Wednesday, March 01, 2006

Las Vegas—A House of Cards Bound to fall

Las Vegas is a booming city with very low unemployment figures, and a robust, thriving economy. Over 6,000 new families move here every month, taking advantage of the abundant number of service sector jobs, and the city welcomes them with open arms. Regardless of where you look, construction abounds, as the city tries to keep up with this explosive growth -- building the infrastructure (schools, roads, housing, new casinos, high-rise condo projects, etc) to support this massive expansion.

The situation hasn’t changed much throughout the entire 11 years that I’ve lived here--it has been constant growth. Las Vegas has absolutely flourished in a vibrant U.S. economy, and has expanded to more than twice its size.

With that said, this thriving Las Vegas economy is completely dependent on the discretionary spending of vacationers (Airlines, Hotels, Restaurants, Shows, Gambling, Drinking, Strip Clubs, etc) and the city lacks any real or substantial diversification. Gaming is big money and people have been more than happy to live life to the fullest and part with their cash in a strong U.S. economy. Their spending has kept thousands upon thousands of people gainfully employed in this city.

Again, the last 10+ years have seen an unprecedented economic boon, but what will happen when the U.S. economy finally starts to contract, when millions of U.S. homes start to lose value, when consumers interest rates rise and payments double on credit cards, when gas & travel become prohibitively more expensive, when the American consumer is finally tapped out and no longer has the discretionary money to gamble away in Vegas?

I'll tell you the answer: Currently, Las Vegas hotel/casino occupancy rates are running ~ 90%. Each one of these highly profitable businesses is staffed with thousands of employees (desk clerks, maids, concierges, cocktail waitresses, maintenance workers, moneychangers, card dealers, security, managers, etc.), who depend on the jobs to pay their mortgages, rents, car payments, etc. When tourism & discretionary spending finally start to decline, gaming revenues will drop, hotel occupancy rates will fall, and thousands of layoffs will follow.

Those who find themselves unemployed will quickly find that they have very limited options, as the entire hotel & gaming industry will be feeling the same economic pains. The lack of industry diversification in the city will be a killer...

Once the LV layoffs begin, more homes will go into foreclosure, as people won’t be able to make their mortgage payments. Then businesses outside of the casino industry (local restaurants, retail, home improvements, beauty, health care, etc) will also begin to feel the pain. Eventually, a chain reaction of dominoes will begin to fall, and ultimately the number of outbound U-hauls will vastly exceed those inbound...

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22 Comments:

At 3/02/2006 7:58 AM, Blogger David said...

Very possible. What about as the US dollar falls will there be enough foreigners to make up some of the shortfall?

 
At 3/02/2006 4:52 PM, Anonymous Anonymous said...

You're certainty about the fragility of Vegas in the face of a national economic downturn belies a level of profound ignorance to it's past. Stated in terms more suited to you, betting against Vegas is a sucker bet.

 
At 3/02/2006 9:54 PM, Blogger contrarian2day said...

Anonymous,

Thanks for posting up!

Your use of the English language suggests that you are somewhat intelligent, yet you make assertions without backing up your position with facts or statistics. It’s quite easy to say, based on previous Vegas history, that I’m ignorant and that “betting against Vegas is a sucker bet”, but if you took the time to read any of my previous posts (which I’m sure you have not), you would quickly understand that this Blog’s purpose is not to cater to the prevailing “all is well” philosophy (the completely oblivious mainstream consumer can continue to drink kool-aid and watch American Idol and CNN for that info). My purpose is to try to get people to look beneath the surface, at the important economic issues that tend to get glossed over by the mainstream media. I personally believe the US economy is in completely uncharted territory, with far too many fundamental imbalances, and that we are teetering on the precipice of major economic change (for the worse).

With that said, Vegas has, for many years, reaped the rewards of a strong, expanding US economy, and has also benefited from the consumer wealth effect brought on by the housing boom. It has been a great ride that I feel will soon come to an end.

