Sunday, October 28, 2007

Las Vegas Housing Party is Nearly Over

Back in April of 2006, I made an assertion that the Las Vegas housing party was nearly over (link). Many folks (expecially those I work with) thought I was crazy and I was given every excuse in the books why the party would continue ad infinitum: We’re running out of land and over 6,000 people are moving here a month; The economy is strong and everyone wants to live here; Housing prices have NEVER declined in Vegas… Understandably, those eternal optimists (many with a vested interest) had their reasons why the party would last, but I knew better.

Today, there are over 30,000 homes for sale in the Valley, and median home prices have already declined by double digits. In addition to the 30K homes for sale, there are currently 28,000+ homes in some state of foreclosure, while the numbers trend higher each and every day--many caused by teaser-rate mortgage resets that cannot be serviced (see reset chart below—the pain has merely just begun). Lastly, Sin City home sales (both existing and new) are now down greater than 50% YoY, and credit/mortgage lending markets are now tighter than the bark to a tree--whereas two years ago, anyone who could fog a mirror could get approved for a $1M mortgage, it now takes a 15% down-payment, steady “verifiable” income and good credit... Something many folks in this town do not have.

So, should one now conclude that the Las Vegas housing party has ended? I would suggest the short-term answer is yes, but we’ve merely just turned off the party music and the drunks are beginning to stagger over to their cars. Little do they know however, the cops have set up a roadblock and DUI checkpoint just outside the parking lot. The fun was great while it lasted, but tomorrow’s hangover will be the most painful ever experienced and many lives will have changed forever. But that is tomorrow and we’re not quite there yet…

When all is said and done, and only if we do not get hit with an economic crisis by then (e.g. banking crisis, dollar collapse, deep recession or worse), we will probably see the bottom to this housing mess around 2010 or 2011. By that time however, home prices in Las Vegas will have dropped > 50% (back to ~ 2000 levels).

I’m sure many would still like to refute the data above--in trying to keep an optimistic outlook on things, but always remember: a turd is still a turd no matter how much cologne you spray on it.

Bottom Line: Las Vegas Housing Data (increasing inventories and foreclosures with declining prices) is going to get much, much worse.



Anonymous said...

"... medium home prices have already declined..."

That might be and probably is. The link to was depicting medium prices among other things.

Medium and median can, of course go hand in hand.

Anyway, piles of cheap houses entering the market could lower the median, as well.

contrarian2day said...

Good catch anon. I was having a bit of a party myself while composing this message and the beer was tasting pretty good. Didn't catch the error--now corrected.


Tom said...

WELCOME BACK! Where the heck did you go?

contrarian2day said...

Thanks Tom. I guess all I can say is that I've been lazy, but far too many of my earlier predictions are now starting happen and are negatively impacting the GLOBAL bubble economy (credit crunch, dollar in a free fall, Gold soaring, housing market tanking, high oil prices, strapped consumer, etc)...I couldn't just let it lie. :>)

Anonymous said...

Well there should be plenty of stuff for you to post about. How about the false GDP reading? They said we had the lowest inflation that we have ever had in 30 years? Yeah right! They are cooking these numbers BIG TIME!

Anonymous said...

If you want to be fair about Vegas, discuss the growth in the Vegas economy. Can you deny the number of jobs being created in the short term? What do you think the average salary of an employee will be at City Center? I can assure you it will be more that $10 an hour. (100,000+ new jobs in Vegas) These people will have to live somewhere. Rents will increase and the desire to own a home will seem more reasonable. This will stop any such 50% fall in housing prices. Maybe if you live in Detroit.

I believe the prices of homes will fall as long as the subprime borrowers and investors continue to default. A large amount of investors have already done so. I can also attest to the fact that there are more foreclosures entering the market than new purchases. As shown in your chart, the last of the subprime borrowers will adjust in June '08. Then you have the stated alt-A borrowers. There are a considerable amount of people, making good money in Vegas (tip industry), that would be considered stated income borrowers. They will not default.
They may not be too exited about being upside down in their home, but what choice do they have.

It will take a few years for these unclaimed homes to be acquired by buyers and investors. The time will come when Vegas continues to be the fastest growing city and the real estate market will not be so bad. I become a buyer of single family homes mid to late '09. Maybe a nice apartment complex some time in '08. The Fed will keep rates low. Banks will lose their cold feet attitude. Common sense lending practices will come back into play.

I agree with you 100% on our global economy. Better for Vegas. More people moving here because we will have jobs. Bring the Euros to Vegas. I do believe the casinos will exchange foreign currency.

