THE SECOND QUARTER IN LAS VEGAS MARKED its hottest quarter yet. Inventory of homes for sale remained low—measured in days, not months—and existing home prices were up nearly 25 percent annually.

But the third quarter told a different story. Homes on the market spiked to nearly 16,000 from 1,400 at the beginning of the year. On Oct. 2, Pulte Homes made waves when it reduced its prices across Las Vegas by about $70,000 per home. Two days later, it reduced its third-quarter earnings guidance downward from $2.00 to $2.10 per diluted share to $1.95 to $2.05.

The Las Vegas market has cooled, according to industry experts, due in part to competition and investors leaving the game. But some welcome a return to a less blistering pace, and they expect Vegas to remain a top 10 housing market.

Last year and the start of 2004 were boom times in Las Vegas for Pulte, the market's second largest builder (it closed 2,717 homes there in 2003). Buyers snatched up every home offered, leading the company to raise prices with new deliveries. But toward the end of this summer, sales traffic dropped. “We determined we were probably overly aggressive in our pricing,” says Mark Marymee, the company's director of corporate communications. “We got ahead of the competition.”

Marymee says the price reductions aren't a reflection of any larger problems in the company or the Las Vegas market. In fact, he says that the lower prices have sparked buyer traffic, and he anticipates Pulte's homes in Vegas will still sell for almost 30 percent more than last year.

Market observers agree. “The market is doing fine,” says Dennis Smith, president and owner of Home Builders Research, a market research firm in Las Vegas. “We had one builder that overreacted on its price increases early in the year, and it just happened to be one of the biggest builders in the country.”

Competition has caused an oversupply in some submarkets, Smith says, leading a few other builders to pull their prices back, though none as far as Pulte. Some builders have even returned to raising their prices. “The problem is not with the new-home market,” he says.

Speculators were responsible for much of the jump in the number of homes for sale. About 50 percent of the homes listed at the beginning of October are considered “new” because investors bought but never lived in them, says Monica Caruso, spokesperson for the Southern Nevada Home Builders Association.

A few years ago, the Vegas market was selling about 23,000 new homes a year. The figure jumped to 30,000 in 2003 and was on track to climb higher in 2004, says Tim Sullivan, principal of Hanley Wood Market Intelligence (formerly Meyers Group, recently purchased by Hanley Wood, LLC, publisher of BUILDER).

He says the new-home market can sustain 23,000 sales. Many of the extra homes have ended up on the selling block, Sullivan says, because “if people planned on flipping, they're on the market, and if they didn't plan to flip but they got scared, they're selling, too.”

Smith estimates it will take four to six months for the resale market to even itself out. Prices will still be as much as 20 percent ahead of last year, and the fibers driving a strong Vegas housing market—good weather, no state income tax, and job growth—will still be in place.

What's more, Sullivan expects builders will continue to make money by building smaller, higher-density, homes with a higher price per square foot. “This is good for the market,” Sullivan says, adding, “Incomes can catch up [and] we can get rid of the frenzy and get back to a more normal market.”

Learn more about markets featured in this article: Las Vegas, NV.