Area housing: It’s still a bleak market

Foreclosures continued to leave a large footprint on Washoe County during the first half of the year, with areas such as the north valleys and Sparks seeing distressed properties account for more than three-quarters of their active listings.

As of July, bank-owned properties, short sales and houses with special conditions accounted for a staggering three in five properties being sold in Washoe, according to the Center for Regional Studies at the University of Nevada, Reno.

The problem is especially magnified in areas that saw the most construction during the boom years. Distressed properties accounted for eight out of 10 properties in the north valleys. Three other areas — Sparks, old southeast and Spanish Springs — cracked the 70 percent mark for their rate of distressed inventory.

Overall, 59 percent of Washoe County’s 4,060 active listings in July were distressed properties. Only Incline Village, Washoe Valley and the new southeast had distressed properties accounting for less than 50 percent of active listings.

The area’s high rate of notices of default, meanwhile, signal potentially troubling times ahead with regard to rising foreclosures, said Brian Bonnenfant, project manager of the Center for Regional Studies. Federal interventions, such as the foreclosure moratorium, helped stem the tide for a little bit. But once those interventions ended, distressed properties came back in full force, with new bank-ownership hitting a record 351 units in July.

“If you look at the (notices of default), they are still climbing,” Bonnenfant said. “Back in 2,000 they had such an insignificant number that they weren’t even tracked. These days, you can’t even use historical trends anymore because we’re in uncharted territory. This is the new reality.”

Reality bites

Reality has been especially tough for the new home sector, which continues to struggle under the combined weight of heavily discounted foreclosures, soft demand and tighter financing.

New home sales in Northern Nevada totalled 274 in the second quarter, with Washoe County accounting for the bulk of sales, according to real estate research firm Hanley Wood Market Intelligence. Douglas County only had 9 sales for the quarter. The Carson area reported zero sales.

Although significantly lower than last year’s sales for the same period, Northern Nevada’s second quarter sales still represented a marked improvement from last year’s fourth quarter bottom, said Kathryn Boyce, regional director for Hanley Wood Market Intelligence. Back then, sales for the five counties Hanley Wood tracks as part of the Northern Nevada market totalled just 67.

“We’re seeing increases but it’s still a bleak market,” Boyce said. “We’re an awful lot away from a normal market.”

Market conditions have forced builders to sharply scale back in the last four years. Hanley Wood projects residential building permits in Northern Nevada to total 1,072 this year, about half of the annual levels seen in 2007 and 2008, and far below the 2005 peak when permits broke past 6,000. The number is below even 1991 levels, which reported more than 1,500 permits.

Many projects have already been cancelled or put on hold due to tough times. In the greater Reno metro area, developers halted sales for 12 percent of active projects while 24 percent were cancelled outright and turned over to the banks. The cancellations could provide opportunities for remaining builders to snap up distressed projects and finished lots at a discount, Boyce said. On the flip side, lending guidelines are also a lot tougher, with banks now requiring personal guarantees and not willing to take much risk.

The turnover in developments likely isn’t done either, Boyce cautioned.

“The number of builders exiting the market will continue to shake out (so) look for more existing projects to halt sales,” Boyce said. “It’s hard for builders to find projects at the right price to support today’s price points and still make a profit selling homes.”

Lost value

At the heart of the price point issue are plummeting home values, which have seen a steep nosedive from the heady days of the housing bubble.

After peaking at $423,311 in February 2006, median values for new homes have since dropped 43 percent to $242,000 as of July this year, according to the Center for Regional Studies.

Existing homes are no different, falling from a peak of $350,000 in the third quarter of 2005 to $182,950 in the second quarter this year — a drop of about 48 percent. Assuming that the market did not have a bubble and simply appreciated at the historic rate of about 1 percent per quarter since 1990, today’s median price for existing homes would actually be 18.1 percent undervalued.

Given the steep drop in home values, market observers are seeing a new disturbing trend: walk-offs.

“One thing that’s starting to happen are strategic foreclosures, where a household can afford a payment but they’re looking at negative equity for 15 years,” Bonnenfant said. “We’re starting to see these types of households walk and that’s going to add another wave into this foreclosure issue we now see rippling through neighborhoods.”

Such walk-offs would be bad news for an industry already struggling from foreclosures brought about by resetting mortgages and unemployment. Hanley Wood is projecting Northern Nevada to lose nearly 16,000 jobs this year, a significant jump from the 9,000 jobs the area lost last year. Unemployment in Nevada also reached a record 12.5 percent in July, with Reno-Sparks not far behind at 12.2 percent unemployment, according to the Nevada Department of Employment, Training and Rehabilitation.

“(Employment) is one of the big wild cards right now,” Boyce said. “It’s weakened dramatically, and it will go down even further.”

