The greater Reno-area housing market is hot. Limited supply and rising prices, however, are causing several issues, with housing affordability at the top of the list. Here are some key statistics. Jason Hidalgo/RGJ
Stacks of wood lay alongside a concrete foundation at the Riata Solar Home Community in Sparks as new homes in various states of construction steadily take shape around them.
In Reno, black and turquoise flags dance with the wind at the new Esplanade development, which features several two-story structures surrounded by scaffolding.
No, this is not a scene from 2005. But it sure is starting to feel like it.
Just three years ago, the number of lots available for new home construction in the greater Reno-Sparks area was equal to about 14 years of supply. This was the natural result of a real estate crash and crippling recession that sent new home building to a virtual standstill.
Today, an improving economy, influx of new jobs, rising home prices and rehabilitated consumer credit is fueling a “boomerang market” as Reno real estate makes its comeback.
Prospective buyers hoping to seek refuge in the existing home market should be ready for a scrum. After reaching a high of nearly 20 months of supply in 2008, existing single-family homes are down to less than three months' worth of homes as first-time purchasers, move-up buyers and investors snap up available properties. Based on current market demand, the supply of lots available for new home construction is down to 26 months as new homebuilding in the area hits a nine-year high, according to data from housing analytics firm Metrostudy. Meanwhile, the number of new vacant single-family houses that are finished is at 117. That’s less than a month’s supply.
“I always tell my clients that the easy part is getting financing,” said Sam Britt, a mortgage lending specialist with the Reno Homebuyer Team. “The hardest part is actually finding the property you need.”
Although a residential real estate recovery is long overdue for one of the regions hit hardest by the U.S. housing crash, the Reno area’s sizzling residential market is bringing up problems both new and old.
One involves concerns of another housing bubble as the last housing boom remains fresh in many residents’ minds. Prospects of an interest rate hike as well as millennials saddled with enormous debt from student loans could prove to be wildcards that could impact Reno’s housing momentum as well.
With double-digit appreciation being the norm in the last few years, affordability is also issue No. 1 for residents who haven’t seen incomes rise in similar fashion.
“When you realize that one-third of households here earn less than $35,000 a year, then you need to do something about affordable housing, whether it’s apartments or single-family (homes),” said Dennis J. Donovan, a principal with New Jersey-based site selection firm Wadley Donovan Gutshaw Consulting.
Don't mention the words "cash buyer" to Adam Carmazzi.
Since 2012, the 27-year-old Reno resident and wife Jessica Carmazzi have made two home purchases. On both occasions, cash buyers managed to pull the homebuying rug from underneath them multiple times.
When the couple recently decided to move up to a new home within the hot $300,000 to $350,000 segment of the market, they noticed a familiar pattern.
“We were not getting the homes that we wanted,” Adam Carmazzi said. “We kept getting beaten out by cash buyers.”
When the Carmazzis were trying to buy their first house four years ago, they put offers on 12 homes. Each time, they lost to a cash buyer or investor until they finally prevailed on their 13th try.
For their second house, the Carmazzis had one extra challenge: The purchase was dependent on a contingency — they had to be able to sell their first house. In a highly competitive seller’s market, such contingencies are toxic when property owners have their pick of buyers, according to Carmazzi.
After several failed bids on other homes, the Carmazzis put an offer on one house that they really liked. Two weeks later, the home went to a cash buyer. Carmazzi described it as a really crushing experience.
Tired of seeing a repeat of their miserable experience from four years ago, the couple opted to leave the existing home market altogether. They bought a brand-new home from Lennar instead.
“I told my wife ‘We’re not moving for the next 10 years,’” Carmazzi said.
The Carmazzis' experience is typical for buyers in Reno’s hot real estate market. They also represent a growing phenomenon in a market recovering from the housing crash: the rise of the “boomerang buyer.”
The phrase can refer to two types of buyers who practically disappeared from the market after the housing bubble popped. One involves move-up buyers such as the Carmazzis. The other are buyers who were foreclosed on during the recession and are now eligible to get a loan on a house.
Move-up buyers are especially prevalent in today’s Reno market.
“Right now, the move-up market is the strongest I’ve ever experienced in seven years,” said J.D. Drakulich, co-owner and listing specialist with Drakulich Team Real Estate Group.
Chalk it up to the great equalizer known as equity. As rising home values give them equity and more buying power, move-up buyers are fueling a significant chunk of residential real estate purchases, said Bill Process, president of the Reno/Sparks Association of Realtors.
“You have a lot of people whose life conditions have changed and are able to move up to better homes because they have equity,” Process said. “These include people who bought what they could afford during 2012, 2013 and 2014.”
