Homebuilding posting solid gains

Home construction activity in the Reno-Sparks region is on track to increase nearly 45 percent this year from its levels in 2012 — bringing good news to furniture retailers, appliance stores and garden shops as well as the building industry itself.

Observers who follow the industry closely say the trend appears to have legs for a long run, although banks remain cautious about lending for speculative construction that gets ahead of the orders that builders have in hand.

Mark Krueger, a principal with ArchCrest Commercial Partners and expert in the market for residential land, says builders sold 632 new homes in the region in the first half of this year and appear on track for sales of 1,125 by the time the year is done.

While that’s nowhere close to the approximately 5,000 new homes that were delivered annually at the peak of the last decade’s boom, it’s a marked improvement from the sales of 780 new homes recorded in the region last year.

“The movement has been significant,” says Krueger.

What’s driving the improvement?

For starters, take a look at the tight inventory of existing homes on the market.

Helen Graham, president of the Reno-Sparks Association of Realtors, says limited supplies of existing homes — particularly in the lower-price ranges favored by first-time buyers — has led to bidding wars and a 32 percent increase in the median price of existing homes in the past year.

While an improving economy and falling unemployment rates are major contributors to the tight inventory, Graham says other factors are at play as well.

Homeowners who have taken advantage of low interest rates and higher values to refinance their loans, for instance, are likely to stay put a while longer than the average of six years that most folks live in a house before moving on.

And while some of the investors who paid cash to snatch up single-family homes appears to be moving on to other markets, Graham says their purchases have played a role in keeping supplies tight.

New construction fills some of the gap.

“Construction is on the rise, which will help stabilize our inventory,” Graham says.

At the same time, a new state law may tighten the inventory of existing homes coming onto the market, says Erin Schiller, regional sales executive and education director with Ticor Title.

Dubbed the “Nevada Homeowners Bill of Rights,” the legislation extends the timelines that families facing foreclosure can stay in their homes and work out new arrangements with a lender.

A similar law in California meant that fewer homes come onto the market as the result of foreclosure, Schiller says.

And with fewer existing homes from which to choose, buyers give a closer look at new construction.

Coincidentally, another new California state law — Proposition 30, raising taxes on high-income Californians — is boosting the migration of folks from the Golden State into the Reno area, she says.

Krueger says the near-halt of residential construction in the region after the financial crisis also is playing a role in today short inventories.

If home construction had continued at its long-term pace — an average of 2,940 new homes a year in the region — Reno and Sparks today would have an additional 9,000 homes, he says.

While demand remains strong and inventories remain tight, residential experts says a few clouds float over the horizon.

A big one: Rising interest rates.

A half-percentage-point increase in mortgage rates adds $30 a month to a buyer’s payment for each $100,000 borrowed, says Graham. When the recent increases in interest rates — they’re up about a point from their lows — and the sharp increase in median prices, some potential buyers are squeezed.

And unlike the go-go days of 2005 and 2006, they’re not going to get any help from lenders who turn a blind eye.

“Fogging a mirror no longer counts as qualifying for a loan,” the Realtors association leader says.

For buyers of new homes, rising prices paid by builders for the lots upon which they build will have a growing impact.

“Land is definitely on the move,” says Krueger, noting that most of the bargain-priced deals that builders got in buying foreclosed land from banks now have disappeared.

The Spanish Springs and Sparks areas have been the most active for new-home construction so far this year, he says, although south Reno and west Reno are close behind.

The top five builders in the market this year, Krueger says, have been Lennar, Ryder, Toll Brothers, Pulte and, in a tie, Desert Wind and KDH Builders.