homes/Del Webb Nevada; Dan Ferguson, president, Christopher Homes, a luxury home builder; and Dennis Smith, Home Builders Research, Inc. In Northern Nevada, we caught up with Jon Delaurentis, president, Lifestyle Homes, which was founded in 1989; and Steve Haley with Dickson Realty, 2006 president of the Reno/Sparks Association of Realtors.

Is the housing market slowing down in Nevada? What adjustments has your company made to the new Nevada housing market?

Andrews: The housing market has slowed down throughout 2006 and we’ve adjusted to it by keeping our inventories low. If our sales have slowed, so have our construction starts. We’re still seeing sales in all the submarkets around Las Vegas. The activity varies widely between locations.

DelGiorno: The housing market has slowed. It’s the same in every market. But really, we have an excess of supply. There are 23,000 resales on the market, and if you add in the new homes, supply exceeds demand. We’re only building homes after they’re sold – there’s no spec building. We’re trying to make sure we qualify potential homeowners prior to sale, then start building and take them all the way through the process. We’ve also slowed down development of future lots – there’s no sense adding to the bulge in the market.

Ferguson: It’s slowed down in the sense that we have the same number of buyers, but far more inventory. However, if you look at all the other leading indicators in Southern Nevada, we have very low unemployment – the lowest rate in the country – good job growth and people moving in. We’re still fairly competitive with cost of living compared to other states, especially California. Smith: The year-to-date total of new homes sold through July in Southern Nevada was 21,545 – up 6.1 percent from 2005. The slowdown mostly shows up in resales, which are 22 percent lower year-to-date than last year (as of July).

Delaurentis: There has definitely been a slowdown. We have one project going in Cold Springs. We were already in the process of improving our options and exterior features before the slowdown, so we’ve continued with that trend. According to Haley of the Reno/Sparks Association of Realtors, the market is slowing down across the board in Northern Nevada and sellers are resisting the change. Builders of new homes are offering selective price reductions in some subdivisions or increasing the number of incentives, such as interest rate buy-downs or free upgrades.

What’s the median price for a new home? How does it compare to last year?

Smith: The median price of a new home in July 2006 in Southern Nevada was $324,517, a 2.1 percent increase year-to-year over 2005.

Delaurentis: I’ve heard median price [in Northern Nevada] is upwards of $380,000 or $390,000 – maybe less in the North Valleys. I think there’s been a slight decline in median pricing since October 2005, but I wouldn’t want to speculate as to why.

What do you think will be the next hot housing market?

Andrews: We think Southern Nevada will be one of the stronger markets over the next 12 to 18 months. The fact is, there’s not much land available in Southern Nevada. Since job creation and economic growth is still very solid, we feel this market will correct itself very quickly, probably by year-end. All the builders have slowed their construction starts and we’re keeping our inventories low, but because Las Vegas still leads the nation in job creation, people are still moving here, and they need houses. According to Smith, the annual job growth rate in Las Vegas was 5.5 percent in June and 5.6 percent in July. For the U.S. the rate was 1.3 percent.

DelGiorno: It’s hard to speak to other parts of the country, but I have faith in the Las Vegas market. We’ve still got great job growth, it’s a great place to live, there are tax advantages to living in Nevada, and we’re still doing well with tourism. Over the long term, this is one of the places that will still be a great housing market. There are still places to build. In the northwest [Las Vegas Valley], we’re building in a new master plan called Providence, and in the south, we have a major holding called Inspirada, a 1,900-acre master-planned development. In some of the most desirable parts of the Valley there is still room to grow and satisfy the needs of homeowners.

Delaurentis: I read a great article in National Geographic that said Americans want a sense of community. They want to be part of something. I think master-planned communities are what the market’s going to want, where infrastructure, parks, playgrounds, schools and activities are all located within the community and you don’t have to drive to town to get groceries or something to eat.

What types of homes are most in demand? What are kinds of features are people looking for?

Andrews: Lower priced homes in the $250,000 to $300,000 range are really in demand.

Koart: Never mind price. Energy efficiency is a huge priority. Also, the best location that has the lifestyle component the buyer wants.

DelGiorno: People still want the best value for square footage. They also want to customize to a certain extent.

Delaurentis: Our large two-story homes, which are basically the least expensive per square foot, are selling rather quickly. Also our smaller, least expensive homes in the $230,000 range.

Haley: Square footage, kitchens and garages – garages are always popular in Reno. Having a four-season climate here, people want to store things indoors. Three-car garages are a huge bonus. Features vary by price range. People paying a million dollars for a home expect granite countertops and stainless steel. If they’re paying $300,000, they’re hoping for landscaping or central air.

What do you consider an affordable home, and what’s the market like for these types of homes? Can families still expect to own a piece of the American dream?

Haley: Affordability is driven by income, so what’s affordable for one person is not necessarily affordable for another. It’s a function of balancing median income and house size. We’ve had corrections in the Reno market. I’d say we were undervalued for years, considering our lifestyle and the price of property and finished homes, and we’ve had a correction driven by demands from outside the area, but I think we’ve met that correction now. We might see a correction of some kind – housing prices might come down a bit. At the same time, if interest rates stay stable and the tax laws stay the same, I think the change needs to be in the wage situation. In order to be more attractive to people coming into the area, we definitely need to raise wages. Currently a medium-priced home in Reno is 13 percent above the national average, and wages are 12 percent below. There’s a 25 percent swing between the two.

