Investors and Housing Markets in Las Vegas: A Case Study
Markets in Las Vegas:
A Case Study
Allan Mallach
June 2013 EXECUTIVE SUMMARY
The Las Vegas case study focused on four zip codes in the Las Vegas Metropolitan Area representing low to middle-level housing market subareas (the lower three quintiles of the market based on price) within the larger region containing roughly 12% of the region’s population. The analysis looked at the universe of single-family and condominium sales for calendar year 2011 by census tract for these four zip codes, looking at the distribution of owneroccupant vs. non-owner-occupant (NOO) buyers by location and price range of houses bought by each, and the nature of the transaction, such as REO, short sale or conventional sale, as well as the geographic distribution of non-owner-occupant buyers by address, and whether there were patterns of concentration among non-owned occupant buyers. Using other property data sources, activity patterns of selected buyers in the larger market area were studied, while all of his information was supplemented with a series of interviews with informants in Las Vegas to provide a greater qualitative understanding of the dynamics of the real estate investor sector.
The Las Vegas area has been one of the nation’s foreclosure hot spots since the collapse of the housing bubble, which was particularly pronounced in Las Vegas. Prices declined from the 2006 peak by roughly 60%, home construction came to all but a standstill, foreclosure starts were more than double the national average, and the great majority of owners in the area found themselves underwater. Investors began entering the market in large numbers late in 2008 or in
2009, and have represented roughly half the market since them. A ballpark estimate is that between 2009 and 2012 investors spent $25 billion acquiring single-family properties in the Las
Vegas area.
Investors showed a pervasive presence throughout the study area, representing slightly more than half of all single family transactions and two thirds of condominium purchases, typically purchasing properties slightly below the median price within each submarket area. While individual buyers may focus on a particular submarket, investor activity was consistent across all submarkets represented in the study area. Half of the investors recorded out-of-state addresses; because of widespread use of local agents and representatives, particularly by overseas buyers, this significantly underrepresents the extent to which the Las Vegas area is drawing investors from out of the state, and from other countries, most notably, according to informants, from East
Asia, particularly China. Investors are principally individuals or small-scale corporate entities, particularly LLCs, through while investors may buy one or two, but rarely more than twenty or so, properties. The ability of outside investors to function successfully in the Las Vegas market is significantly enhanced by the presence of a strong investor support network, containing Realtors, property managers, lawyers, home warranty companies, and the like, all oriented to the care and servicing of small investors. While there is evidence that ‘mega-investors’ such as Blackstone and Colony Capital have entered the market, they still have only a small market share.
As market conditions have changed since investors began entering the market, investor strategies have changed. The Las Vegas market has seen little predatory flipping or ‘milking’ of properties.
What I have called ‘market-edge’ flippers, who are able to sell the houses they buy for more than their cost by taking advantage of greater market knowledge or greater access to properties than other investors or homebuyers, were common during 2009 and 2010; as the market began to stabilize, and the disparity between REO and conventional transactions diminish, they have
2largely left the market. Nearly all investors in the market today are buying to hold for 3 to 8 years and rent, with the expectation of obtaining an annual cash-on-cash return of 6% to 8% and further return from appreciation on resale at the end of the holding period. Most of the properties coming on the market require little in the way of rehab, while property taxes are manageable at
1% of market value. While properties in low-end submarkets may require greater repairs and maintenance, that is offset by a lower gross rent multiplier; the same is true of the condominium market, where high HOA fees are offset by prices that are significantly below single-family house prices.
There is compelling evidence that the dramatic increase in real estate transactions in the Las
Vegas market from 2007 to 2009 was investor- rather than homebuyer-driven, an increase that enabled the market to absorb an exceptionally high volume of inventory becoming available through foreclosure. That, in turn, meant that the widespread abandonment that was taking place at the same time in many other parts of the country affected by high foreclosure rates did not take place in Las Vegas. It is unlikely that, had investors not been ready to step in, the market would have adjusted in anything like the same fashion; the probability that an equivalent number of would-be owner-occupants would have emerged during those years must be considered remote.
