Mesquite Market

It is official according to the National Association of Realtors Report last Tuesday. NAR reported June sales down for the third straight month and the market has shifted in favor of the buyer’s. 

Add this fact to the report from Local Market Monitor, which provides research to the real estate industry, assessing values and comparing selling prices to “equilibrium values.”  The company bases those values on local economic and population growth numbers as well as construction costs, vacancy rates, household incomes in the area and interest rates. They rank values for 100 cities; Las Vegas is one of them. The report places Las Vegas at 33% overpriced based on a median price of $302,000 and an Equilibrium value of $227,500. 

Mesquite is not Las Vegas. Construction costs, including land may be higher in Mesquite. Local economic and population growth, jobs, household income, and vacancy rates may be similar, and I stress “MAY BE” because without workforce or affordable housing, new jobs really don’t mean much to the economy. They may create the jobs but can they fill them? (But that’s a whole different issue.)

Interest rates are the same. 

The median priced home in Mesquite last month was $359,000, that’s $57,000 above Las Vegas and Local Market Monitor says that is 33% overpriced. If we use the “equilibrium value” for Las Vegas in Mesquite, with the average selling price of $359,000, Mesquite is 58% overpriced. Of course that would assume that Mesquite has similar local economic and population growth, construction costs, vacancy rates, household incomes, and interest rates to Las Vegas.

I am trying to figure out where that puts Mesquite’s buyers in this “Buyers Market.”
 

At this point builders are feeling pressure from all directions. 

Nation wide cancellations have jumped from 15% to 40%. Buyers are looking at the contract price and realizing they are paying more than the home is worth in the market today and walking away.  The builders are holding thier breath on existing contracts, hoping the buyers don’t get wind of the truth in many cases. 

Interest rates for interim financing, (the money they use to build with) cost more and is adding to the cost of each home. 

Building materials costs have jumped, wallboard up 26%, plastic construction materials up 18%, cement up 15%, copper and brass up 86%, asphalt doubled to $55 a ton. The cost of oil is reflected in many of the components in a home. At the end of the day, all commodities have gone up, which has put pressure on the cost of building.
 
Land costs in Mesquite were up 44% for single family lots in the second quarter of 2006 from a year earlier. 

The competitive market, resale homes and speculators sitting with new empty homes are creating fierce competition for builders. 

Wall Street downgrades across the board for publicly traded builders, the analysts are looking at a very, very weak market and dumping the builder stocks. Many analysts expect this picture to carry through 2007. 

Add to the pain builders are being forced to offer huge incentives, further reducing bottom line numbers. 

Many are caught with large contracts to purchase tracts of land, commitments that will cost plenty to hold, or won’t be cheap to walk away from.

Yesterday I met some very nice people from Minnesota; they are like most of the new breed of real estate speculators, novices not seasoned investors. Yes they have bought and sold a few homes in their day, but property management from 1000 miles away is part of the new experience.
 
The “pat” answer from the speculators to the current market conditions seems to be “no problem we will just rent it out,” (they must teach this in all the real estate get rich courses). 

 Just for the record I do not work in property management, with thirty years in the real estate business and enough experience with my own rentals I have found it to be an area I would rather avoid, it is a specialized business. 

Back to the people from Minnesota, they came in very frustrated. The house they bought last year has been rented, (they wanted to save the management fees, so they found their own tenant) now the tenant seems to be having some financial difficulty. At this point they are about two months behind, but they won’t move out. Upon inspection of the property the owner found it to have dirty carpet and walls and generally not well cared for. It was brand new just a few months ago. 

Anyway they wanted to know “how do we get them out of the house?” They flew in just to try to deal with this and they can only stay a day or so. (Of course just like they teach in those classes, the travel expense can be deductible, it adds to the already serious negative cash flow but it may be deductible!)  I introduced them to our property manager and she told them, “under Nevada law they can go to the justice court and file a five day eviction, at the end of five business days they can pay the constable to evict them. As far as damages and rent, they have two avenues, the deposit and court. Good Luck! 

Once they have possession of the property back they will just have to deal with it and either re-rent it or sell it. 

Units listed “For Rent” in the news paper and on the internet have increased dramatically in Mesquite. There appears to be around 100 available, not including condo conversions or apartment buildings. There are many brand new, never lived in units available for rent. The competitive rental market is leading to incentives like “first months rent free.” 

Not a healthy environment for speculators who are faced with negative cash flow even in a strong rental market.

