Las Vegas builders continue to focus on affordability

Affordability continues to be a buzzword in the Las Vegas housing market with the hope that continued rate cuts by the Federal Reserve during the rest of 2024 and into 2025 will make the valley’s homes more affordable.

Earlier this month, the Las Vegas Realtors association reported all-time high prices for town homes and condos at $299,500. The $479,900 for homes sold on the Multiple Listing Service is just short of the all-time record of $482,000 set in May of 2022.

Now, Las Vegas-based Home Builders Research reported the median price for new homes sold in September was an all-time high of $550,000, up 8 percent from September 2023. It also was record territory for new town homes at $393,990.

That’s why the housing industry was counting on the Federal Reserve to cut rates as it did in September by half a percent with more coming down the road. High mortgage rates make homes even more unaffordable given prices are rising.

The anticipation of a rate cut over the summer pushed 30-year fixed mortgage rates down from more than 7 percent in early July to just under 6 percent in mid-September after the Fed acted. Now, the rates are at their highest level since July in excess of 6½ percent.

The new home market has outperformed the existing home market because builders’ preferred lenders have the ability to offer buyers lower interest rates while sellers of existing homes don’t. New home market share of overall closings, including resale homes, in September was 30.3 percent. The average monthly share for new home closings in 2024 is 8 percent higher through the third quarter, according to Home Builders Research.

“Builders are able to offer pricing incentives that bridge the affordability gap for buyers,” said Wells Fargo Senior Economist Charlie Dougherty in an interview with RJ New Homes, noting lower mortgage rates always help boost the housing market. “Builders have been able to offer a mortgage rate buy-down that helps attract buyers very concerned about affordability issues. Interest rates are certainly a big part of why existing home sales have been sluggish.”

While the lowering of mortgage rates provides some relief of affordability, Dougherty said it won’t be a “cure-all” because other factors limit homebuying, such as prices continuing to rise rapidly and incomes not keeping pace to that appreciation.

A report from Bankrate said Nevadans need to make at least $111,557 to afford a monthly mortgage payment, a 56 percent increase from four years ago when it was estimated a $71,221 household income would work with 30 percent of monthly income for housing, the affordability mark.

“Unfortunately, those home prices are likely to continue to go up,” Dougherty said. “For one, you still have demand outrunning supply with homeowners carrying a mortgage rate that is well below the current rates. One thing that happened is before the Fed started cutting rates by 50 basis points, mortgage rates began to decline in anticipation of that.”

Dougherty said they’re still expecting mortgage rates to come down but they’ll be “relatively high compared to where they were in 2021” when a lot of mortgage rates were around 3 percent.

“We expect mortgage rates to gradually decline over the next year or so, and that means 30-year fixed mortgage rates by the end of 2025 come down to about 5½ percent and stick around there.”

Well Fargo projects rates of 6.15 percent by the end of 2024.

“Every moment downward will help, but the question is how much will it help,” Dougherty said. “The answer is probably not a whole lot because mortgage rates are only one piece of the pie. High home prices, limited supply and few homes for sale means that even if the mortgage rate comes down the question is how many homes are actually available. Is that going to bring more buyers in and push up home prices even more. The affordability headwind is likely to remain even if mortgage rates decline a little bit. It will help around the margins but if you’re looking for a full-scale recovery that doesn’t seem all too likely in the near term.”

As mortgage rates have come down, builders have maintained the same spread they had in offering incentives to buyers, Dougherty said. The spread has typically been in excess of 1 percentage point.

Dougherty noted how the issue of housing shortage and affordability that buyers are encountering has made its way into the presidential election.

Former President Trump has talked about making more public land available for development, which is something pushed by Las Vegas area builders. Vice President Kamala Harris has talked about pursuing policies that help builders construct millions of homes and offering first-time buyers a $25,000 down payment assistance.

“A lot of politicians, not just presidential candidates at the state and local level, have been putting out different housing proposals to help alleviate some of these strains,” Dougherty said. “That tells you the affordability and availability issue is certainly there and top of mind for everyone, politicians included.”

A discussion of the Las Vegas housing market took center stage at a recent meeting of NAIOP Southern Nevada, the development organization.

Scott Bleazard, land acquisition vice president for KB Home, talked about how the company’s stock reached an all-year high the date the Federal Reserve cut rates and talked about how that helps with affordable housing.

“Every time a interest rate drops a half point, there’s another 3 percent of the people that now qualify for a KB Home,” Bleazard said. “I see the market next year kind of how it’s been. We have a laundry list of people to buy our houses. It’s an affordability issue. We’re trying to do rates and as rates go down we will sell plenty of houses. If we drop it again, it’s just going to continue to roll.”

Bleazard, however, called it a “two-edged sword” for the industry that’s facing a land shortage and rising prices to acquire parcels that get pushed down to buyers. When rates get low enough, you will see apartment guys get back in the market and start competing with builders to buy land,” Bleazard said.

Owen Sherwood, a vice president with Fidelity Title, said affordability is influenced by not only interest rates but land prices and construction prices and more than one category needs to drop to have an impact.

“It’s going to take construction costs and land costs or dramatic interest rate cuts or construction costs to change the dynamic from where we are at this moment, today,” Sherwood said.

Since the interest rates went up in 2002, Sherwood said they saw industrial developers and multi-family developers slow down because they’re having trouble getting around pricing.

“It doesn’t seem like the pricing is moving down,” Sherwood said. “If anything, it’s moving up. We’re seeing the homebuilders being very active.”