Thus, although it cannot be proven with certainty, it is a reasonable conclusion that investors played a critical role during that period in stabilizing the market and preventing widespread abandonment.
Over time, however, it appears increasingly likely that investors have come to crowd out prospective homebuyers. This crowding out is not so much because investors are willing to pay more as the fact that, from a transactional standpoint, selling to an investor offers the seller – particularly of an REO property – clear advantages. As one informant summarized them, the investor will take the property ‘as is’, will not look for a warranty, and as a cash buyer, will close quickly and require neither appraisal nor mortgage contingencies.
As a result, at this point, while investors are continuing to sustain the housing market, in the sense that they are continuing to absorb inventory at stabilized or rising price levels, and appear to have played a critical role in fostering a basic threshold level of stability in many neighborhoods, the extremely high share they represent of the single-family market may be discouraging further stabilization of the market by keeping prices from rising more if owner occupants were better able to compete for properties as well as further stabilization of neighborhood conditions, by preventing the homeownership rate from returning to what may be considered healthier levels.
In conclusion, there is strong evidence that investors have played a constructive role in the Las
Vegas market, but there is less clear-cut evidence that their continued domination of the market continues to be as constructive. Since the great majority of investors appear eager to maintain their properties so that they may be able to sell them for a profit in a few years, it is less likely that their properties will be neglected and become neighborhood problems. At the same time, to the extent that they are crowding out potential homebuyers, their effect is problematic. Given that many investors may look to resell their properties over the next two to four years, a public or non-profit program designed to work with investors in order to facilitate their properties being restored to owner-occupancy might be a valuable investment in the community’s future. 34
ACKNOWLEDGEMENTS
I would like to thank my colleagues Chris Herbert, Dan Immergluck, Lauren Lambie-Hansen, and Frank Ford in the larger multi-city study of investors in the single family market of which this case study is one part. I have benefited throughout the study from their help in thinking through some of the key research questions and research design, and am particularly grateful to the individuals in Las Vegas who agreed to be interviewed for this study. This research was done for the What Works Collaborative, including researchers from the Brookings Institution
Metropolitan Policy Program, Harvard University Joint Center for Housing Studies, the New
York University Furman Center for Real Estate and Urban Policy, and the Urban Institute Center for Metropolitan housing and Communities (the Research Collaborative). The Research
Collaborative is supported by the Anne E. Casey Foundation, the Ford Foundation, the Kresge
Foundation, the John D. and Catherine T. MacArthur Foundation, the Open Society Foundation, and the Surdna Foundation, Inc. The findings in this report are those of the author alone, and do not necessarily reflect the opinions of the What Works Collaborative or supporting foundations.
The author can be contacted at amallach@comcast.net. 5
INTRODUCTION
The purpose of this paper is to present a case study of the activities and characteristics of distressed residential real estate investors in the Las Vegas Valley (the Las Vegas-Paradise
Metropolitan Statistical Area or MSA) of Nevada, an area coextensive with Clark County,
Nevada, based on a combination of quantitative analysis and qualitative assessment based principally on interviews with knowledgeable informants. This is one of four case studies carried out under the auspices of the What Works Collaborative to explore the behavior of investors in distressed real estate since the collapse of the housing bubble in 2006–07 and the onset of the mortgage foreclosure crisis, and their impact on real estate market and community conditions.
The Las Vegas experience, as described in this case study, is particularly interesting. Although the area was hit hard by mortgage foreclosures and collapsing prices, in many respects both the business practices and impact of distressed property investors in that market have been markedly different than those observed in Atlanta and Cleveland, two of the other case study communities.
This case study concludes that the role these investors have played in the Las Vegas area has been positive overall, and that, with some qualifications, they played a significant part in stabilizing the area housing market and placing it on the path of recovery.1
This outcome does not reflect differences in the characteristics of investors or their underlying intentions, but rather significant differences not only in market conditions but also in market expectations.2 These factors, as I have discussed in a previous paper (Mallach 2010), are fundamental to any understanding of investor activity. Moreover, a greater understanding of the way market factors affect investor behavior can offer a productive framework for practitioners elsewhere to not only better understand investor behavior in their communities, but to design and adopt effective strategies to address any problems their activities may be causing.