In the last week I have spoken to at least five people with property for sale that for now refuse to reduce the price but instead plan to rent it out. They bought it to sell, they want to sell, but plan to wait for the market. The devil is in the details, things are seldom as simple as they appear and investment fundamentals do matter.
 
My thoughts, waiting could cost more than pricing it right.
 

As the summer heat settles in, we conclude the second quarter of 2006. This report is a review of the real estate activity in Mesquite, Nevada. 

Total listings submitted “For Sale” to the local MLS system 269; compared to 260 in the first quarter 2006, this includes all real estate categories. For 2005 second quarter, 217 listings submitted, new inventory up by 24%. 

Total “Sold and Closed” as recorded in the local MLS system 145, compared to 157 in the first quarter 2006, this includes all real estate categories. In 2005 second quarter we closed 224 units total, which is a 35% drop in sales by comparison of 2005 vs. 2006 second quarter closings. 

Single family lots have jumped up 44% in price, from $199,113 average sale price for the eight that sold in the second quarter of 2005 to $287,190 average price for the ten that sold and closed in the second quarter of 2006. These new prices will be reflected in the new construction costs and in new home prices.

Commercial buildings closed higher in price by 45% from an average of $132 per foot in the second quarter of 2005 (4 closed) to $192 per foot for the second quarter of 2006  (5 closed). Commercial land currently has an average asking price near $20 per square foot, or $871,000 per acre. It cost you more to be in business today by a large margin. 

Single family residence prices are up 24% from the second quarter 2005 to the same time period of 2006. From an average price of $273,844 to $359,557 (from $149 to $185 per square foot.) However they have gone from an average of 51 days on market to 118 days. The number of sales has dropped by 45%, from 127 in 2005 to 70 in 2006. 

Town home/condo unit prices are up 4% for the second quarter 2006 from the same time period for 2005. From an average price of $208,229 to $217,211, ($154 per square foot to $164 per foot average sale price.) While sales are down 27%, from 77 in 2005 to 56 in 2006. Days on market or marketing time has extended from an average of 40 days in 2005 to 85 days in 2006. 

Building permits issued during the second quarter by the city of Mesquite. Single family residential permits, 223 issued in 2005, 71 issued in 2006, down by 68% for the second quarter 2006. Multi-family permits 8 issued in 2005 and 13 issued in 2006, up by 38% in 2006. Commercial building permits issued for the second quarter, 5 in 2005 second quarter and 1 in the second quarter of 2006. 

Units listed “For Rent” in the news paper and on the internet have increased dramatically. There appears to be around 100 available, not including condo conversions or apartment buildings. There are many brand new, never lived in units available for rent. The competitive rental market is leading to incentives like “first months rent free.” Not a healthy environment for speculators who are faced with negative cash flow in a strong rental market. Plan B for many speculators, if it does not sell, is to put it into the rental pool.
 
At the end of the second quarter 2006, looking at the whole market picture of what is “for sale.” This includes “for sale by owners”, builders unlisted inventory, and property listed but not accessible to local realtors in the local system. There appears to around 400 properties available for the buyers to choose from, which based on the monthly average 2006 sales numbers is about a ten month supply. 

The average asking price per square foot for single family homes today is around $205, while they are selling for $185. This illustrates how far sellers are from reality. Since the residential sales this quarter are selling on average, within one percent of asking price. In other words, those priced right are the ones selling. 

Mortgage rates edged up to 6.9% for a thirty year fixed rate, historically a great number, it is the higher prices making it tough for people. Higher rates and the fact that the Federal Reserve board may not be finished with the rate hikes mean the exotic mortgage and negative savings rate time bombs keep ticking away.

Looking at the recent trends in the numbers and in conclusion; in my opinion the numbers look better than the market feels, buyers are very tentative and sellers very anxious. 

 I believe we better all fasten our seat belts for the “soft landing.”

We appear to be coming in hot and steep. 

While the numbers are based on facts from what we believe to be reliable sources, they are not guaranteed; please do your own research. 

For your complete daily market update, go to Mesquitemarket.com or tune into Radiomesquite.com for   “Talking Real Estate” Saturdays at 3pm pacific time.

Please feel free to contact Chris Miller with any questions or comments at 435-862-5951   One last thing, I would like to hear your definition of a “Soft Landing”, or what goes beyond a soft landing in your mind, what does that term mean to you? Let me know on the comments section of mesquitemarket.com