Currently, American savings is at negative levels not seen since the Great Depression and the housing boom is done. With the housing ATM running out of cash, the American discretionary spending, which has provided the fuel for this thriving economy, will soon dry up too. It may take a couple more years, but when the next recession hits (2007), it will impact Vegas doubly hard--due to our lack of economic/industry diversification.

In closing: I somehow feel, with the tone of your reply, that you may have a vested interest in the Vegas market and/or economy, and maybe my comments make you a little nervous. I also feel that I’d probably be accurate in assuming that you’re probably one of the many eternal optimists that feel the Vegas Housing bubble will never pop (not enough land, economy too strong, much cheaper than LA, demand too high, everyone wants to live here, etc). If that’s the case, take a quick drive down my street (master planned community in Aliante) to see the 12 for sale or for rent signs down just 1 block alone.
This bubble is set to deflate…

I wish I could believe different, but the more I learn & understand about our economy, the gloomier the picture becomes.

Regards…
Randy

 
At 3/03/2006 7:49 AM, Anonymous Anonymous said...

I've been flying to vegas because of cheap airefare, When oil prices climb this summer say goodbye to the $200 roundtrip. And say goodbye to me. The loss of cheap flights to vegas will hurt that economy.

 
At 3/03/2006 10:11 AM, Blogger Out at the peak said...

I did skip my annual Vegas trip this year based on personal budget. I could 'afford' it, but I did not want to dip into savings. (My friends have a rough idea of how much I'm worth and give me a hard time for being frugal. They think I should always live it up. If I did, then I'd be as broke as them.)

I plan to return to Vegas in 2007 as my budget should have surplus again.

 
At 3/03/2006 11:00 AM, Blogger Rob Dawg said...

Vegas isn't any "fun" anymore. Not that I've matured (yeah right) but because they've sanitized any semblence of illicit or seamy underside in favor of profit. Hard Rock cancelled, Omni(?) or Unison(?) or Icon(?) some such one word name has cancelled. The monorail is a total failure and the last few years of roads improvements have barely kept up in the core/strip. Moves are afoot to remove the electricity and water subsidies and unemployment is looming. Previously the unemployed melted away. No, LV has reached critical mass and will be stuck with their problems. LV lives off the margin. Good times, fat margins; lean times, no margin. LV has no plan B, there's nothing to take up the slack from a decrease in visitor volume. Even dollar rich foreigners aren't going to hold up employment that is based on a volume service industry and housing construction.

 
At 3/03/2006 4:18 PM, Anonymous Anonymous said...

Randy, the level of certainty you work yourself into regarding things you know absolutely nothing about is fun to watch, in the same way one watches "Jack Ass". Whether or not that is at cross purposes to your own best interest will be for you to decide.

 
At 3/03/2006 6:09 PM, Blogger contrarian2day said...

Anonymous,

It must be incredibly difficult to throw spears from behind the veil of anonymity. I’m sure you are quite proud of your achievement, yet completely exhausted from the demanding effort required to pull it off!

Anyway, you still haven’t provided any facts to refute my position on the issue (except for, and please allow me to paraphrase: it has never happened before, so that means it will never happen… OK, you’ve convinced me--count me in Einstein!), nor have you disagreed with my assertions that (1) you may have a vested interest in this economy and (2) my comments somehow make you nervous (maybe you actually believe some of this stuff, but are too uncomfortable admitting that in hindsight, maybe you’ve made some poor investment decisions and any downturn will ultimately be quite painful to your portfolio). In addition, you have also neglected to provide any information (regarding this subject matter) as to why you feel superior, or why anyone should believe that you somehow know more about this issue than what I’ve presented before you.

I’m eagerly awaiting your reply (with facts to back it up).

Note: If you’re too afraid to come out from beneath your veil of anonymity, or are unable to provide any facts on the matter, your spear throwing privileges in this Blog will be revoked (deleted accordingly).

Randy

 
At 3/03/2006 11:35 PM, Anonymous Anonymous said...

