Friday and Saturday I showed homes to an out-of-town couple looking to purchase in Reno. This couple, currently living in L.A., plans to retire in Reno. For their home search they indicated a preference for a master planned golf community, and had specifically mentioned ArrowCreek and Somersett. So we began our search with those developments.
Their additional search criteria yielded ten homes in ArrowCreek and eight homes in Somersett. We viewed the ArrowCreek homes on Friday and the Somersett homes on Saturday. During our adventure one thing we encountered time and again was vacant houses. When it was all said and done a full 50% of the homes we viewed were empty. These buyers were somewhat alarmed by this. I must admit, even I was a little surprised by the number of vacancies. Touring so many vacancies was almost eerie.
If memory serves me, about half of the vacant homes seem to have had residents at one time. The remaining vacant homes had "never been lived in". Flippers gone badly, no doubt.
On a positive note, the number of vacancies sure makes setting up showing appointments a breeze.
In addition to the vacant homes, at least two of the eight Somersett homes we viewed were "sale subject to bank approval". And, coincidentally, these houses happen to be two doors down from one another, as well as having identical floor plans. These listings are:
MLS #70007550 (a foreclosure)
8405 Fairway Chase Trail
Sold on 11/03/2005 for $789,500
Lender purchased it 12/04/2006 for $674,038
Current asking price: $599,900 ($191/square foot)
MLS #60023424 (a short sale subject to lender approval)
8425 Fairway Chase Trail
Sold on 8/15/2005 for $770,287
Current asking price: $649,900 ($206/square foot)
This home is currently under contract, but the lender is accepting backup offers.
Although this couple found two homes in which they were very interested, they decided that prices still have a ways to drop; and because they do not need to purchase immediately, they have decided to sit things out for a few months and monitor the market.
By the way, these buyers are readers and fans of this blog.
Reno Ignoramus
Thanks Guy for such a superb post. It is this kind of info that is so valuable to everybody.
So 50% of the houses you looked at with your clients were vacant. Do you suppose that all these vacant houses are owned free and clear by sellers who can wait years to get their price? Or do you suppose these houses are encumbered by mortgages that the sellers must carry every month?
You estimate that about half the vacant houses were at one time occupied and half have never been occupied. I think you are right on in your assessment that the “never been lived in” houses are flips gone bad. You think these are owned free and clear? Hardly. I think we can safely assume that the flippers are holding on until their ARMs reset. Houses bought in 2004 with ARMS that have a 3 year introductory rate will reset this year. Houses so purchased in 2005 will reset next year. Can you hear the time bomb ticking?
As the months go by and these sellers have to carry the mortgage and pay taxes and insurance on these vacant houses, how long can they hold out? They only have so many options. They can lower the price, they can seek a short sale, or they can just walk and allow the foreclosure. In all events, prices fall from here.
Interesting that you encountered two short sale/foreclosures in Somersett within two doors of each other. I’m sorry for Somersett, but as I have said before, the whole development was built on the bubble, and it will see a lot of pain before this is all done.
I suppose if this was an isolated instance we might not make too much of it. But it isn’t. If 40% or more of this inventory is vacant, oh is this going to be ugly.
Your buyers were wise, very wise, to not buy now. And great kudos to you for the integrity to tell them the truth.
GuyJohnson
To see if my buyer’s experience was representative of all of Somersett I performed a quick search on the Active Somersett listings. Here’s what I got back: 94 Active listings (as of 4/22/07)
38 are owner occupied (40%)
8 are tenant occupied (9%)
48 are vacant (51%)
And, of course, these numbers do not include the unlisted Builder inventory.
Perry
I know that the home on Fairway Chase for $599k backs to Somersett Pkwy which makes it worth less but how on earth does MLS#70006772 think they’re going to get $729k for their same place. I don’t care if it’s backs to the golf course or not that’s too big of a difference. Now this is pain.
With regard to the empty houses, two of the three listings are empty and the third that is pending looks barely lived in.
GreenNV
So the original developer of the houses on Fairway Chase could buy them back for 16-24% less than they sold them for 18 months ago and they are passing up the chance? That’s a pretty powerful indication of where they think our market is at.
I remember back in the boom, when people started to get worried about the number of “investment” purchases, all the research said that only 10-11% of the sales were to flippers. You could infer from Guy’s experience that the number may be closer to 25%! Remember all those “ghost” children that didn’t show up for school as expected last year causing a huge funding shortfall? I think we have found where they live.
There is always room for the optimist – 2395 Ridgefield listed this week for $999,000, a whopping 68% over it’s sale price of $595,076 on 9/21/2005!
