Sunday, February 20, 2005
Copyright © Las Vegas Review-Journal

HOME APPRECIATION RATES: Homeowners hit jackpot

Real estate investment returns outperform others in Las Vegas

Click image for enlargement. Graphic by Mike Johnson. Construction workers build a home Wednesday in a development near Charleston Boulevard and the Las Vegas Beltway. Home appreciation rates soared last year, and one economist says housing activity is expected to decline only marginally in 2005 despite gradually climbing mortgage interest rates. Photo by K.M. Cannon.

For many Las Vegans who sold their homes last year, they probably made more money from the increased value of their homes than they did at their jobs.

Even for those who weren't selling, the returns on their home investments generally outperformed the stock market, 401(k) retirement plans, certificates of deposit and other conventional investment tools.

Depending on the source, the median price of existing homes sold in Las Vegas last year jumped anywhere from 38 percent to 52 percent, or about $70,000.

The median price for 59,444 existing homes sold in 2004 was $235,000, compared with $167,500 the previous year, a 40.3 percent increase, said Larry Murphy, president of SalesTraq, a company that tracks the local housing market. The average price went from $199,443 to $267,261.

Home appreciation rates vary in different parts of the Las Vegas Valley, registering as high as 56 percent in ZIP code 89131, near U.S. Highway 95 and the northern beltway. That's up from 17 percent last year.

The lowest rate was 4 percent in ZIP code 89139, south of Warm Springs Road and west of Interstate 15, which showed a 2 percent depreciation last year. None of the valley's 49 ZIP codes showed depreciating home values in 2004.

Murphy said one caveat to his ZIP code appreciation figures dealt with the 89011 area, or Lake Las Vegas, which would have shown depreciating home values for the second year in a row if he went by median prices. That's because of condominiums being sold in the $500,000 range, whereas a few years ago it was mostly million-dollar custom homes.

To compensate for that, Murphy calculated the price per square foot for a home in Lake Las Vegas and found a 31 percent increase, from $321.89 in 2003 to $420.45 in 2004.

The National Association of Realtors reported last year that Las Vegas led the nation with an unprecedented 52 percent appreciation rate in second quarter 2004.

While escalating land costs weigh heavily on home prices in Las Vegas, much of last year's increase was fueled by supply and demand. Speculators and investors snapped up homes in the valley with the intention of "flipping" the property when the price hit a profitable percentage margin, depleting the inventory of available listings.

Not all home sellers in Las Vegas last year made a profit, said Shawn Cunningham, a real estate agent with ReMax Advantage in Henderson.

"I think the numbers are a little skewed," Cunningham said. "There's been appreciation, sure, but not everyone is a big fan of the numbers you come up with. The market is not as upbeat and optimistic as some people make it out to be."

He said there's no "bubble." If a house is put on the market, it gets offers and, if it's priced right, will sell within 30 days.

Murphy agreed that percentages shown in this story's accompanying chart don't reflect each homeowner's true appreciation rate.

"What you should know when you see this map, you should know that half the people in that ZIP code saw a higher rate and half saw a lower rate because that's the definition of a median price," Murphy said. "Please don't expect that you and your neighbor would have the same appreciation rate. If you did, it's purely by coincidence."

However, appreciation rates, especially in the new home market, are skewed toward the first quarter of 2004, Cunningham said. "It was insane, absolutely insane. You can't compare it to any quarter in the history of Las Vegas."

Some people who bought a new home for $500,000 in April or May saw the value drop to $425,000 by the time they closed escrow on it in November, and the builders weren't releasing buyers from their contracts, Cunningham said.

"I don't know of anybody who bought their home and held on to it for 12 months and lost money and that's an incredible statement, I can assure you," Murphy said. "I can show you people who bought and sold in less than 12 months and lost money. They sold for $25,000 less and had to pay a broker commission on top of that.

"You show me someone who bought a home and held it for a year, you stretch that to two years and I would defy you to find someone who lost money. I don't think there is such a person. You'd have to work at it. You'd have to be incredibly unlucky and stupid," Murphy said.

Home appreciation rates that led the nation were a double-edged sword for Las Vegas.

On the one hand, there's the accrual of personal wealth. Most people's first big-ticket purchase is an automobile, but a home is usually their most expensive purchase.

On the down side, high appreciation creates somewhat of a housing affordability crisis for first-time home buyers on moderate incomes. The Southern Nevada Home Builders Association determined that 1,400 people are priced out of the market for every $1,000 increase in home prices.

