Technical Analysis for Real Estate

Technical analysis is no longer just for Stocks and Commodities trading. The S&P/Case-Shiller Home Price Index was created by Robert Shiller of Project Syndicate blogging fame. Not only can you create your own custom index of real estate prices both regionally and nationally, but also chart where housing prices were historically.


For example, the most recent report, released in spring 2008, in home-buying time, says that prices in Las Vegas are down 20.76 percent back to their June 2004 pricing levels. So, if you are looking for real estate timing indicators, visit http://www.macromarkets.com/.

The above chart was created from a free down loadable excel file from macromarkets.com. Here I used, Los Angeles as the S&P/Case-Shiller Index and San Diego, Las Vegas and Phoenix for tier markets. This is an excellent tool to review the past real estate cycle and their correlations.

Apartments no option for Homebuilders

This topic appeared on Lanser on Real Estate Blog

Great topic discussing the current state of affairs and the Homebuilders Index with NAHB. Here's my comments on their blog:

"One of the reasons for the relative rental gloom is that incentives and concessions are beginning to hurt rents, NAHB said. The part of the index that tracks rents plummeted to 47.5 in the fourth quarter of 2007 from 61.3 in the last three months of 2006."

Gary Banner Says:
March 14, 2008 at 10:38am

One must realize their are important facts to consider regarding Multifamily Investment and Development. That is the ability to recognize the differences between “Short-term Technical Trends” and “Long-Term Fundamentals.” Today’s Builders and Developers have learned to time the market much better than their predecessors.

The Builders Index is reflecting current market conditions…Recessions leads to Job Losses…Job Losses leads to Rent Concessions and competition for renters (who can still pay on time) heats up! And its a Two-Sided Coin as Inflation is rising today and so are the costs of operating apartments…mcuh like corporations on Wall Street…a possible margin squeeze.

Today, heavy density areas of apartments in Las Veas, NV are now giving rent concessions in order to compete…this in essence is lowering rents…or “Effective Occupancy Levels” where the Rent Roll may say 95% occupancy but when a review of a trailing 12-months actually shows 85% due to turnover.

In Market Analysis, this is defined as “Short-Term Technical Trends” and is immediately reflected in underwriting for construction financing. Try getting construction financing at 80%LTV…very difficult…more like 75%-65% today.

Yes, the long-term “Fundamentals” reflects Echo-Boomers heading to household formations in excess of 75 Million. But, without Job formations these same prospects will delay moving out of their parents homes. And Yes, those who lose their homes to foreclosure will have to rent…but vacant houses are competing with Class-A apartments in price…especially here in Las Vegas.

Las Vegas Apartment Vacancies Rise Again!

Apartment vacancy in Las Vegas rose to 9 percent in January, up from 8.4 percent in December. The breakdown by class shows 7.76 percent for Class A, 9.38 percent for Class B and 9.67 percent for Class C, as reported by CB Richard Ellis.

Sales Volume Down Big for Las Vegas Apartments

As posted by "The Ground Floor" the blog site for the Urban Land Institute-ULI

"In an interview with Commercial Property News, Grubb & Ellis chief economist said he expects a 40% decline in commercial real estate transaction volume in 2008 as compared to 2007. Among the factors underlying his comments was the recently released Federal Reserve Board survey of senior bank lending officers which noted that 80.3% are tightening lending requirements, the highest percentage in nearly 20 years".

And we have already begun experiencing the effects of this credit crisis in Las Vegas. Sales of apartment projects totaling +5 units or greater have fallen sharply in 2007. There has been nearly a -35 percent decline in units sold versus 2006.

Prices paid per unit has held steady in the Class-A/B sector with $/Unit increasing to $112,900, or +7 percent in the 4Q2007 vs. the same period a year ago. However, the Class-C segment has dropped nearly -13 percent to an average of $68,400/unit, according to the "Apartment Insider" newsletter.

The Las Vegas Strip Ignors the Slowing Economy

In today's business section of the Review Journal/Wall Street Journal Sunday was an article entitled "The R Word" describing the effects of a slowing economy here in Las Vegas. Of the three page article, I found the comments of Dick Rizzo, the Western Division chairman of Perini Building Co. comments best reflects the anecdotal evidence I use to time the cycle in our economy. Perini is building CityCenter and Cosmopolitan in Las Vegas and has a backlog of two more huge projects on the way, though Rizzo wouldn't identify them.

"We have a unique perspective into the future because we get invited to meetings two and three years in advance of these programs and I can tell you tha the list is significant," Rizzo said from his Las Vegas Office. "People are still able to justify and finance significant new programs in the next three to five years."

Meanwhile, Las Vegas' employment growth has slowed to 1.1 percent with a total work force of roughly 945,000. And unemployment has crept up to 5.6 percent. Roughly 15,000 jobs were lost in the construction industry, which accounts for 11 percent of total employment, twice the national average. Other posts on this blog point out that the recent construction lay-offs are resulting in Class - C apartment vacancies reaching 9 percent.

