Editor’s note: This is the fifth and final installment of a major article by urban infill real estate developer Jim Noteware examining the Las Vegas real estate market—where it has been and where it is going.

Part V

Where Are We Going From Here?

In conclusion, the Las Vegas real estate market in early 2007 is approaching or is at its bottom. Recovery will likely begin in the spring in advance of anticipated supply/demand balance in the summer. The key factor to this recovery is and will be the continued growth in residential demand created by Las Vegas unique job creation and population growth.

To assure recovery, however, and to accelerate future absorption of the current excess inventory, prices must adjust to reflect the realities of the market—most especially, buyers’ expectations. Very simply, buyers will not re-enter the market until they are convinced that prices have “hit bottom” and are beginning to recover. Sellers therefore must make the price adjustments necessary to bring buyers back to the market; meanwhile, sellers are well advised to do so, since the alternative is continued suspension in transactions, overall market uncertainty, and the costs associated with both the carry during this period of suspension and the cost of uncertainty.

Most importantly, we in the Las Vegas marketplace must face our challenge openly and honestly. Accurate and timely market information is essential to our successful recovery. And, we must realize that, while recovery will indeed come, and I believe relatively soon, it will not be as robust as previous market conditions, because future market conditions will not include the participation of nearly so many investors which accentuated apparent demand on the way up, but also have accentuated excess supply on the way down. Most of these investors have learned their speculative lesson, and will likely stay away.

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Posted April 10, 2007 1:46 PM by Jim Noteware | Permalink | Comments (1) | Email This

Editor’s note: This is the fourth of a five-part article by urban infill real estate developer Jim Noteware.

Part IV

What Are the Solutions? What Can We Expect?

Before discussing the solutions, we must go to the third factor in recognition (the first, we have a problem; the second, that markets suspend transactions at their peak). The third factor is: Let’s get real. Many professionals involved in workouts of troubled properties liken the workout process to the psychology of those informed of impending death: first is disbelief; then denial; then anger; and ultimately, recognition and resolution. It is only upon recognition that the recovery can begin. So, most fundamentally, to achieve recovery, we must recognize our situation and resign ourselves to the realities which will be required of recovery.

Absorption of Excess Inventory—As noted, we in Las Vegas are blessed by the strength of local demand—job and population growth. So now, let’s do some arithmetic—the numbers I believe will quantify the pace of our recovery, and the numbers I wish the media would analyze and report. Las Vegas adds about 80,000 people per year, but it loses some, too. These numbers are hard to discern, but let’s say, 10,000 people, for a net of 70,000. This seems to be what consultants and governments alike think is about right for the next few years. Each household has about two occupants on average—actually a little more than two, but I like to keep the numbers simple—so we will need about 30,000 to 35,000 housing units a year (leave aside for a moment the details about what type of product and the pricing to appeal to the greatest segments of demand). This is the demand.

The supply situation is a little trickier to judge: As noted, the unsold inventory of existing homes appeared to peak at about 25,000 units late last year. According to Jeremy Aguero, principal of Applied Analytics, the number at the beginning of 2007 is 21,000, which he terms “an eight-month supply.” So, the excess inventory is already being absorbed at, say, about 1,0000 units per month. With eight more months at this rate, the inventory will stand at about 13,000 units—perhaps about right. Note that the historical level of 10,000 units was too few to support the Clark County population and the growth of the Clark County population. That is why prices grew so fast when the inventory was this low. (This is analogous to the unemployment rate—if a steady economy needs an unemployment rate of five percent to accommodate transition, then an economy with an only three percent unemployment rate will feel wage pressure and some dislocations, such as has occurred in Clark County in some years past.) So, for steady prices, we need an ample supply of inventory, probably in the range of 13,000 to 15,000 units.

So, if Jeremy Aguero’s eight-month estimate is correct, then we should reach balance by this coming summer. Markets behave in advance of statistics, however, and there is likely to be tension in pricing and inventory well in advance of the summer. This leads me to the conclusion that—based on macro factors alone—the local residential real estate market should show strong signs of recovery in the mid-to-late spring. In fact, some observers note that there are recovery signs already beginning to appear: reduced buyer incentives, stronger buyer traffic. Those may be psychological as well as quantitative signals, but they are extremely important. They indicate the direction of the market, and as most market observers note: markets move first, then participants.