Reno Ignoramus
Well, pardon my Italian, but Holy Sh!t.
51% of Somersett resale houses are vacant, and I bet that every one of them has an owner paying on a big mortgage every month. Like I have said before, Somersett will be the Poster Child community for what this bubble was.
Somersett (at least part of it) and Arrowcreek are pretty upscale. Do you have any info on more scaled down places like all those cookie cutter neighborhoods in Wingfield Springs and Double Diamond? I have heard that there are streets in those neighborhoods where more than 50% of the houses for sale are empty. Maybe it’s 60%??
GuyJohnson
For the “South Meadows” area:
174 Active residential listings, as of 4/22/07 (excluding condos and townhomes)
115 are owner occupied (66%)
16 are tenant occupied (9%)
43 are vacant (25%)
Lindie
There have been stories in the local and national media that more than 50% of the resale inventory in LV is vacant. Vacant because either 1) it was bought as a flip and the flipper got caught holding the bag, or 2)the former owners bought another house before selling their old house and now can’t sell the old house.
1) explains the “never been lived in”. 2) explains the used to be lived in but is now vacant.
People point to this huge percentage of vacant inventory as evidence of how bad it’s going to get in LV. And now it appears it may be similar in Reno?
This is all going to end badly. Very badly.
BanteringBear
“…a quick search on the Active Somersett listings…
: 94 Active listings (as of 4/22/07)
38 are owner occupied (40%)
8 are tenant occupied (9%)
48 are vacant (51%)
…these numbers do not include the unlisted Builder inventory.”
This is turning into a rout. 56% of the resale listings are not owner occupied. That is an enormous number for a supposedly upscale community. I am not surprised though. Driving around Somersett at night, it’s like a ghost town. And it’s going to get much worse before it gets better.
The major problem is the price points. Flippers drove up prices and paid amounts well beyond what people can afford believing they could always find a greater fool to unload their highly leveraged home onto. But the music stopped, they’re now the bagholders, and it’s clearly evident that most of the price gains seen since around 2001 were due to this rampant speculation and fraud. It is quite possible that prices will overcorrect since the bubble was so massive. It stands to reason that even people who purchased at pre-bubble prices could be affected at some point, should they need to sell.
People like Derrick, who bought right in the middle of the bubble, will soon realize that they grossly overpaid for their home while they watch in horror as their perceived equity vanishes like a thief in the night. The fact is, a 3/2 stucco sh!tbox in Spanish Springs on 1/3 acre should sell for around $175k max. The north valleys are really going to get hammered. And even worse can be said for Fernley, Fallon, Carson City, etc.
It won’t happen overnight, and there will be slight upticks in sales and prices along the way, but ultimately prices will return to historical levels, representing what local wages afford in the area, and not the amount of debt some greedy dimwit with no down and a suicide loan is willing to take on.
Phil Hoover
This directly ties in with my recent post about vacant listings in the Boise area.
http://www.boiseblog.com/journal/2007/4/18/boises-see-through-listing-inventory.html
GreenNV
Good work, Guy. What extraordinary mining of the MLS database. You really ought to get in touch with the RGJ business editor with the data.
Of all the properties that I’ve mined at Somersett focusing on 2005, none were purchased with a 3/27 adjustable loan or a 100% total voodoo special. I suspect these products were not offered on Jumbo loans at the time (don’t take that to the bank). The loan package of choice seems to have been 10% down, 80% 5/25 adjustable at about 6.25-6.5% initial rate, and a 10% HELOC. I’ve seen a couple 20% down 5/25 loans at the same rates, but I have not seen a single 20% down 30 year fixed rate loan. Maybe Angie (if she is still talking to us) could shed some light on this.
Just call me a happy camper with my 15 year fixed at 4.875!
DERRICK
bantering bear You said “people like derrick who bought right in the middle of the bubble” Im having a hard time understanding you here. SO what your saying is the bubble started in 1997-98 now? that hardly makes anysense. Especially considering I bought in jan. of 2002. speculative prices were not driven up by artificial demand and bad lending practices in the lates 90’s. maybe you should look at history a little more before you attemp to attack me again. the bubble did not start in 1997 bud
DERRICK
bantering bear so do you have any evidence that the RE bubble started in 1997 now? and you think a 3bed/2.5 bath 2,400 sq.ft easily 50k in upgrades all of which with the help of some friends installed myself, a 10k paver patio, on a .33 acre culdesac in spanish springs should sell for 175k? Or a Sh*T box as you put it. now that is funny. I would appreciate it if you stop with the personal attacks. bubble started in 1997? LMFAO!
