Stakes Raised in Las Vegas Real Estate Market

Las Vegas real estate has been high-rollin', but investors are fretting about a slowdown.
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The Las Vegas housing market, which has been on a tear in recent years, is a crucial piece of many homebuilders' revenue streams. And although the market is still growing, investors clearly are worried about a slowdown, as evidence points to some cooling demand from homebuyers who are looking to make a quick profit.

The issue was brought to light this week when

Technical Olympic USA

(TOA)

told a major hedge fund investor Tuesday that the company had 30 cancellations last month at its Vegas properties.

Concern then spread among investors that the Vegas housing market was cooling. The worries surrounding Technical Olympic, coupled with data showing mortgage applications were slowing, helped to drag down the entire homebuilding sector earlier this week.

On Wednesday, Technical Olympic fell 2.3% to $24.24, and two other builders with a heavy Vegas focus also dropped.

Pulte Homes

(PHM) - Get Report

shed 1.3% to $41.82, and

William Lyon Homes

(WLS)

fell 3.4% to $147.36.

"Hedge funds are playing the sector like all hell," says Greg Gieber, an analyst with AG Edwards. On Thursday, the sector reversed much of its decline, and Technical Olympic jumped 4.3% to $25.27.

The Las Vegas cancellations don't appear to be a big issue for Technical Olympic, several analysts say. Company spokesman Hunter Blankenbaker says most of the homes have been resold, but he didn't have information on whether the prices were reduced. The issue won't affect the company's earnings guidance of $3.42 a share for this year, he says.

About half of the cancellations were from the buyers themselves -- some who lost financing, and others who were speculators deciding to back out of deals, Blankenbaker says. The other half of the cancellations were initiated by the company, which realized it had sold to more speculators than it cared to.

The issue points to the precarious situation that homebuilders face when dealing with investors who buy the homes with an eye toward turning them over relatively quickly at a higher price. Most builders over the past year have enacted policies preventing buyers from selling their homes within a year of occupancy. The typical policy provides that if a home is sold within the year, the homebuilder gets a portion of the sales price.

For its part, Technical Olympic says it recently enacted such a policy but doesn't know how many speculators have purchased homes in the past year. "The company is working through the last of the backlog that has investors in it. Going forward, we really do have a policy on limiting investors, if not eliminating them," Blankenbaker says.

"We're in the business to create communities with people, and when you have investors in there you have empty homes. You don't get the same community feel as when you have permanent homebuyers," he says.

But even though such policies look like a nice PR move, they pose some challenges, because the homebuilding industry's dirty little secret is that speculative investors have made up a good chunk of buyers over the past two years.

Investor speculation in condos and single-family homes has been particularly heavy in markets like Florida, Vegas and Arizona. There is no solid data on what percentage of the buyers have been speculators, but reports from brokers suggest the numbers are rather high.

As a homebuilder, "Do I push

investors away and watch my demand go down or do I pretend not to see what is going on?" asks Nick Buss, vice president with PNC Real Estate Finance, which provides financing to homebuilders.

"Vegas is hung out as the poster child of

investor activity," Buss says. But looking at the market, it's not clear what's going on. "Is it an investor or a second-home purchaser, and can you tell the difference between the two?" Buss asks.

To get a feel for how much such investor activity there's been in Vegas, do an online search for homes at

www.realtor.com. Hundreds of single-family homes are available for rent, many of which are new homes built in the past two years.

Rick Storrer, a broker with Elite Realty in Vegas, says most of the rentals are owned by out-of-town investors. And now, it's taking longer for them to be rented, he says. With the rental market slumping and home price appreciations slowing, investor buying of new homes "seems to have slacked off a little bit," Storrer says. "It's certainly not like it was a year ago."

In the second quarter, the median sales price of a Vegas home increased 11.2% from a year earlier. Although the regional economy is still producing a healthy number of jobs, Vegas' acceleration in prices will slow, says Gieber, the AG Edwards analyst.

The median price of Las Vegas housing was below the national average and is now above it. "So it's become less affordable," Gieber says.

Still, Gieber expects the market for single-family homes to remain strong for builders. Even if they can no longer rely on speculators to fuel much of the demand.