Falling land costs set builders for rebound

A parcel of residential land in northern Nevada that sold for $37.44 million in late 2005 sold for $3.88 million less than four years later.

Another tract that sold for $11.4 million in early 2006 sold for $670,000 in late 2009 losing 94.1 percent of its value in the meantime.

Gut-wrenching as those sales and others like them undoubtedly proved to be for the sellers, they've established a platform for the region's homebuilding industry to begin its recovery one of these days.

Here's why: New homes need to be price-competitive with existing homes. Builders can't make that work with high-priced land they purchased at the height of the housing boom.

But the much less expensive land they purchased after the bubble burst begins to pencil out, especially once builders factor in reduction in construction costs as hungry suppliers and subcontractors whittle away at their profit margins.

Mark Krueger, a senior vice president and land expert with the brokerage Grubb & Ellis|NCG in Reno, says current prices are reminiscent of those 15 years ago.

The price of ready-to-build residential lots, he says, are similar to those found in the Reno market in 1997.

And the 77 percent of new home sales in the under-$250,000 category in the Reno-Sparks area last year? That looks a lot like 2001, when 83 percent of new home sales fell into that category.

A builder who hopes to hit the market with homes priced at $170,000 that's roughly the median price of recent sales can afford to pay about $24,700 for a ready-to-build lot, Krueger told members of the Builders Association of Northern Nevada last week.

Back in 2005, when the median price was $350,000, builders could still turn a profit if they paid $117,500 for the lot.

But even though the cost of building a house has begun to make sense, builders have told Krueger they see 2011 as a waiting year, one in which they get themselves positioned for a recovery of the market in 2012.

A handful but only a handful of new housing projects are likely to get under way this year, Krueger predicts.

The problem? The new home business still faces headwinds from the existing home market. But that competition may be subsiding, said Ken Amundsen, the immediate past president of the Reno-Sparks Association of Realtors.

The inventory of existing homes on the market has remained for several months at level that's about balanced between a buyer's market and a seller's market, Amundsen said.

Prices while still far below their 2005 peak also have stabilized in recent months. The median price of an existing home sold in Washoe County was just a hair under $174,000.

The stability, Amundsen said, is all the more remarkable because it's coming in the face of record-high jobless rates in the region.

"We've got affordable homes in the market right now," he said.

Still, distressed sellers made up 75 percent of those who put their homes on the market in December, the realty association estimates, and sellers hoping for a bank's cooperation on a short sale these days are nearly as numerous as traditional sellers. Roughly a third of the existing homes on the market are bank-owned.

While builders expect a slow recovery of the home construction market, tight inventories of newly constructed homes as well as ready-to-build lots could cause them to scramble if things turn around more quickly.

About 85 newly built but currently vacant homes are available in Reno and Sparks, Krueger said, and lenders' reluctance to finance speculative building is likely to keep inventories tight.

The number of ready-to-build lots in the area 3,407 is enough to meet demand for more than six years at the current level of construction, he said. But it's only enough to meet barely more than a year's demand at the average level of sales over the past 12 years.

SIDEBAR

Strategic defaults: The market's wild card

While the supply of existing homes on the market a key indicator watched closely by builders of new homes remains stable, realty experts worry that so-called strategic defaults may continue to depress the market.

A study released by the Nevada Association of Realtors last week found that 23 percent of recent foreclosures involved people who still could pay the cost of their mortgage but chose to walk away because they're so far under water on their loan. And the study cautions that number continues to grow.

While the survey involved homeowners statewide, it probably holds as true in northern Nevada as it does in the Las Vegas area, says Mike Young, a Realtor in Incline Village who serves as president of the state association.

Young said many of those strategic defaults are the result of homeowners' inability to win concessions from mortgage lenders.

The Realtors' study, which was undertaken by SGS, a national research firm, found strategic default is more common among older homeowners, and it found that many of them had been advised by trusted advisors to take the step.

Young said the Nevada Association of Realtors want to see faster action by financial institutions after homeowners request modification of their loan terms.

NNBW staff