The housing bubble

Las Vegas Valley homes are overpriced and poised to fall, according to new study from PMI Group Inc., a Walnut Creek, Calif.-based national home mortgage insurance company. The PMI U.S. Market Risk Index names the Las Vegas-Paradise area as one of the nation's 11 most overvalued housing markets, making it ripe for a price adjustment over the next two years.

"With rising prices and a red-hot housing market, the Federal Reserve will likely continue to raise its target federal funds rate until a neutral level has been reached or surpassed," said Marco Van Akkeren, an economist with PMI Mortgage Insurance Co., a unit of PMI Group. "This implies that both the short and long end of the yield curve are set to increase, causing further strain on home affordability, especially in specific housing markets."

Median new valley home prices reached $301,050 in September, a 7.1 percent increase since last year, reports SalesTraq, a residential research firm. But that figure jumps to $330,000 when 753 apartment-to-condominium conversions during that month are excluded.

Subdivisions continue to be built around the valley. Homebuilders remain optimistic but a recent report suggests Las Vegas housing prices may be overvalued by 25 percent.

Valley home costs have nearly doubled during the last five years. A median new home ran $161,893 in 2000, and it came with more square footage and a larger lot.

Existing home sale prices are similarly rising in value, reaching $284,500 in September or 14.3 percent more than year ago. The average listing time, however, reached 42 days in September or 40 percent longer than in 2004.

"Existing home inventory for the valley dropped nearly 1,000 units in September, the first month this year that the total was less than last year," said Stephen Bottfeld, executive vice president of Marketing Solutions, a Las Vegas housing analyst. "Forget about the celebrated housing bubble in the near future. I think instead that the market will return to normalcy in 2006."

PMI calculated its Risk Index by tracking and comparing home-price appreciation, labor markets, employment levels, affordability and the percentage of monthly income that a mortgage takes up.

AFFORDABILITY IS AN ISSUE

Although local unemployment hovers around 4 percent with a 7.4 percent annual job growth, the median household income is still only $47,700 a year, according to the state Department of Employment, Training and Rehabilitation. Despite strong economic conditions, salaries have yet to keep pace with inflation.

The end result is that annual earnings now cover only 15 percent of a new home purchase price as opposed to 26 percent in 2000, reports the Restrepo Consulting Group, a local real estate research firm.

"The impact of rapidly rising home prices on our economic diversification is a potentially major issue in attracting some types of companies," John Restrepo, company principal, said. "As for-sale housing prices continue to rise, they will put upward pressure on rents as well."

Only 60 percent of valley residents own a home, which is 10.6 percent less than the national average, reports Applied Analysis, a Las Vegas economic research company. Over 40 percent of locals, meanwhile, rent instead of own their residence.

The rising cost of living in Las Vegas is also higher than the national average in every major category. Southern Nevada ranks as the 33rd most expensive housing market in the country, with prices rising at twice the rate of the national average.

"Las Vegas ranked among the top two fastest-appreciating metropolitan areas in each of the last four quarters," said Jeremy Aguero, principal of Applied Analysis. "Its ranking slipped 19 places to 21 in the scored quarter of 2005, as the region reported a comparably modest 4.4 percent quarterly appreciation rate."

THE CALIFORNIA EFFECT

The PMI Index considers the Las Vegas-Paradise area overpriced by 25.5 percent resulting in a 197-point risk rating. Average national rates on 30-year fixed-rate mortgages recently rose above 6 percent for the first time since late March, which could spark a market softening as well.

The report, more significantly, places the Los Angles-Long Beach area at the top of its risk list. Southern California defectors make-up one-third of the valley's new residents.

The median price paid for a Southern California home was $475,000 in September, up 16.1 percent from a year earlier, reports DataQuick Information Systems, a La Jolla, Calif.-based real estate research firm. It marks a 37 percent price premium over homes in the Las Vegas area.

Orange County was the region's highest sector with a median price of $610,000, or about 51 percent more than an average Southern Nevada home.

Many of those California residents are capitalizing on the current real estate boom to cash-out the equity from their home and move to Las Vegas where housing is still considerably cheaper. It enables those new residents to either upgrade to a higher-end home or create a financial nest-egg. As a result, a pricing deflation in Southern California could have a ripple effect throughout the Las Vegas market.

Some local homebuilders think Las Vegas is still a bull market.

"We have about 100,000 new residents annually creating demand for a minimum for 35,000 housing units a year," said Astoria Homes President Tom McCormick. "And we are barely meeting demand right now."

A diminishing land supply coupled with labor constraints and rising material costs are preventing homebuilders from delivering more units per year. It has subsequently depleted the available housing inventory creating a pent-up market demand, McCormick believes.

SUB-MARKETS

Entry-level and custom homes remain the two most robust sectors, while mid-priced residences and high-rise condos could see some softening. There were 93 luxury condominium projects, totaling 175 towers and 47,590 units, proposed, planned or under construction in the Las Vegas Valley during the second quarter.

"There is insufficient market demand to absorb all of the units currently in the development pipeline," said Brian Gordon, principal of Applied Analysis. "We estimate that between 30 and 40 percent of the projects currently planned will be developed during the next eight to 10 years."

The apartment market, meanwhile, is facing a negative inventory due to the number of condominium conversions, resulting in a higher demand for affordable housing. Converted condos now account for roughly one in every five new home sales.

Custom residences are also seeing increased activity due to greater personal wealth as well as new residents from more expensive metropolitan markets are garnering cash windfalls from their home sales.

"There have been 40 luxury home sales in the Las Vegas Valley during the past year in the $1 million to $3 million plus range," said James Beasley, president of Beasley & DeVarreau Sotheby's Int'l Realty. "We're seeing an 8 to 10 percent annual appreciation in the luxury market."

Notably, there are fewer speculators flipping homes at a luxury level, resulting in a genuine price appreciation. The scarcity of available large lots and a ban on new golf course construction (a favorite setting for luxury homes) has created a finite inventory for those seeking a custom built residence..

"While we are still more affordable than California, we're becoming less competitive compared to Phoenix, Albuquerque, Denver and Salt Lake," Restrepo said. "As interest rates rise, the volume of housing sales will slow down resulting in price an adjustment and more normal rate of appreciation over the next several quarters."

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.