The Reno area is also seeing an influx of out-of-state buyers, including those who are moving into the region for work. Although not as numerous as move-up buyers, they still represent a key part of the market and are expected to grow as more companies expand or move to the area.
Out-of-state people are especially noticeable on properties priced from $500,000 and up, according to Drakulich. Drakulich’s firm recently represented two young Tesla Motors employees who were pre-qualified for half a million and had “pick of the litter” for properties.
“They’re coming here,” Drakulich said about out-of-state buyers. “There’s a lot of positive buzz about our town.”
While touring Reno’s Old Southwest neighborhood, one property caught Robert Hunter’s eye.
“It was an absolute disaster,” Hunter said. “Here I was walking down one of the best blocks in Reno with gorgeous trees and beautiful homes and then saw this eyesore.”
By March 2015, Hunter called himself the proud owner of said eyesore after buying it for $275,000. That’s a bargain from the property’s marketed price of $350,000, Hunter said.
Nevertheless, it was a big gamble for Hunter, who lives more than 500 miles away in Los Angeles. Hunter, who works as vice president of investment for Republic Investment Co., is part of a growing number of investors looking to cash in on Reno’s hot real estate market.
For the enterprising Californian, buying the home was not part of his work at the commercial real estate investment firm. Instead, it was a personal side project. It also represents a huge gamble in a city that is no stranger to making bets.
“I was talking to a friend about a year and a half ago and he was telling me how Reno was a great market,” Hunter said. “It made me recognize that Reno wasn’t just going to be a second-tier Las Vegas and that it was moving away from that image.”
The talk inspired Hunter to visit the area, and he liked what he saw. In addition to proximity to Lake Tahoe and outdoors recreation, Hunter liked downtown’s ongoing transformation with places such as Startup Row and its growing foodie scene.
Hunter decided that he wanted in on Reno.
As his first project, Hunter bought the Old Southwest Reno home and started to make improvements. It wasn’t an easy remodeling job. Hunter had to commute to Reno 15 times in the past nine months while it underwent significant work.
By April, Hunter was ready to put the house back on the market. Normally, the betting odds should be in his favor. A balanced real estate market has about seven months of housing inventory. Reno’s supply of existing single-family homes as of March was at 2.8 months based on data from the Reno/Sparks Association of Realtors. In contrast, supply of existing single-family homes in January 2008 was at 19.5 months.
For new homes, supply of vacant finished single-family houses is down to less than one month, according to analytics and data firm Metrostudy.
“Right now, it’s definitely still a seller’s market,” the RSAR’s Process said. “Sellers are dictating what’s going on in the transaction.”
For Hunter, however, the process isn’t as cut and dry. After factoring in all the work and money he has poured into the property, Hunter plans to list the house for $600,000. That’s above the sweet spot for the market.
“Anything under $350,000 is getting a lot of attention and typically moves fast as long as they’re not overpriced,” Drakulich said. “When you go over a half million dollars, you have a bit of a buyer’s market at that point.”
Hunter says he’ll find out what demand is like for a property like his once he lists it on the market this month. One potential advantage is that the house also has mother-in-law quarters at the back, which should appeal to homeowners who live with a parent or want to rent out the second unit to lower their monthly mortgage cost.
Hunter admits that improving and managing a fixer-upper from another state is tough and he likely won’t purchase a similar residential project again. It does not mean, however, that he is done with Reno.
“I’m going to start purchasing commercial properties, like an office or well located apartment building,” Hunter said. “That’s the next goal.”
After getting married in June last year, Tanya and Kevin Morgan decided it was time to buy their first house.
The couple set their sights on a Reno home that was built in 1987 and placed their offer. By the next morning, there were four more bids on the property. For the first-time homebuyers, the highly competitive market was a bit scary.
“When we were walking through the house, there were four or five families who were already there,” Tanya Morgan said. “It was intimidating.”
The feeding frenzy on homes is starting to bring back memories of a decade ago, when property showings would attract throngs of buyers at the peak of the housing boom.
Although move-up buyers and investors are a big part of the market, another group is entering the fray as well. A flood of foreclosures and short sales wreaked havoc on the Nevada housing market during the recession, with Nevada joining Florida and Arizona in leading the nation in distressed activity. Today, many of the people who lost their homes to foreclosure and short sales are eligible once again for mortgages — comprising the other half of the “boomerang buyer” equation.