Randy, your entire Vegas premise begins with the question "what will happen when the U.S. economy finally starts to contract?"

Do you have even the slightest idea how the Vegas economy has responded to past National economic downturns?

As to your science fiction doomsday scenarios that you are certain are in store for the Nation and Vegas, what "figures" would you like to see that "refute" a fictional story set in the future?

Vegas Median House Price Data:

2005 = $345,130
2004 = $290,287
2003 = $209,611
2002 = $186,827
2001 = $178,920
2000 = $161,893

Given the Vegas economy which continues to grow jobs, renters have and will continue to seek homeownership. You may not agree, but most people know that homeownership increases wealth over time. The Federal Reserve Survey of Consumer Finances shows the median net wealth of a homeowner household is "36" times higher than a renter household. 36 TIMES. If you bought into the "bubble theory" three years ago and decided to wait on your home purchase, you now face housing prices 75% to 100% higher, or more. Is that factual enough for you? Should you choose to wait again in 2006, are you gonna pay more in 2007?

 
At 3/04/2006 1:02 AM, Blogger Out at the peak said...

anon: Please compare the 2000-2005 median housing price to wage growth during the same time. It was only the phenomenon of low interest rates tied with creative financing along with speculative greed that got us to this point.

Most of us were still championing the bubble in 2003. I loved it and didn't see an end near. By October 2005, I was desperate to get out. However, I was still able to command a high price because the inevitable was yet to come.

Housing prices will come down in areas that had the highest run ups as borrowers have hit a wall.

The Vegas tourist attractions will still remain great, but the housing boom is turning into a bust nation wide.

 
At 3/04/2006 1:12 AM, Blogger Out at the peak said...

Know when to hold 'em; know when to fold 'em.

Even if prices could stay even, you are losing on transaction costs, opportunity costs, inflation, etc.

With growing inventory, your chances of getting out before others becomes slimmer. This is a testimate to asking prices. To move inventory, sellers must price accordingly.

 
At 3/04/2006 9:33 AM, Blogger contrarian2day said...

Anonymous,

My fictional story, as you say, assumes that one or more of the following issues will finally begin to unravel. No one can predict (with certainty) the future, but based on all the negative issues in play, I think one can assume things must change (for the worse).

Do you refute my position that:

(1)The Outsourcing of American Jobs is detrimental to our country?
(2) The Negative Personal Savings Rates are detrimental to our future purchasing power?
(3)Record US Trade Deficits pose a growing problem?
(3)American Debt (combined > $40 Trillion) is an issue?
(4)Asian Central Bank $3T in holdings is a cause for concern?
(5)Relaxed lending standards/ultra low rates provided fuel for the current housing boom?
(6)Corporate struggles (Auto, Airlines, etc) are an indicator of the US economic future?
(7)Increasing housing starts, lower sales and massive inventories won’t impact housing prices?
(8)Pension Plan defaults (look at the PBGC) provide reason to be concerned?
(9)Interest only/NEGAMs/ARMs, will bite the consumer in a rising rate environment?
(10)Oil supply and prices are tremendous concern in today’s economy?
(11)The Inverted Yield Curve is indicative of problems on the horizon?
(12)We Americans suck up 80% of the world’s savings to live our lifestyle?
(13)Housing and consumer spending have been responsible for 90% growth in GDP?
(14)The possibility of Hyperinflation or a falling dollar could be detrimental to purchasing power?
(15) The Las Vegas economy lacks diversification outside of gaming?


I could go on but I think you get the point. With that said, your “data” on the rising value of homes only provides more rationale as to why things will change. Are Las Vegas workers making that much more money today than they were 5 years ago? Answer: No, the only way locals can afford to buy a home today is through the use of non-conventional mortgage instruments, and in a rising rate environment, this will eventually come back to bite them (and our economy) in the ass.

With that said, I sold my home (made > twice what I paid) and currently rent at ½ what it would cost to purchase a new home (thanks to the huge # of speculators who must rent in order to reduce their monthly losses). I will sit on my liquidity until the opportune time arrives to purchase again.