Rizzo siad it's important to distinguish that most of the job losses came from residential construction, not commercial. He tracks the union employment base monthly and said availble manpower for the mostly union crafts people used for Strip construction has increased.

The sheer size of Strip projects adds thousands of workers at each site. CityCenter has 6,000 to 7,000 workers now on site and will peak at 8,000 in mid-2009, Rizzo said.

Deutsche Bank; Las Vegas to Create 120,000 Jobs

Review-Journal Sunday, February 10th

"History has shown the Las Vegas economy rebounds from any slump when the Strip goes through a building boom. Observers believe today's extensive Strip makeover wil be no exception. Some 40,000 new hotel rooms are in phases of planning and construction along Las Vegas Boulevard that will keep a construction work force employed through 2012". says the article.

"Deutsche Bank, in a report to investors, said the building boom will create upward of 120,000 new jobs." "The Las Vegas Convention and Visitors Authority said the room inventory expansion could boost room tax collections to more than $571.8 million annually, 30 percent higher tha the current collections."

Las Vegas Apartment's Increase in Vacancy

CB Richard Ellis reported that Las Vegas apartment vacancy at 8.4 percent in December up from 8.11 percent in Novembers 2007. Vacancies for Class - A is 7.6 percent of the total 26,900 units in this segment; Class - B units were reported at 8.48 percent; and Class - C came in at 9.06 percent.

Take another look at the previous articles labeled "Charts" in the right margin. These reported vacancies substaniates my views regarding higher capitalization rates and vacancies for the Class - C market in 2008.

RERC's Reports on Las Vegas Apartment Sector

"Many respondents to RERC's third quarter 2007 institutional investment survey noted that the apartment sector continue to represent the best commercial investment opportunity during the next year, as demand is expected to remain strong due to the wave of delinquencies and defaults in the subprime residential market. However, some respondents see the apartment sector as less attractive due to the low capitalization rate and the likelihood that slow job growth will hurt demand."

RERC's required going in capitalization rate for Las Vegas apartments is 6.0% as of 3Q2007. The terminal (exit) capitalization rate is 6.8%. The required pre-tax yield rate for apartment properties for third quarter 2007 was 8.5%, a 20 percent increase from second quarter.

Could Immigration Trends Hurt Las Vegas Apartments?

During a recent market study I noticed an alarming new trend. A trend that was confirmed by a recent phone conversation I had with a client, a substantial apartment owner here in Las Vegas and Phoenix. The trend of a slowing economy coupled by new immigration laws that are beginning spreading throughout the southwestern U.S., (i.e. Arizona & Texas) has suddenly caused properties with Hispanic demographics to increase in vacancies.This dilemma was brought further to light recently with the decision from Framers Branch, a suburb of Dallas Texas in their recent Ordinance 2952. Farmers Branch City Council unanimously approved the ordinance which would require all renters to pay $5 fee and claim US citizenship or legal immigration status to obtain an occupancy license from the city.

This new ordinance will bar illegal immigrants from renting homes and apartments in Farmer Branch. Key provisions:

*Prospective tenants would have to apply for an occupancy license.
*The application form will ask whether the person is in the U.S. legally.
*Anyone who completes the form and pays $5 will get a license and be allowed to move in.
*The city will verify noncitizens’ legal status through a federal database.
*Anyone identified as being in the U.S. illegally will get 60 days to prove otherwise.Violators – tenants or landlords – will face fines of $500 a day.

http://www.dallasnews.com/sharedcontent/dws/dn/latestnews/stories/012308dnmetfbrentals.2c1fcca.html

The State of Arizona as well, has a new law that went into effect January 1st, with strong penalties for employers hiring workers without legal status. Today, Arizona Employers hiring these workers could suffer a suspension of their business license for 10-days on the first offense plus fines; revocation of their business license on the second occurrence. Many hardworking Latino workers have begun leaving the Sun Devil State in the past few weeks, seeking employment elsewhere.

There are no such laws that I'm aware of in Las Vegas....Yet...but the word on the street is many employers are cracking-down on documentation for employment. When combining the slow-down in local housing construction where a great many Latino workers where employed and this budding trend against immigration. It is easy to build a hypothesis for higher vacancies going forward for Class - B/C apartments in Las Vegas. In today's apartment investment environment, investors demand purchasing buildings on actual operating income and expenses. Gone are the days of acquisitions based upon Pro Forma (a method of betting on the future) and higher vacancies equate to higher risks. 2008 could experience a widening spread in capitalization rates between Class - B/C apartments and their Class - A counterparts.

As reported by the RERC/CCIM report, surveyed institutional investors responses found the required going in capitalization rate for Las Vegas apartments is 6.0% as of 3Q2007. The terminal (exit) capitalization rate is 6.8%. The required pre-tax yield for Las Vegas apartment properties is 8.5%, a 20 percent increase from 2Q2007. I would suspect in 2008 Class – B/C properties should see an increase in spread of 130 basis points beyond a typical Class – A property. That would equate to approximately 7.3% capitalization rates for 2008 transactions. Guess what?...we’re already there and beyond!