LV homes called undervalued


A new report points to substantial undervaluation in local housing prices, though an economist who co-authored the study suggested the market's worst price declines have passed.

House Prices in America, a report from Massachusetts forecasting company IHS Global Insight and Ohio bank holder National City Corp., shows that homes in Las Vegas fell 18.8 percent below what market fundamentals would justify in the third quarter.

The newest numbers reveal a sustained slide in Las Vegas home values. Six months ago, home prices here were 3.1 percent below the values historic fundamentals warrant. That wasn't even enough of a shortfall to qualify as undervalued.

Today, though, consider Las Vegas undervalued. Out of the 330 markets IHS Global Insight and National City track, Las Vegas ranks near the bottom, at No. 287. The report's researchers declare as undervalued any market with prices more than 14 percent below market fundamentals.

To determine historically normal values, analysts look at median prices from 2000, household income, population density and interest rates.

Housing economists say they're not surprised values in Las Vegas fell significantly through 2008.

It's common for markets that enjoyed steep overvaluation -- Las Vegas peaked in the third quarter of 2006 at 30.8 percent above fundamentals -- to experience similar exaggerations on the down side, said Richard DeKaser, chief economist of National City and developer of the statistical model behind House Prices in America.

That's because inflated markets foster overbuilding and speculative investments. And when builders or real estate investors overextend themselves and later flood the market with large supplies of homes, the property glut pushes home prices well below equilibrium value.

On top of that typical correction in oversupply, Las Vegas claims thousands of foreclosure properties, and foreclosures "have a contagion effect" on prices, DeKaser said.

Larry Murphy can tell you all about that contagion effect.

Murphy, president of Las Vegas housing-analysis firm SalesTraq, said his sales and pricing data show parallel local housing economies: a standard resale market with a median price of $217,000 in October, and an inventory of bank-owned homes commanding a median of $166,000. Those foreclosures make up two-thirds of all home sales right now. After you account for foreclosures, the overall resale median in Las Vegas is $184,000.

Murphy said he agrees with DeKaser's and IHS Global Insight's conclusions. He did some recent numbers-crunching of his own for a client, and found that annual appreciation averaging 3 percent to 4 percent for the last 25 years would have roughly yielded today's median value.

"We're about where we should be in the overall cosmic scheme of the universe," Murphy said.

National City's internal numbers indicate that the precipitous devaluation of 2008 should slow in 2009.

The bank holding company forecasts a floor under local housing prices at a median of around $182,000. That's $10,000 below the third quarter's $192,000 median, and well off the 2006 high of $295,000. The company's economists estimate Las Vegas will bottom out sometime in early 2010, which means it will take 15 months to drop about 5 percent on top of the 30 percent or so the market fell in 2007 and 2008.

For consumers, undervaluation should signal purchasing opportunities, DeKaser said.

"Real estate is now a good buy in Las Vegas," he said.

Before you survey 2008's falling prices and dismiss that analysis, think about conventional wisdom in 2005. People often assume past performance predicts future trends, so DeKaser heard plenty of snickers three years ago, when he warned that housing values would tumble.

Recalled DeKaser: "People would look in the rear-view mirror and say, 'Wow, prices went up 30 percent in the past two years. What are you talking about?'"

Yet, history shows that markets experiencing significant undervaluation provide a "strong likelihood that buyers will be rewarded over the longer term," DeKaser said.

That doesn't mean anyone will make money flipping local homes in the next 12 months. But it does mean buyers with time horizons of five years or longer are likely to realize "lucrative" returns on homes they buy today, he said.

Murphy said he's not sure how low housing prices here will go, but he noted that KB Home and Richmond American dropped prices over the weekend on some north and northwest subdivisions to around $75 per square foot. Murphy has long said builders couldn't make money selling local homes for less than $100 per square foot, so he was "shocked" to see the new data.

Murphy said he's also concerned about the number of foreclosures yet to hit the market. The Las Vegas Valley has a 7.5-month inventory of bank-owned homes, and that's before a potential new wave of foreclosures hits the market as homeowners grapple with spreading job loss.

"How low can prices go? I don't know," Murphy said. "But they can't hit zero."

Contact reporter Jennifer Robison at jrobison@reviewjournal.com or 702-380-4512.

After several years of overvaluation based on factors including historic median prices, household income, interest rates and population density, Las Vegas now faces serious undervaluation:

Third quarter 2004Third quarter 2005Third quarter 2006Third quarter 2007Third quarter 2008
Price: $240,800Price: $274,800Price: $294,900Price: $272,400Price: $191,500
Overvalued: 22.3%Overvalued: 24%Overvalued: 30.8%Overvalued: 17.6%Undervalued: 18.8%

Other regional markets and their valuation in the third quarter:

St. George, Utah: At $223,700, 39.7 percent overvalued

Salt Lake City: At $260,700, 18.8 percent overvalued

Phoenix: At $197,500, 3.9 percent overvalued

Los Angeles: At $384,400, 1.6 percent overvalued

San Francisco: At $666,100, 15.6 percent undervalued

Stockton, Calif.: At $161,000, 27.7 percent undervalued

San Diego: At $337,000, 19.1 percent undervalued