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Posted April 9, 2007 10:49 AM by Jim Noteware | Permalink | Comments (1) | Email This

Editor’s note: This is the third of a five-part article by urban infill real estate developer Jim Noteware.

Part III

Why is This Real Estate Recession Different than Those in the Past?

Numerous reasons point to why our situation in Las Vegas today is different from those in the past—and those which may now be occurring elsewhere.

Oversupply vs. Under-Demand—To understand the principal reason why things are different this time, we must distinguish between oversupply and under-demand. Our situation in Las Vegas today is clearly one of oversupply. As noted earlier, we have simply built too many housing units in advance of the market’s ability to absorb them at steady (or increasing, as has been the recent market norm) prices. With 6,500 people moving into Clark County each month (about 80,000 per year) in response to employment growing both in numbers (about 40,000 per year) and quality (the fastest growing segment of employment in 2006 was professional employment—12%!), demand is nearly as high as it has ever been, and is arguably higher in Clark County than anywhere else in the country.

Of all the confusion in the local markets, one thing seems perfectly clear—and nearly universally accepted—that job and employment growth in Clark County will continue at similarly high levels for the foreseeable future. No one—that is, no one I know—is predicting a decline in these growth levels. In fact, with housing prices flat, or possibly declining for a period of time, these lower costs might spur even higher levels of growth.

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Posted April 6, 2007 9:11 AM by Jim Noteware | Permalink | Comments (0) | Email This

Editor’s note: This is the second of five installments of a major article by urban infill real estate developer Jim Noteware examining the Las Vegas real estate market—where it has been and where it is going.

Part II

Three primary causes can be ascribed to the current real estate softness: overbuilding, media confusion and now, of course, buyer skepticism.

Overbuilding—Overbuilding is by far the most important factor and also is the cause of the other two. Very simply, we have built too much supply for the level of demand. News stories and analyst studies now report statistics that the inventory of unsold existing homes has increased from 10,000 (the apparent long-term inventory level) to a peak of about 25,000 several months ago.

A more important question is, perhaps, why did we build so much inventory? The answer is straightforward and has several elements: First, demand was so strong for so long (remember the supply/demand imbalance that created a 25 percent compounded increase in housing prices annually for the last five to 10 years?). We not only kept building, but also steadily increased our rate of building. True, we all believe in the growth story. And even in the face of increasing in-migration (from about 4,000 people per month to about 6,500 per month this decade), we overbuilt even for this increasing level of new population! The second reason is that we responded to the presence of investors in the market.

Those investors never really expected to occupy the units they contracted to purchase, just sell them to someone else who would. For a time—a long time, actually—this worked. The situation is like cooking a frog in water by increasing the temperature a little at a time. Since the investor presence in the market grew with the market, we did not appreciate it for what is actually was. The problem with the role of the investors is that they became invisible—we accepted their presence as actual demand. In reality, and in hindsight, however, we now realize that they accentuated the demand on the upper part of the cycle, and now that conditions have changed and they all want out together, they are accentuating the supply on the downside of the cycle.

So, we are now left with this overhang of inventory which has caused downward pressure on prices and longer times that houses remain on the market.

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Posted April 5, 2007 7:06 AM by Jim Noteware | Permalink | Comments (0) | Email This

Editor’s note: This is the first of five installments of a major article by urban infill real estate developer Jim Noteware examining the Las Vegas real estate market—where it has been and where it is going.

Part I

My love affair with Las Vegas and its housing market began nearly three years ago when I accepted an invitation from an old friend and former partner to visit and learn first-hand the benefits of developing there. As a Houston-based residential developer with experience in many metropolitan areas from coast to coast, I was immediately taken with the Las Vegas growth story, the open business attitude and the desire of public officials to increase the quality of life in Clark County through quality development standards.

I quickly concluded that Las Vegas would provide my company a long-term opportunity—there’s a lasting benefit for doing business here, more than for just a one-off project—and that the South Strip would be an ideal location for the urban infill, medium-priced multi-family product that is the focus of my company’s business strategy.

Upon committing to the Las Vegas market, my firm did its quantitative homework and identified several sites suitable for the product we envisioned. We negotiated a series of successful (but what seemed expensive) land contracts and assembled a team of high- quality professional advisors.

Together, we then did our social homework, and in what appears unusual for Las Vegas developers, we met with our neighbors and obtained their suggestions for improvement and, ultimately, their support for our project.

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Posted April 4, 2007 9:47 AM by Jim Noteware | Permalink | Comments (2) | Email This