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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: nextrade! who wrote (17954)	2/28/2004 5:44:00 PM
From: Elroy Jetson	Respond to of 306849

Strong housing demand in Las Vegas does not translate into profits for home owners or home builders. Ten years ago I worked for a Weyerhaeuser subsidiary, Pardee Construction, which was and is the largest home builder in Las Vegas and San Diego. Based on this I can suggest some problems in the Las Vegas market. Pardee built identical homes in each of their market areas. The gross profit margin in San Diego was around 50% since the land is typically purchased an average of 13 years before the sale of the home. In Las Vegas, the land was purchased perhaps 7 years prior to sale but the profit margin is roughly 10% because the land has not appreciated much over the holding period, excepting the incremental value of the entitlement process. Las Vegas is not land constrained so land values appreciate at a very low rate. The depreciation on buildings is often greater than the appreciation of the land value. As a result when residents sell their homes they often obtain a sales price that is close to the price they paid years before. Because of the abundance of land, community builders buy smaller tracts. As a consequence, when land prices fall during a down-turn, builders simply establish a new lower basis. However, because of the competition from other builders, everyone once again achieves the same 10% profit margins except on lower home prices. This economic structure also exerts a strong tendency for neighborhoods to decline both in quality and in the economic demographics of residents as the neighborhood ages.