Delaurentis: There are different types of affordable: first-time buyer affordable, upgrading-to-a- larger-home affordable, empty-nester downsizing affordable. It’s a relative term depending on what your circumstances are.

DelGiorno: In the $300,000 to $350,000 range, mortgage rates are still at historic lows and still affordable and there are so many different loan products, people have a lot of choices.

What effect has the rising cost of materials had on your company?

Andrews: It makes it difficult. Even as home prices are pressured downwards, the cost of materials continues to rise almost across the board – concrete to steel to drywall to windows – everything continues to go up, and fuel costs are also driving part of that.

DelGiorno: We’ve been lucky. KB Home is a large national builder with national contracts, which allows us to soften the blow of rising costs.

Koart: It’s one of the contributing factors making housing less affordable over the last decade. Overall, everything is more expensive – land, labor, raw materials to build houses. Long-term, it’s more than likely we won’t see this trend reverse itself. We may see small periods of softening costs, but it’s going to be more expensive to provide homes.

Ferguson: In the last year and a half, costs have increased by 10 to 15 percent, and that’s a large number over such a short time.

Delaurentis: We’re seeing increases from subcontractors and suppliers. The cost of material goods is steadily going up because of the price of fuel. So many things are made through some kind of process that requires fuel, or it takes fuel to get it here. The price of lumber constantly goes up and down. We’re seeing a steady increase in material costs, even though prices have flattened on new homes and resales.

Has your company had problems getting permits and entitlements from local governments? Are you experiencing delays in getting projects approved or getting approvals from inspectors?

Andrews: No more than normal. There are always delays in that process, it hasn’t changed much one way or another.

Ferguson: In the last year and half, the process has slowed because of the demand on people in those roles and the demand for architects and engineers. That whole process has slowed down, particularly with government entities – what took four to five months before now takes six to eight or even 10 months, so that has almost doubled the time for getting entitlements.

Delaurentis: There was a code change last summer and it took a little time to get the plans current and approved at our end. The company got hit pretty hard with re-submittals for new codes. We almost expected a slowdown, but I think it’s gotten better. It’s fairly consistent now.

Koart: Along with rising costs, it’s another hurdle, the ever-increasing difficulty in obtaining enough land and getting the approvals necessary to build. The regulatory environment has become more difficult over the years.

Have you been able to get all the labor you need to build?

Andrews: There’s plenty of labor, probably because of the lower construction starts. It was different a year ago, but now we have everything we need.

Koart: We’ve been fortunate to get the labor we need today. However, with immigration legislation and things that are happening politically right now, there are serious concerns in the industry. We don’t profess to have the answers to very difficult questions, but certainly it needs to be balanced. Labor has been in short supply in the industry for a long time and it’s been a very competitive environment to attract enough labor, and immigration legislation could negatively impact the availability of labor.

Is land still available for large tracts or master-planned communities? If so, where?

Andrews: No. Large tracts are not available in Las Vegas. Many large parcels are already in development or are under federal ownership, and we have a lot of complications because of that.

Koart: The BLM [Bureau of Land Management] has auctions occasionally and sometimes those land parcels are big enough to provide large-scale master-planned communities. Short of that, it’s rare to find a piece large enough to develop what we consider a master-planned community. We’re left with more of an in-fill environment.

Will homes be built on smaller and smaller lots as land prices rise and land becomes scarcer?

Andrews: While multifamily products will continue to grow in market share in Southern Nevada, I don’t believe they will ever be the dominant product. I really do believe that a home with a yard, a garage and a little bit of space between houses is still an enduring part of the American dream and buyers are not going to easily trade that in for a condominium.

Haley: The regional plan does call for some higher-density in-fill, but getting those projects approved through local governments has proved challenging. In-fill doesn’t always mean condominiums – sometimes it means reduced lot sizes. Right now around 4,500 square feet is the smallest lot size, but we might have to go down to 2,500-square-foot row house lots. There is also a move to mixed-use, live/work type environments, and commercial buildings with residences in the neighborhood.

Delaurentis: I don’t think [very small lots] sell well. For the immediate future, I think you’ll see the regeneration or rebuilding of the downtown Reno area, converting some of the old hotels into condominiums. However, on the outskirts, I don’t think smaller lots and houses closer together are desirable.

What’s your opinion of the housing market in Nevada?

DelGiorno: What was happening in the market wasn’t sustainable. The law of averages is that everything has to come back to the middle and the historical rate of appreciation is 5 percent to 6 percent a year. It will work its way back. Investors who came into the market were looking at homes as short-term investments, when in reality a home is, first of all, a place to live that will appreciate over time, but not over a year or two. It’s a place to live and raise a family.

Haley: We’ve had incredible appreciation [in home prices] these last three years and have to understand that’s not normal. Twenty percent appreciation is not a normal function of economics. Traditionally in the 21 years I’ve been in business in Reno, you’re looking at a 4 percent to 6 percent appreciation per year. We’ve had more than 50 percent for a three-year period, so there has to be some adjustment. Right now, buyers are the ones forcing that adjustment and sellers are resisting. Sellers need to do a reality check and say, "When I purchased that property, what were my expectations?" The market over the last few years has far exceeded anyone’s expectations.

Delaurentis: It’s a little nerve-wracking watching home sales go down, because there are so many satellite businesses that depend on construction. People sell lunches to construction workers, furniture outlets sell to new homebuyers, trades rely on construction-related jobs. The last three or four years have been almost ridiculously busy, and it’s nice to see things get back to what was normal before the big push. You asked about a slowdown, but that’s really part of the cycle of building.