The perceptions game
December 31, 2007
Mark Krueger, managing director and senior vice president with Grubb and Ellis|NCG, says market perception is the biggest challenge to overcome before there is any rebound in new residential construction.
The former bull real estate market has given consumers their choice of more than 100 new home communities scattered throughout the Reno-Sparks area, and builders are trimming their inventories through lucrative buyer incentives.
Krueger sees the market continuing in a downward trend until the area’s larger builders have cleared both their inventory of unsold homes and unfinished lots.
“They need to continue building through those to get their lot inventories down,” Krueger says. “I don’t think we will necessarily see too much really positive next year. It is going to be more of the same correction taking place.
“We still have positive job and population growth, and we still have homebuyers coming into the market,” Krueger adds. “But the drastic perception is that the market is tumbling and people should wait to make a better deal.”
But the ability of some builders to weather the storm worries some observers.
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“Most builders are strapped for cash,” says John Wright, a Reno real estate appraiser who outlined the building industry’s challenges for a Colliers International symposium earlier this month.
Land values, Wright says, have fallen by 10 percent or so in recent months, but developers and builders still can’t find buyers. Potential purchasers, he says, are waiting for prices to fall even more.
When the bottom hits, Krueger expects builders to pull back incentives and tighten the sweet deals on new homes.
“Now is a fantastic time to be out there there is still a ton of motivation for these guys to pare down their inventories,” he says. “But will the market perceive that and start generating more velocity? People just haven’t stepped up to buy yet.”
Rick Demar, chief executive officer for the Builders Association of Western Nevada, predicts new residential development will remain stagnant throughout the year. As a result, longtime northern Nevada builders have drastically scaled back development plans.
“I recently had a conversation with a builder that has sold 100 homes a year for the last five years,” says DeMar from his Carson City office. “He’s not building 100 homes this year. He will be lucky if he sells eight or 10. Builders are not going to be as aggressive as they once were.
“The ultimate resolution of all the subprime lending issues is going to be a huge factor and it is going to take the industry 18 months to pull itself back together, to relieve all the issues and give buyers some comfort level,” Demar adds. “If there is nobody to buy your product, you are not going to build it it is not prudent business practice to build more homes than you can sell.”
Even though newly built homes have sold slowly in recent months, some say northern Nevada’s diverse economy lends itself to a quicker rebound than other hard-hit areas.
“Our new home inventory is relatively small and easy to absorb,” says Bambi Spahr, executive director for the Builders Association of Northern Nevada. “The challenge is dealing with existing inventory, and now we are seeing movement with that was well.”
A light in the dark: A relief package for some subprime borrowers developed by mortgage companies and the Bush administration this month.
If that reduces the number of foreclosures, it will tighten the inventory of existing homes on the market and help builders move more new houses.
“The early data I saw this fall is that our market has the potential to hit bottom second quarter and start coming round the bend third or fourth quarter with a very healthy rebound in 2009. Hopefully that will be accurate,” Spahr says.