Positive signs

Despite continuing challenges with unemployment, foreclosures and falling home values, Northern Nevada’s housing market is also seeing some positives.

Sales continue to be strong, paring down existing single-family inventory in the Reno area from a high of 19 months last year to a little over six months in July.

Increased affordability should also help the market, housing experts agreed.

During the second quarter, the Reno-Sparks area ranked 105th out of 226 metro areas in the nation and 16th in the region in affordability, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index. Based on the index, residents earning a median income can afford 78.3 percent of homes in the area.

“The affordability index now has Reno ahead of most of our regional competitors, including Salt Lake City, Tucson, Boise, Sacramento and most of the California valleys,” Bonnenfant said. “That means we’re back in a position where a homeowner can sell a house in California for more than what they can purchase here — provided they could sell their home, that is.”

Affordability is already boosting interest in Northern Nevada, said Julie Reynolds, spokesperson for Realtor.com. The greater Reno metro area ranked fourth among 145 markets in July for interest among Realty.com visitors, posting a nearly 125 percent jump in search activity compared to last year, Reynolds said.

“Folks appear to be finding value in Reno,” Reynolds said. “It’s capturing the attention of first-time homebuyers, investors and people looking to re-enter the market.”

Casting a shadow

Buyers looking to enter the market, however, will likely be faced with several challenges, said Kris Layman, president of the Reno/Sparks Association of Realtors. Layman described the current environment as “incredibly challenging” for buyers due to the area’s inventory mix, particularly its large number of short sales. Short sales take so long to process that it’s common for frustrated buyers to just walk away, especially if they feel they won’t make the Nov. 30 deadline for the $8,000 first-time home buyer tax credit. Banks, meanwhile, appear gun shy in adding inventory to the market following the dive median prices took when foreclosures first flooded the market.

“Banks went from one extreme to another,” Layman said. “If you look at a year ago, the bank-owned inventory was above the five- to seven-month supply you see in a balanced market. If you look now, bank-owned inventory is well below three months’ supply. There’s no clear evidence that they’re holding back. But they have so many properties, it seems that they are, in effect, having an opportunity to manipulate the market.”

The prospects of held-back inventory has been a hot topic among those in the industry, especially as it relates to “shadow inventory.” Shadow inventory refers to potential supply that has yet to hit the market, whether it be properties that banks are holding back or even homes owned by potential sellers just waiting for a market comeback. Too much shadow inventory hitting the market can lead to a glut in supply, which can depress prices, said Greg Gross, Northern California director for research firm Metrostudy.

“Shadow inventory is a big concern because banks don’t want to share that information,” Gross said. “We can see things like the number of notices of default. But not shadow inventory.”

Bill Uffelman, president and chief executive officer of the Nevada Bankers Association, said he “honestly doesn’t know” just how much inventory banks hold — only that financial institutions are trying their best to deal with the distressed properties on their books.

Meanwhile, many in the industry say it will take time for the area to recover from the “vicious circle” created by foreclosures, unemployment and poor consumer confidence.

“We’re not going to see housing construction come back as the animal it was five years ago,” Bonnenfant said. “Construction will come back slowly, which means jobs will come back slowly and purchases will come back slowly — everything just feeds of each other. The question now is what will be the next silver bullet (that rallies the economy)? What will be the next dot-com boom or the next construction boom? It’s really hard to say. I think it’s going to take a while to bottom out and climb back up.”

Additional Facts
$423,311: The median price for a new single-family home on February 2006 in Washoe County.
$242,000: The median price for a new single-family home on July 2009 in Washoe County.
315: The number of new single-family homes sold in Washoe County on November 2005.
55: The number of new single-family homes sold in Washoe County on July 2009.
$182,950: The median price for an existing single-family home during the second quarter of 2009 in the Greater Reno-Sparks area.
Here are the quarter-by-quarter changes in median price:
2Q-09: down 8.5 percent
1Q-09: down 10.7 percent
4Q-08: down 9.7 percent
3Q-08: down 7.8 percent
$36,400: The gap between the median deed value of distressed properties and the actual median price banks sold such properties for in July 2009 in Washoe County. Median foreclosure deed value was $185,900. Median resale price was $149,500.
Number of permits issued for single-family housing in Washoe County since 2000:
2000: 3,153
2001: 3,819
2002: 3,796
2003: 4,312
2004: 4,866
2005: 5,535
2006: 2,909
2007: 1,985
2008: 873
2009: 298
- 351 vs. 246: The number of new bank-owned inventory in Washoe County on July 2009 vs. July 2008.
- 302 vs. 167: The number of bank re-sales in Washoe County July 2009 vs.
July 2008.

Source: Center for Regional Studies, University of Nevada, Reno