Thursday, January 06, 2005

Economist says housing market won't collapse

Nevada prices could stagnate instead

By JOHN G. EDWARDS
REVIEW-JOURNAL



Construction continues Wednesday on Red Rock Station in the northwest valley. Nevada ranks second nationally for construction expansion, officials said Wednesday.
Photo by Samantha Clemens.

Fears that Nevada's swollen housing prices may come crashing down any time soon may not necessarily come true, an FDIC analyst said Wednesday.

"A boom does not necessarily equate with a bubble," Rich Brown, chief economist of the Federal Deposit Insurance Corp., said during a conference call with reporters.

Brown said housing appreciation rates, such as the 50 percent-plus increase Nevada recorded in the third quarter of 2004, are not sustainable. But he suggested prices may stagnate for the next several years rather than collapse.

"Fundamentals are going to have to catch up, and home prices are going to slow," Brown said.

Recent home-price busts have occurred in areas in which the local economy tanked, but Nevada's economy shows no signs of slowing.

Housing prices slumped in oil-patch states when crude oil prices collapsed in 1986, he pointed out. Southern California and the Northeast, similarly, had home prices plunge during severe recessions in early 1990 and 1991.

Still, FDIC officials pointed to signs that the Nevada and Las Vegas housing markets are starting to descend from a peak.

"The Greater Las Vegas Association of Realtors reported that the inventory of homes listed for sale grew from a few thousand in early 2004 to nearly 16,000 in September, prompting one of the area's major home builders (Pulte Homes) to reduce asking prices in October," the agency said in its Nevada profile.

The skyrocketing housing prices are a negative for buyers, the FDIC pointed out, because the typical middle-income family cannot afford to buy a midpriced home in the Las Vegas area.

Home-price affordability plunged 27 percent in the Las Vegas area, said Catherine Phillips-Olsen, San Francisco region manager for the FDIC.

At the same time, demand for apartments outpaced the number of new units coming to the market, driving vacancy rates lower and rents higher, Property and Portfolio Research reported.

On a positive note, the FDIC reported that Nevada's economic growth continues to surge.

"The gaming industry, of course, is attracting a lot of visitors, and the retirees going into the area are contributing as well," Phillips-Olsen said.

Nevada also recorded a 4.5 percent year-over-year growth in jobs. Las Vegas posted a 4.9 percent gain, tops in the country, and Reno came in sixth at 3.9 percent.

"Every sector is showing positive growth (in Nevada)," Phillips-Olsen said.

Statewide, construction added 11,000 jobs during the period, three-quarters of which were in the Las Vegas area.

Nevada ranks second nationally for construction expansion, with Arizona in first place, Phillips-Olsen said.

Nevada-based banks, meanwhile, are growing more reliant on commercial real estate loans and construction and development loans. The median or middle commercial real estate loan concentration at Nevada banks was 421 percent compared with capital or net worth in the third quarter, up from 391 percent last year. That's the fourth-highest concentration of any state.

Construction and development loans as related to capital rose to 137 percent from 120 percent a year ago, the second highest among states.

Phillips-Olsen acknowledged that the focus of real estate lending is understandable in the state, but she said bankers in Nevada should watch it closely, just as banks in the Farm Belt monitor their level of agricultural lending.

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