Lindie
I agree with Green NV. Somebody needs to get this info to the attention of the RGJ. The guy there who has been writing on the housing market is Zack Hall. Maybe we all ought to email him the link to this blog, and particularly this post.
People have posted here that the RGJ is really nothing more than a shill piece for the local real estate industry, unwilling to print the truth about the Reno market. I guess if we have proof that this info has been delivered to the RGJ and it choses to do no more than its usual “well the market has been down a little but soon we will back to happy days” storyline, then we will know that it is not interested in reporting objectively about the truth.
Who wants to send Mr. Hall the link first?
longerwalk
Um, all the conversation here has been about the new developments. What about neighborhoods that have been around 10-15-20 or more years? How are they fairing? Vacancies? Are there older areas undergoing significant remodels? Old SW maybe?
Mike Van H
Although I don’t have access to the data everyone does (where are you guys looking up the vacancies from?) I can say with a fair amount of confidence the vacancies in my neighborhood (Holcomb Avenue North) are very low to non existent, mostly because homes in my neighborhood, even with the ‘bubble’ stayed under $300,000, so people were easily able to rent them. Nearly all the homes in my neighborhood are filled with people, and that’s a good feeling. Speaking of rentals, with all these people getting homes forclosed on, it will be interesting to see how the rental market fairs, with only 5% vacancy rate already for apartments, things could get tight in inventory for rentals.
Mike Van H
Also, GUY it would interesting if you could do one of those sold, pending, active thingies for my neighborhood, old Southeast (generally from Virginia to Kirman, and from Ryland/Liberty to Vassar).
It seems like homes within the McCarren Loop priced under $300K are doing well. Virginia Lake Crossing’s lower price points are attracting a huge interest list of 1600+ people, and sales are strong at Brighton Manor (they are planning their 2nd and 3rd phases). I am told there is wide interest in Grant’s Landing as well. It seems like there is a huge difference between the inner-McCarran-loop, and the scenario in Wingfield Springs where Cosmic Village is offering free upgrades to get rid of its standing inventory.
NAS
My husband and I are the couple Guy referenced in this posting.
I don’t read too many blog sites, but I read this one. I don’t write blogs, but I wanted to share some thoughts. Guy and Diane
are in tune to the local market. Guy was very helpful, excellent knowledge base, organized, and we will continue to work with him.
The Good: Reno is a great city. Many think of it as “Plan B” for a
gambling/resort destination and equate the entire area with downtown. Their loss. Every city has problems, but we’re glad we found Reno as a potential place to call home. The community has numberous positives, including it’s residents.
The Bad: At present- the R.E. market. (hey, I live in So.Cal. and
the road kill is starting to smell down here too!) Lending practices, flipping, spending deficits, sub-prime- ad nauseum. Any one reading this blog already knows about it.
The Ugly: Somersett (Oh, go on-I can hear you groaning).
I think someone said it’s like “throwing deck chairs off the Titanic.” A sampling of our viewing: In the Amber Glen area, we viewed 4 properties: #1 was in default, #2 was reduced 50K (vacant), #3 was reduced 110+K, #4 was owner occupied, over priced, and apparently willing to ride it into the ground. This is in addition to the bank sales on Fairway Chase that Guy has mentioned.
Before I close, I want to say something about the Developers.
We visited two Developers in Somersett and talked directly with
their sales people. Before we could say anything, they told us
builder incentives included 75K-85K right off the top (I think that could be negotiated even more), landscape & upgrade incentives also. How does this work? they just write you a check when you close escrow. Sort of like a rebate, only of major proporation. Therefore, sold prices reported are very close to the listing prices. Is it what the house really sold for? no. Does it keep the stats high? yes. Legal? yes. Ethical? you decide. It also
hyperinflates a buyer’s assessments and taxes they will be paying.
We are waiting and watching. Prices are dropping.I don’t have a crystal ball, but this is going to take awhile to settle down. When
it does, the community will have many new homeowners, happy
about living in a nice area.
MikeZ
RE: “with only 5% vacancy rate already for apartments, things could get tight in inventory for rentals.”
I doubt the 5% number. I live in an apartment complex near McCarran and Kietzke and in my eight-apartment building, three units are vacant right now.
Also, the complex has signs out front advertizing specials.
Mike Van H
http://www.colliersparrish.com/newsletters/rno.inv.news.Q4-06.pdf I was just going off this Q4 2006 Apartment Market report by Colliers Parish. And this very recent article by RGJ saying apartment occupancy was at 93.7%. http://news.rgj.com/apps/pbcs.dll/article?AID=/20070419/BIZ03/704190327/1071/BIZ
BanteringBear
“Before we could say anything, they told us
builder incentives included 75K-85K right off the top (I think that could be negotiated even more), landscape & upgrade incentives also. How does this work? they just write you a check when you close escrow. Sort of like a rebate, only of major proporation. Therefore, sold prices reported are very close to the listing prices. Is it what the house really sold for? no. Does it keep the stats high? yes. Legal? yes. Ethical? you decide. It also
hyperinflates a buyer’s assessments and taxes they will be paying.”