Rather than attempt to carry out a comprehensive quantitative analysis of the entire Las Vegas
Metropolitan Area, a region of nearly two million population spreading across 600 square miles,
I focused principally on a subset of the MSA consisting of four zip codes representing low to middle-level housing market subareas (or roughly the lower three quintiles of the market, based on price) within the larger region with a combined population of approximately 211,000 in 2010
(See appendix 1 for a map of the target zip codes). The analysis looked at the universe of singlefamily and condominium sales for the calendar year 2011 for these four zip codes, and within this area, I further examined activity at the census tract level for those census tracts having a minimum number of transactions.3 Within this framework, I looked at the distribution of owneroccupant versus non-owner-occupant buyers4 by location and price range of the houses bought
1 There is some evidence that patterns have been similar in some other Sunbelt communities, such as Phoenix (Timiraos 2013)
2 Although the possibility of self-selection exists; that is, that investors sharing certain characteristics may be more drawn to areas with particular market characteristics.
3 Using a minimum cut off of 15 transactions (for single-family detached [SFD] or condominium sales separately) to be included, the analysis included 37 census tracts for single-family detached transactions and 18 for condominium transactions (17 of the 18 condo tracts were also included in the SFD list). Five census tracts were excluded from the SFD list.
4 The differentiation between owner-occupant (OO) and non-owner-occupant (NOO) buyers was made on the basis of the address recorded for tax purposes. An address other than the address of the property was considered an indicator of an NOO buyer. While it is possible that a certain number of second home buyers (rather than investor buyers) are included as a result, none of the census tracts included in the analysis is considered to contain significant numbers of second homes.
6by each, and the nature of the transaction, such as REO5, short sale or conventional sale. I also looked at the geographic distribution of non-owner-occupant buyers by address, and whether there were patterns of concentration among non-owned occupant buyers. In addition, using other property transaction data sources,6 I looked at the activity patterns of selected buyers in the larger market area, in order to understand investor behavior in the Las Vegas area generally. This information was supplemented with a series of interviews with informants in Las Vegas to provide a greater qualitative understanding of the dynamics of the real estate investor sector.7
The case study is in four parts. The first provides an overview of housing market conditions and trends in the Las Vegas area, and more specifically in the four zip codes that were the focus of the quantitative analysis, in order to provide a framework for the analysis of investor activity.
The second looks at who the investors are and the nature of the investor support system in the Las Vegas area, and describes in general terms the different strategies that they have used and how they have changed over time. The third section looks in more detail at the economics of distressed property real estate investment, including case studies of specific investors, while the final section attempts to evaluate the effect that investor activity has on the Las Vegas real estate market.
THE LAS VEGAS HOUSING MARKET
Area Overview
The Las Vegas area has experienced one of the nation’s most dramatic patterns of price appreciation and collapse over the past decade. Figure 1 shows the trend in house values trend since 2000. As the figure suggests, the area has gone through four distinct phases during that period:
• 2000–03: steady, moderately strong appreciation
• 2003–06: unsustainably high appreciation (bubble)
• 2006–09: market collapse (bust)
• 2009–12: moderate decline with possible gradual market stabilization
From July 2003 to July 2006 house prices increased by 81 percent in the Las Vegas area. By July
2009, prices were only 42 percent of what they had been three years earlier, as shown in figure 1.
The dramatic drop in prices, coupled with the large share of newly constructed units in the housing stock, has led Nevada as a whole to have by far the largest share of underwater borrowers of any state in the United States. By the second quarter of 2012, 59 percent of all mortgaged properties in Nevada were underwater.8
5 REO or ‘Real-Estate-Owned’ is the generally-used term to refer to properties to which lenders have taken title as a result of foreclosures.
6 The principal supplemental data sources were the Clark County Assessor and blockshopper.com.
7 A list of informants are provided in appendix 4 to this case study.
8 CoreLogic Negative Equity Report, September 12, 2012
us/researchtrends/asset_upload_file448_16434.pdf. While the data is only available statewide, there is little question that this is equally or more true for the Las Vegas area, which contains 69 percent of the state’s population.