Homeowners who lost their home to foreclosure typically have to wait seven years before they can apply for a conventional home loan, according to mortgage lending specialist Britt. For short sellers or people who filed for bankruptcy, the wait time is four years. The time frame is even shorter for Federal Housing Administration or FHA loans, which require three years. FHA loans are especially a big deal as they account for about 83 percent of transactions in Washoe County, Britt said.
After seeing lending guidelines swing to the opposite extreme after the real estate bubble’s collapse, homebuyers are starting to see the pendulum swing the other way for mortgage opportunities.
“The guidelines have loosened up dramatically in the last 24 months,” Britt said. “It’s not as loose as it was in 2005, but we’re back to what I would say is the traditional way of lending.”
Homeowners, for example, are now able to get a loan with a minimal down payment, something that was not possible three years ago, according to Britt. Combined with double-digit appreciation in home values each year since 2012, it’s no surprise that many locals who remember the last boom-and-bust cycle are concerned, Drakulich said.
“People ask me, are we at the boom again?” Drakulich said. “Everybody has a justifiable fear when they’re seeing increases of 20 to 15 percent each year.”
There are some key differences, however, between today’s hot residential market and the previous one, according to Drakulich and Britt. One is that appraisers are stricter about their valuations.
Drakulich has seen several cases in his own practice where appraisals would come in lower than the list price and offers for a house. Recent examples from Drakulich include a home with a $420,000 offer coming in at appraisal for $392,000 and a house that received an offer for $315,000 getting appraised at $295,000. One big reason involves comparable sales, which look at pricing for houses that recently sold in the neighborhood.
“I knew people who lost their jobs or lost accounts because they did not do a proper appraisal (during the last housing boom),” Drakulich said. “Right now, sales comps are everything.”
Lenders, meanwhile, continue to tweak their underwriting guidelines to seek a balance, Britt said. Even as banks start to loosen some requirements, the industry has yet to see a big return of some of the more creative financing options that caused plenty of the headaches seen in the market a decade ago. These tools included adjustable rate mortgages with “negative amortization” payments, which did not cover the interest due. Another big issue involved mortgages that used stated income and assets without verifying the borrower’s actual finances.
Such tools allowed people to buy more house than they could afford, which ultimately led to the crash once borrowers ended up underwater on their loans.
“You won’t find a bank in the state of Nevada that will accept a stated loan because it’s illegal here,” Britt said. “Even as the guidelines change constantly, (lenders) are still tweaking them so they don’t get too loose.”
Affordability, however, is a serious issue. The area’s more popular neighborhoods, for example, are already seeing ceilings that are too high for many potential local buyers.
The current average income in Reno can afford a $302,000 home, according to Britt. The median price for an existing single-family home in Washoe County in March is already approaching that level at $296,000. In Reno, the median home price for the same period was more than $306,000. Meanwhile, a third of households in Reno-Sparks earn less than $35,000 a year, according to site selector Donovan.
A big driver of rising home prices is limited supply for new and existing houses based on strong demand. The limited supply is driving people to apartments, causing rents to rise as well. Reno started 2016 with a 12.3 percent jump in rent, the third highest increase in the nation, according to apartment search company Abodo.
“It’s not that we don’t have units coming into the market because we do,” Process said. “But buyers are scooping them just as fast.”
Interest rates, meanwhile, continue to be a huge wild card that could further compound affordability issues and slow down Reno’s real estate momentum. FHA loans are holding steady at 3.55 percent to 4 percent despite talks of an increase this year, Britt said. Should rates shoot up to 5 percent or even 4.5 percent, they will definitely have an impact on residential activity.
“If rates go up, it will slow down the market,” Britt said. “A lot of people who qualify now for those $300,000 or $400,000 homes, well, they won’t be able to qualify for those if interest rates see an increase.”
Here's a quick breakdown of the numbers that matter in our housing market.
- $296,000: The median price for an existing single-family home in Washoe County in March 2016.
- $306,000: The median price for an existing single-family home in the city of Reno in March 2016.
- $302,000: The house price that the average income in Reno can afford.
- Less than $35,000: The median income for one third of households in the greater Reno-Sparks area.
- 19.5 months: The supply of existing homes in Reno-Sparks back in January 2008.
- 2.8 months: The supply of existing homes in Reno-Sparks in March 2016.
- 26 percent: The increase in new home construction in Reno area in first quarter of 2016.
- Nine years: How long it has been since Reno saw new home starts at the level seen in the first quarter of this year.
- 4,183: The number of finished and vacant single-family lots for new home construction in Reno area.
- 14 years: Reno’s lot supply for new home construction three years ago.
- 26 months: The remaining lot supply for new home construction in Reno area in early 2016.