On another note, I do try to write with an air of certainty (conviction) because I do believe in what I preach, and I do believe that fundamental change is in store. Anyone who thinks they can sell an idea without believing it themselves is a fool.

BTW: What, might I ask, is your line of work? I somehow feel that you are probably a realtor or speculator. Do you own any Vegas property? Do you really believe home values will continue to rise indefinitely here in Vegas?

Why are you looking at this Blog if you don’t have any reason to be concerned? Are you currently having a difficult time selling homes today because you lack CONVICTION? Just wondering…

One final parting comment: If it weren’t such a serious matter that could impact millions of people, I think the old adage “he who laughs last laughs best” would apply to this issue.

Continue to drink the Kool-aid and ride with the herd, as your loss will ultimately be my gain :>).

Have a great weekend!


Peak! Thanks for backing up my points and for the link…

 
At 3/04/2006 11:26 AM, Blogger Tom said...

In response to:

"2005 = $345,130
2004 = $290,287
2003 = $209,611
2002 = $186,827
2001 = $178,920
2000 = $161,893"

That 2005 figure doesn't tell the whole story. Prices have actually dropped since August and it is getting worse. Inventory is way up, and prices are slipping.

I guess Randy's fictional story based on facts is a misnomer.

 
At 3/04/2006 2:27 PM, Anonymous Anonymous said...

I suspected you would avoid my first question, and you didn't disappoint:

Do you have even the slightest idea how the Vegas economy has responded to past National economic downturns?

I will take your silence as a "no".

The 15 issues you list that so alarm you, as someone so new to economic awareness, could be replaced with 15 equally, or more, pressing concerns for every past economic cycle going back generations. The issues and headlines that are so new to you and cause you to conclude without doubt that collapse is at hand, are no lesser or greater than past challenges - just different.

Quickly:
Re: incomes vs. housing prices - learn to differentiate between debt and debt service and understand that not every asset bubble "reverts to the mean" - far from it.

Re: your questions about me - I am a business owner and NOT in the real estate industry, don't own RE in Vegas and never have, have never understood why anyone would live there EXCEPT to become wealthy - which is not terribly difficult. I have done business in Vegas for decades and have made millions there (I am not bragging or soliciting envy, simply answering your question). Neither I nor anyone I know believes RE anywhere rises indefinitely. I read blogs because they can be a source of useful information, and information absorption from as wide a range of sources as possible has always worked out well for me.

Honestly, I think your propensity to draw absolute conclusions based upon an extremely limited level of knowledge will not serve you well, but that is for you to decide.

Did you sell your home in '04 and miss the 42% run up or in '05 and miss out on the 19% increase? Before even that, perhaps? How many -5% years will it take for you to recover from that error?

Alas, Vegas is not going YoY neg anytime soon.

 
At 3/04/2006 2:52 PM, Blogger contrarian2day said...

Anonymous,

Last post is much better--thanks!

Rather than beat a dead horse, I guess we can agree to disagreee and I will take your points into consideration.

As far as my previous home is concerned: sold it for $440 1yr ago. New owner rented at a loss for a while, and currently has it back on the market (for 5 months now)listed at $479.

If it sells at asking price, after fees, closing, realtor, etc--he'll be very lucky to break even.

Agree I may have gotten out just a bit early, but no one can accurately predict the top or bottom.

I disagree with your closing remark and (when the economy turns) do forsee problems in Vegas's future.

Lastly, I have enjoyed the debate--only time will tell.

Regards
Randy

 
At 3/05/2006 8:42 AM, Anonymous Anonymous said...

"betting against Vegas is a sucker bet."

"housing prices 75% to 100% higher, or more"

"have never understood why anyone would live there EXCEPT to become wealthy - which is not terribly difficult."

Come on up and spin the wheel people. Everybody here is a winner! Place your bets and make your fortune. It's so easy that anyone can do it. Now it's your turn to have it all. Boohyahhh...

