Real Estate Investors Cast Watchful Eye On Las Vegas

Las Vegas' lucky number last year was 52 -- as in 52 percent. That's how much real estate prices jumped in the nation's fastest-growing city in one year, as a housing shortage set off a wave of speculation by investors from California and other states.



But as any gambler knows, Lady Luck eventually turns a cold shoulder. Las Vegans wanted to cash in, too, and so many put their houses up for sale that they flooded the market. By the end of the year, some homebuilders were slashing prices.



For investors from states like California where prices seem to move in only one direction -- up -- it was a stark example of a deflating bubble.



"When you lose money in real estate, you really feel it,'' said Igor Doncov, a software engineer in Half Moon Bay who bought two new houses in Las Vegas early in 2004 but sold them at a loss after his builder, Pulte Homes, cut prices on its new models by $180,000.



"I thought I couldn't lose," he said in a telephone interview. "But it turned into a total disaster."



Housing analysts don't think Las Vegas' slowdown is a sign that prices will soften soon in other fast-appreciating regions. But they say it is a warning of what could happen in the Bay Area as interest rates go up -- particularly for people trying to "flip" houses for a quick profit.



"Everyone is watching Las Vegas with its price appreciation and flipping, " said John Karevoll, an analyst at DataQuick, the La Jolla real estate research firm. "If something weird happens, it'll happen there first."



For years, Las Vegas real estate was cheap. Myrna Kingham, president of the Greater Las Vegas Association of Realtors, remembers not-so-distant days of driving around in a pickup wearing high heels and showing clients dusty 5- acre parcels listed for $20,000.



But as the population of Las Vegas and surrounding Clark County grew 81 percent in the 1990s, adding 621,160 people, housing prices caught up, matching the national median of $145,000 in 2001.



Then last year, the market caught fire, boosted by healthy job gains, a growing stream of retirees, Californians drawn to lower home prices and an influx of investor money.



Builders, faced with a shortage of workers, had trouble keeping up. Add rock-bottom interest rates, and the scene resembled the go-go days of the Bay Area's tech boom. Hundreds of would-be buyers descended on open houses, and home prices seemed to increase as quickly as the progressive jackpots in the slot machines on the Strip.



Record appreciation



In the spring of 2004, the median price for a single-family house was $269,000, 52 percent higher than the year before -- a national record for appreciation, according to the National Association of Realtors.



"The market was hotter than blazes," Kingham said. "People were looking for affordability -- they wanted a nice home in an area with nice weather that they could buy for $200,000."



Californians, who pay some of the highest home prices in the nation, took notice. Golden State residents have snapped up nearly 27,000 Las Vegas properties since 2000, according to DataQuick. In 2004 alone, California residents bought 11,600 homes -- 12 percent of the transactions in Clark County for the year.



Bay Area residents bought nearly 7,800 Las Vegas properties over the past five years. In the second quarter of 2004 alone, the number who bought Las Vegas property doubled from the same quarter the year before, to more than 800, surpassing investment in Sacramento, the Tahoe region and Palm Springs for the seventh straight quarter.



But in less time than it takes to build a single house, the market changed.



Egged on by the stratospheric prices their neighbors were asking -- and getting -- homeowners in Las Vegas flooded the market with "for sale" signs. The number of existing houses posted for sale on the Multiple Listing Service ballooned from about 1,400 in February to more than 16,000 by October.



Among them were never-lived-in homes offered by investors who had bought them only months before from national homebuilders -- who were selling their own brand-new houses literally across the street.



In early fall one of those builders, Pulte Homes, took the extraordinary step of slashing prices by $25,000 to $180,000 on more than 20 of its Las Vegas-area developments. The move sent shock waves through the Las Vegas building industry and angered investors like Igor Doncov.



Doncov, a 57-year-old engineer who was a victim of the technology flame- out, was one of thousands of investors who hoped to turn a quick profit by buying and selling Las Vegas property within a few months. Early last year he bought two new houses from Pulte Homes for $515,000 each.