Additionally, some homeowners are furious about the increased property taxes that have come with their higher home assessments.

John Restrepo, principal of Restrepo Consulting Group, said the appreciation rate in 2005 has the potential to match last year's because of strong job growth and in-migration, relatively stable long-term interest rates and a constrained land market.

"As long as the economy remains strong and we continue to have supply constraints in terms of land, there will be no (housing) bubble," Restrepo said. "What it would take for housing prices to depreciate would be a flat or negative job growth."

Restrepo said "some Realtors are wrong" about home appreciation rates not being as high as reported. His numbers show a 40 percent appreciation rate last year, compared to 15 percent in 2003 and 10 percent in 2002.

"The 35 (percent) to 40 percent is real to most people because it's based on recorded closings, not sales," he pointed out.

Historically, Las Vegas has lagged behind the nation in housing appreciation, said Mike West, president of Century 21 and a real estate agent in Las Vegas since 1981. Home values were increasing by 2 percent to 6 percent throughout the 1980s and early 1990s.

One factor depressing appreciation was lower-priced new homes, which were just a few thousand dollars more than an existing home. The ratio of new home sales to resales was about 50-50 for many years, West said.

"There was a lot more land, and the builders ... there was so much competition, so to stay competitive, they had to really watch their pricing. They could not really increase prices," he said.

"So resales could not pass up new homes because, all things being equal, with a new home, you get new appliances, home warranties, they're more energy-efficient. So now that land becomes more scarce and the high cost of land starts creeping up into new home prices, as new homes become more expensive, people will go buy a resale. It's kind of like riding on the coattails."

David Berson, chief economist for Fannie Mae, said that home sales will drop 7 percent to 8 percent nationwide this year for several reasons: price increases have made affordability a concern in many markets despite low mortgage rates; a significant number of households who would have purchased homes this year did so instead in the past couple of years when rates were at or near record lows; and with prices slowing, investors may decide it's time to abandon the housing market.

Housing prices overall will grow by about 3 percent this year, compared to 10 percent in 2004, he said. Most places will see price gains in the 4 percent to 4.5 percent range, Berson said, although prices will probably go down in some markets.

Berson said he couldn't predict which markets are headed for a real price decline, but most at risk are those that have had high price gains relative to income along with other risk factors such as a high level of adjustable rate financing, relatively weak job growth and low household formations.

Berson said that investors' share of home purchases has doubled over the past year from 4.5 percent to 9 percent, and is as high as 25 percent to 30 percent in some markets.

"Investors go in and out of markets all the time," he said. "They have gone in because of the high returns they can get. If prices begin to slow this year, investors will start to slow their purchases, reducing demand for housing and increasing the supply of homes on the market, slowing price gains some more."

The resale median has been stuck on $250,000 in Las Vegas for six months and could stay there through July, Murphy said. The median is the point where an equal number of homes sell for above that price as below. It is preferred over the average because it compensates for extreme prices on the low and high ends. Prices will then start to rise again in the second half of the year, so next year's ZIP code map won't be plastered with negative numbers, he said.

After seeing prices plateau in the last few months of 2004, statistics released by the Greater Las Vegas Association of Realtors for January show local housing prices increasing slightly, both for single-family homes and condos and townhouses.

Year-over-year price increases are still up significantly from the same period last year. The Realtor association lists 13,803 homes available for sale in the market, compared with about 2,000 at this time last year. Homes are staying on the market longer than during the booming months of early 2004. For example, 37.6 percent of January's sales were completed in 30 days or less, compared with 65.9 percent in the same month a year ago.

Housing activity is expected to decline only marginally in 2005 despite gradually climbing mortgage interest rates as jobs and household incomes grow more decisively than they did last year, an economist for the National Association of Home Builders said in January.

"We are telling builders that this year will probably pose some stiffer challenges than 2004, and they should be careful about inventories and vacancy rates," NAHB Chief Economist David Seiders said.

Overall, he is expecting a 3.5 percent decline in home sales and starts this year -- with single-family production off a bit less than 3 percent, multifamily starts down 4 percent and remodeling activity up 5 percent -- but coming out even with last year's stellar performance "would not be out of the question." On the interest rate front, Seiders said the Federal Reserve is "clearly on the move," and that should push up the federal funds rate to 3.75 percent and 30-year mortgages to 6.75 percent by the end of the year.