While this is totally unethical, it should also be illegal. Not only is it artificially inflating prices, but it props up or increases property taxes for those in the neighborhood as the assessments come in too high. And, what sort of lenders are on board with this? If I am purchasing a $585k home with 10% down and receive $85k cash after closing, my lender is loaning more than the property is worth. In the face of declining home prices, skyrocketing foreclosures, and tightening lending standards, it makes no sense for them to take on the risk. The whole industry has become so sleazy it’s sickening. If I’m the buyer, I say no way, lower the stinking price.
BanteringBear
Calling on attorney Mr. Smallhouse!?
If the builders are writing rebate checks AFTER escrow closes, isn’t that defrauding the lender? I’d like to know why this is not illegal, if it isn’t already. This reeks.
Jennifer
Thanks to guy or gal who wrote in based on his recent trip out with Guy. For me, it was great to hear from someone in a similar situation to ours (maybe moving).
I’m here is Nor Cal, and we are very seriously considering(OK, really hoping) for a move to Reno in the next few months based on a job interview coming up. All cities have their problems, but we love Reno – the people, the attitudes, the outdoorsy stuff, our friends, (we used to live there). We want to move back and never leave again.
We haven’t seen Somersett since it was built after we moved, but honestly, it sounds freakin’ scary (the ghost town descriptions pretty much did me in). I have to say that the prices people seem stuck on are completely unrealistic based on nothing more than stats. You’ve all read the posts, and we can banter on about whether or not it’s rock bottom, but that’s getting old.
What I really want to know is if any one has any thoughts on Damonte Ranch – nice area, ghost towny, crazy flipper/short sales situation like Somersett???? Inquiring minds want to know.
MikeZ
RE: “…builder incentives included 75K-85K right off the top (I think that could be negotiated even more), landscape & upgrade incentives also. How does this work? they just write you a check when you close escrow.”
Careful!
I’m not a lawyer, but that sure sounds like mortgage fraud. If I were you. I’d consult with an attorney before accepting any such deal.
Grand Wazoo
Seems like that $75K rebate would be IRS 1099 income – so you have to pay income tax on it. Right? What a hosejob if so.
A couple of weeks ago, after living out here nearly two years, my wife and I drove out and through Somersett. Our initial reaction? “An awful lot of these houses look empty”. It is interesting that our initial reaction appears to have some merit.
Reno Ignoramus
To NAS:
Thank you very much for the comment. You contribute to the knowledge base by your sharing of this info. Thanks again.
To Jennifer:
If you look in any development that has houses built in it in the 2003-2005 time frame, you will not be able to avoid flips gone bad. You will not be able to avoid buying next door to what may turn out to be a short sale in the next year or two. The dirty little secret, that is now slowly becoming less of a secret, is that Reno ranked with the best of them in the amount of houses sold to flippers. Since flippers are attracted to new construction, it is the new neighborhoods where it happened the most. As somebody above suggested, the older more established neighborhoods will reflect a lot less flipper activity. You probably stand a lot better chance of not having the next door house sold on a short sale/foreclsoure in the Old SW, for example.
Unless, of course, it turns out that owner of that nice house on Sharon Drive went out and got a cash-out Voodoo re-fi in 2004 which is set to explode next year.
Treacherous times these days to be a buyer.
Reno Ignoramus
GreenNv says, in referring to houses sold in Somersett in 2005:
“The loan package of choice seems to have been 10% down, 80% 5/25 adjustable at about 6.25-6.5% initial rate, and a 10% HELOC”.
Well, it that’s true, these folks are all upside down. Their 10% down has evaporated, their ARM is holding at about 6.5%, and the interest rate on the HELOC has gone from about 4% to 8%.
So they are now underwater on a house that continues to decline in value. Will they continue to make that ARM payment at 6.5% and that HELOC at 8%? As they watch the value of their house sink into the sunset?
Guy’s post answered that question with respect to at least two houses, on the same street, two doors down from each other.
From Harpers Magazine, May 2006:
“A real estate boom that began with the promise of “economic freedom” will certainly end with a growing number of workers locked into a lifetime of debt service that absorbs every single spare penny.”
“A modern equivalent of peonage, a lifetime spent working to pay off debt on a asset of dwindling value.”