TO BE CONTINUED

 
At 3/05/2006 9:38 AM, Anonymous Anonymous said...

"I am a business owner and NOT in the real estate industry, don't own RE in Vegas and never have, have never understood why anyone would live there EXCEPT to become wealthy - which is not terribly difficult. I have done business in Vegas for decades and have made millions there "

This is the same kind of person that expects a gov't bailout when the sh*t hits the fan and he loses his shirt. It also sounds like he did better in English than he did in debating and economics class. Just because someone can speak so eloquently does not make them a genius. Far from it.

 
At 3/06/2006 11:08 PM, Anonymous Anonymous said...

Here's a bit of info:

Currently there are 14,570 homes (including condos and townhomes) listed on the MLS in Las Vegas.

1644 of the homes listed are owned by a real estate agents.

5921 of the homes are vacant (can you say investors?)

Believe me these investor are not hurting. Just some rentals coming available when they don't sell.

For this month only, there are 4,435 homes in contract. Lots of people buying homes.

These people are not fearing a housing bubble. Vegas is a great city. The casinos, entertainment, night life, tax breaks, good weather is not going anywhere. People are going to continue to come. Vegas is more popular than ever before.

No bubble here.

We will recap at the end of the summer.

Stef

 
At 3/07/2006 8:32 AM, Blogger contrarian2day said...

Hey Stef,

Glad you could post up!

Housing Tracker refutes your figures: http://www.benengebreth.org/housingtracker/location/Nevada/LasVegas/

As of March 1st, 17,681 homes are reported to be on the LV market (A 23% increase in the last 2 months)and prices have been dropping since January 06.

I disagree that investors are not hurting; had these folks known what the market was up to (a downturn) many of them would have completely stayed away. I believe these folks are at a pucker factor of 9+. I read in the RJ that 65 homes in Aliente (new master plan)have gone into foreclosure (defaulted). I can only imagine it's the investors walking away.

Agree, tax breaks, weather, etc are very good, but as Robert Cote noted and I think he hit the nail on the head: "LV lives off the margin. Good times, fat margins; lean times, no margin. LV has no plan B, there's nothing to take up the slack from a decrease in visitor volume. Even dollar rich foreigners aren't going to hold up employment that is based on a volume service industry and housing construction"

We'll see come spring/summer.

Again, thanks for posting up.

Randy

 
At 3/14/2006 10:13 PM, Anonymous MoMark said...

I agree with you Randy. That's why I sold my home in Henderson in June of 05, quit my job there, and moved to Southwest Missouri where the housing market is currently considered 4-5% UNDERVALUED. I paid cash for the house on 4.3 acres, no debt, and took a year off. I loved living in Las Vegas, but I recognize that the economic situation is beyond the control of even a successful city like Las Vegas that is dependent on tourists to keep it afloat. Even the biggest employers like HSBC/Household, and other financial institutions outside of gaming and the tourist industry are dependent on people borrowing money and taking on credit which is becoming ever more expensive to do. While I love Las Vegas, I couldn't stay there and watch everything I'd worked for evaporate as the national economy and housing markets slide. I think your analysis is right on. The "sucker" anonymous reminds me of the blogs taken over by people raving about how great a bargain South Florida is for home buyers..the postings are usually within 1-2 minutes of each other and ENTHUSIASTIC about why they're going to move ASAP to the Florida paradise... You've got to laugh at it ;-) Great work Randy!

 
At 4/04/2006 6:07 PM, Blogger Joe Logic said...

Great blog! I sold my house in Vegas at the peak and moved out, so I guess that makes me a sucker.

Don't get frustrated by some of the comments. Most of the people in Vegas are sheep that still believe in "real estate only goes up" and "you better get in now before you're priced out forever".

That's fine, prices have stagnated for almost 9 months now, and inventory's about to hit 20,000. We'll see who the sucker is when all those SUVs get repo'd and there's a foreclosure on every street.

 
At 11/27/2011 7:28 PM, Anonymous Bernard said...

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