7
Figure 1: House prices in the Las Vegas metropolitan area 2000–12
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Median sales price index (Jan
2000=100)
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Source: Case-Shiller
Index.
2000 2003 2006 2009 2012
Price appreciation coincided with an increase in housing construction; as figure 2 shows, however, the volume of housing construction in the area was already quite high prior to the bubble years, fueled by steady appreciation and population growth during the 1990s. The Figure 2: Building Permits in the Las Vegas metropolitan area
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Building permits
Source: United
States Bureau of the Census. bubble, in some respects, was too short-lived to trigger more than a relatively modest increase in construction volume, with permits rising from an average of 30,700 between 2000 and 2002 to
37,500 between 2003 and 2005. Overall, the area was arguably heavily overbuilt, with permits issued between 2000 and 2005 equal to roughly 40 percent of the number of households in the area. With the market collapse, however, construction of new housing all but came to an end in the area, dropping between 2005 and 2009 from nearly 40,000 to barely 5,000 permits per year. 8
The market collapse following the house price bubble triggered a wave of foreclosures, leading
Nevada to become known widely as the foreclosure capital of the United States. Table 1 compares key foreclosure data for the state of Nevada and the United States for selected quarters in recent years (percentages are of all mortgages). There were 24,971 foreclosures completed in
Nevada during the 12 month period ending June 20, 2012.9
Table 1: Foreclosure trends in Nevada and the United States
Mortgages past due In foreclosure inventory
Foreclosures started in quarter
NEVADA US NEVADA US NEVADA US
Q4 2007 6.53 percent 6.31 percent 3.02 percent 2.04 percent 1.54 percent 0.88 percent
11.12 percent 8.63 percent Q4 2008 6.58 percent 3.30 percent 2.65 percent 1.08 percent
12.14 percent 8.86 percent Q2 2009 9.13 percent 4.30 percent 3.70 percent 1.36 percent
12.88 percent 9.39 percent Q3 2010 9.72 percent 4.39 percent 3.17 percent 1.34 percent
10.37 percent 8.11 percent Q2 2011 8.15 percent 4.43 percent 2.25 percent 0.96 percent
7.35 percent 9.85 percent Q2 2012 6.09 percent 3.09 percent 1.31 percent 0.90 percent
Source: Mortgage Bankers Association National Delinquency Survey.
Predictably, the great majority of residential sales transactions in recent years have been either
REO or short sales, with foreclosure sales peaking in 2009 at nearly 75 percent of all singlefamily sales in the area. New foreclosure filings (notices of default), however, have dropped off sharply since the fall of 2011 as a result of enactment of Assembly Bill 284 (AB284) by the Nevada legislature, a bill prompted by the robo-signing scandal. AB284, among other things,
“makes it a felony for loan servicers to sign documents without ‘personal knowledge’ of who owns the note, and requires lenders to provide an affidavit showing they have authority to foreclose” (Smith 2012). The bill, which became effective in October 2011, resulted in a sharp
Drop, from over 5,000 new filings to fewer than 900, as shown in figure 3.10 Since then, new filings have gradually but slowly increased, to an average of approximately 1,900 per month for
October 2012 through January 2013. Since trustee sales significantly lag initial filings,11 they have not dropped as dramatically, but have also declined in number as the effects of the filing slowdown were felt. Since mid-2012, trustee sales appear to have leveled off at roughly 40 percent of the pre-AB284 level.
9 CoreLogic, Foreclosure Report, July 31, 2012.
10 Clark County, shown in figure 2, is all but coterminous with the metropolitan area.
11 According to the average period between filing of the notice of default and the trustee sale for
August 2012 trustee sales was 520 days, or roughly 17 months. This is unusually long for a state with a non-judicial foreclosure process, and reflects the existence of a strong state foreclosure mediation program, in conjunction with widespread use of postponements of trustee sales by lenders in conjunction with provisions of Nevada law which require a lender to foreclose after no more than three postponements, or else be required to start the proceedings again from the beginning.
9
Figure 3: Trends in monthly notices of default and trustee sales in Las Vegas area
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Notices of Sale
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8/11 10/11 6/12 1/13