By the end of the summer, he said, the houses were worth well over $600, 000, based on Pulte's prices for the same models. Then Pulte cut the price by about $180,000.



Doncov sold the two properties in December and January for $480,000 and $490,000; after closing costs and sales fees, he estimates he lost $100,000. He is working with a lawyer to try to recoup the losses from Pulte, on the grounds Pulte misled investors by systematically raising new home prices, then abruptly lowering them. Many people in Las Vegas shrug at tales like Doncov's, saying any plan to get rich quick is fraught with risk.



"There are people who come here and lose all kinds of money on the card table," said Keith Schwer, an economist at the University of Nevada at Las Vegas.



By December, it was clear the peak of the frenzy had passed.



Residential building permits that month were 34 percent below the previous December's, as measured by the Center for Business and Economic Research, which Schwer directs. And 15 percent fewer people were moving to Las Vegas -- some undoubtedly spooked by the region's steep jump in home prices.



Pulte officials would not comment on the price reductions. In the wake of Pulte's move, other builders also cut prices but made no formal announcements.



KB Home, the region's largest home builder, didn't cut prices but did tighten its policies on sales to investors. Contracts now stipulate, that, barring the loss of a job or other major problem, those who resell their properties within a year have to give KB Home the profit.



Despite the builders' moves, Schwer and other experts say the Las Vegas market remains healthy. In recent months, they say, the number of homes for sale has declined and homes are selling faster.



In January, however, there were still 13,800 homes for sale. Though the median price for a new home climbed 6 percent to $307,500, the median for an existing home -- $251,000 - was up only one half of one percent from a year before, according to Schwer.



Over the long term, the area's job growth -- including a new 8,000- employee casino opening in April -- warm climate, entertainment options and well-equipped airport will continue to draw buyers, Schwer said.



On a Friday morning in February, Bill Jeffers, who owns Valley Furniture in Livermore, toured a $731,000 home in a subdivision called Inverness. By buying a home in Las Vegas, Jeffers, who has lived on Maui for several years, will shorten his twice-monthly commute to the store and put his grandchildren into strong school systems.



"I tried to get in last year, but there were just too many other buyers," said Jeffers, a Livermore native.



Some making profits



And some investors who bought wisely are making profits.



Stephanie Wedge, a San Jose real estate agent who also brokers property in Las Vegas, bought a house for $625,000 last May. She put the 5-year-old home on the market on Feb. 23 for $775,000, and she expected to get an offer the following week.



"That's a really good turnaround," said Wedge, who also has reserved a condo in a yet-to-be built high-rise. "I think it depends on where the property is -- and this is in a gated, country club community." The continued pace of construction serves as an outward sign of the region's confidence. On a stretch of freeway south of the Strip, a sign reads "KB Home, Next 5 Exits."



Adding more houses to a market already flush with them would seem to only exacerbate any stagnation in the market. But Dennis Smith, president of Las Vegas' Homebuilders Research Inc. pointed out the vast majority of new homes are presold. The market "is still in correction mode because of the high inventory in the resale segment,'' he said. "It will probably take at least six months for that to end."



So, will what happened in Vegas, stay in Vegas?



Schwer doubts Las Vegas' deceleration will bleed into the Golden State --



or any other state -- in part because Las Vegas growth rates were so far above the norm.



Others say the arc of Las Vegas' recent experience may contain a hint of the Bay Area's future.



While the nine-county region saw much lower price appreciation last year than Las Vegas -- an increase of about 17 percent -- Ed Leamer, a UCLA economist, contends that both regions are enveloped in a speculative frenzy.



In Las Vegas, an oversupply of homes relative to demand may spell price declines. Back in the Bay Area, Leamer thinks rising interest rates will take some of the air out of the market as fewer people qualify to buy expensive properties -- though any correction would be far less dramatic than Las Vegas'.



"Because the market has cracked in Las Vegas doesn't mean it's imminent in other areas," Leamer said. "But it gives you a sense of what may happen in these areas in the face of rising interest rates."



By-Kelly Zito