Lindie
Grand Wazoo is absolutely correct that whatever “rebate” or “refund” or “incentive” or whatever other spin jive word the builders want to use, it is includable in income. So besides all the other stupid reasons to take this “deal”, you could send yourself rocketing into tax brackets perhaps never before achieved. Sure, go ahead and put an extra $100,000 or so into your jeans. Say hello to the AMT.
Josh
Ok, Flippers I understand, ARM’s, vacant homes, builder incentives you say –
I understand the logic of everyone’s post – EXCEPT the doomsday analysis for the buyer. If you are a buyer moving to Reno like myself planning to live there for 15-20 years while I raise children, and I am buying the old construction is established neighborhoods, I don’t see how the flippers or vacancies effect me.
You couldn;t pay my wife and I any amount of money to live in new construction. With small yards, usually no consideration to view orientation, and large closed floorplans, the new construction makes us laugh when we have walked throough a random open house or two on our recent buying trip to Reno.
We see the new construction as garbage with new polymers, plastics and materials that will offgas PCB’s for years to come with stucco that will look like hell in 3 years. Just walk through any K&B development or even homes in Reno 5 years old and they already show signs of distress, cracked stucco. One of the new houses for sale off of Manzanita for 800+ had a million dollar view – the problem you ask? The only room utilizing the view was the garage!
Yes, we will get a 30-year fixed, but with a long term outlook and the right house we love who cares if we see 10% decline in the next year or three. What I do NEED is a tax write-off to balance off a large income.
For us long-term buyers who are looking for a home, not an “investment” there could not be a better time for the buyer. We have the pick of litter, and while there are many, many listings in our target of the Southwest – only 6 of all of the active listings warranted a walk through, and only two were real gems – not even considering price.
So if you want price concessions, repair work done on the home at the owners expense, a good interest rate, and a home to cherish and live in, for me, there has never been a better time to buy.
Josh
BanteringBear
“I don’t see how the flippers or vacancies effect me.”
Flippers drove up prices, costing YOU money. Large numbers of vacancies lead to blight, crime, and an overall deterioration of neighborhoods.
“What I do NEED is a tax write-off to balance off a large income.”
You are getting a deduction on interest you PAID. So, in essence, you are spending money to save money. There are much wiser ways to save money and pay less taxes.
“For us long-term buyers who are looking for a home, not an “investment” there could not be a better time for the buyer. We have the pick of litter…”
A large selection to choose from does not translate into a good time to buy. And inventories continue to grow, so there will be even more to choose from going forward at even lower prices. One could argue that, with all of the information available, now is the WORST time to buy, ever.
If money is of no consideration to you, then purchasing a house right now makes sense. But, I have a sneaking suspicion money does matter. If it did not, you would probably not be buying in the old, dated southwest, but in Montreaux, or somewhere similar.
I do agree with you regarding much of the new construction. Words cannot describe how horrible a lot of those homes and lots are.
MikeZ
The March existing home sales report is out and it’s bad: largest drop in almost 20 years.
S&P is now publicly saying the downturn could last into 2009.
Apparently, Standard and Poor’s missed December’s NAR pep rally where Mr. Lereah declared “we’ve hit bottom!” and “the worst is behind us!”
MikeZ
RE: Josh (about to buy a new house)
(Obviously!) I don’t think this is the best time to buy but it’s certainly better than any time in the last two years.
Good luck with your new home.
SkrapGuy
Josh,
I have a question for you.
Under what market conditions, if any, would you consider it a bad time to buy?
No scarcasm intended here, Josh. I am genuinely curious.
Thanks.
NewInReno
BanteringBear,
I recently moved to this area from Bay Area. I was doing some researcha and came across this blog. Thanks to Diane and Guy for such a wonderful blog and also to other regular contributors. I was thinking of buying a home around 300K but after reading the posts on this blog I think it is better to wait it out.
Recently there has been much bashing on new stucco houses. Can someone explain me why stucco houses are bad and what other alternatives are there? I am from India and have no idea about this. In India, houses are built with bricks and cement which make it really solid. But then, at earthquake times, we suffer the worst.
Thanks.
Kate5000
I for one strongly believe in the huge appreciation potential for the Somersett community. Yes, it has suffered from the bubble when investors from the Bay Area flocked in to get a piece of Reno – but those who can hold on to the property for the next 7-10 years are going to make a very very nice profit.
Just IMHO.
DERRICK
Keep renting bantering bear. you clearly lack intuition when it comes to investing.
Lindie
Well then Kate 5000, there are foreclosures and short sales all over Somersett. Maybe you ought to go buy 3 or 4.