Please refute all of my commentary. I thoughly enjoy it and will defend all that I can.

You know who.

contrarian2day said...

I must concur that growth in LV has been absolutely phenomenal over the last decade--a decade of prosperity driven by the wealth effect of cheap credit (both business and personal) and rising asset values, creating a consumer wealth effect and influencing a carefree lifestyle. People (both local and tourist) had lots of cheap, easy money and access to huge credit lines if they needed more to spend in the City of Sin (all in the name of having a good time and living for the here and now). That however is coming to an end! Credit has started to dry up (right now it is only influencing mortgage credit--months from now it will impact a myriad of other areas—Car loans, Credit Cards, Commercial credit, etc).

Currently, with housing values falling, the wealth effect is under strain and people are having difficulty understanding what has happened to the market. They do however realize that they have a mortgage to pay, while gas and food are getting more expensive and they are scared that their teaser mortgage will soon reset, but they know they can’t refinance because they are underwater (this is impacting people from across the nation!!!). Additionally, the home ATM machine they used to draw money out of regularly has dried up, so they end up resorting back to the credit cards (the same ones they paid off with that home equity line of credit last year) just to make daily ends meet. This is going to end horribly!!!

When tourism starts to wane, due to people running out of discretionary cash, gaming/hotel industry layoffs will follow, cascading the impacts to the already doomed housing market, as more locals will be unable to meet monthly mortgage obligations.

Reference my reset charts: Yes the majority of subprime resets will end in 08, but the Alt-A monsters are nearly as bad (stated income, no-doc, no hope of meeting reset payments). NOTE: Defaults usually don’t begin to happen until a minimum of 3 months after resets (that’s when the lender finally gives up on the borrower). Therefore, looking at the resets charts again, the foreclosing homes today didn’t reset until June/July07 and look at what is happening to the lenders today. Merrill Lynch $7.9B write down, CitiGroup $11B, who knows what kind of garbage is left on their books. Wait till the foreclosures REALLY START!!

Additionally, when the housing market is down 30%, and your rate does reset, what is a homebuyer going to do. We’ll let me tell you: Knowing he purchased the home with no money down and that he is currently underwater by 30%, knowing there is no way to meet the reset payment, knowing he can’t refinance… He will default and mail the keys back to the lender!!! Problem Solved.

So, where did I get the 30% figure? That’s already the discounts being offered TODAY by Rhodes, Lennar and Ryland on existing inventory—Take a look at the HOT DEALS being offered:

So, with that said, just wait till the shit really hits the fan. I’m probably being optimistic with my 50% haircut prediction, as markets typically overshoot on both the up and downside. And this prediction is based on the hope that we don’t have a systematic banking crisis.

I agree the Fed will TRY to keep the rates low, but he only controls short-term rates, the market controls long-term rates (Note: 30yr Mortgages are tied to the 10yr yield). The more he reduces short-term rates, the more investors will dump the US dollar and US dollar denominated Bonds—Driving up the 10yr. Bottom Line: Long term rates are going UP, UP, UP!!

Anonymous said...

Some education for you. Alt-A loans will not typically be adjustable. Long term rates have been lower than the short term and a loan officer would have made less money offering an arm to a Alt-A buyer in the last few years. A subprime borrower has no option. The loan will be a 2 or 3 yr adjustable rate. The last of these loans will adjust at the June '08 date from the chart. Anyone that would be getting priced out of their home due to a rate adjustment will miss three payments and then go into forclosure say 9 months later (early '09). That will be the end. Leave the Alt-A people out of it. So you have a small percentage of borrowers that may default next year. 90%+ of people can afford their mortgage. When does the buying begin? Some will start too soon. Some will start too late. They all will get bought well before the market hits 50% value.

A house that sold at the peak for $450,000 may be going for $350,000 now. At some point it will make sense to purchase this house with 20% down and rent it to break even or make a few bucks like the old days of real estate investments. When these figures align, all of the homes in Vegas will be bought up. The only thing that can stop this will be a huge rate increase or a loss of jobs creating a complete collapse of Vegas. I understand that you are banking on both.

There is a significant amount of cash waiting on the fence. Irregardless of the small timers, investors will not allow the market to slip that far. Las Vegas, has become within the last five years a New York, Chicago, San Francisco, Los Angeles type of market but still priced like Phoenix. There are a bunch of undesirable properties that won't be worth squat. Communities that were piled on top of each other, small lots, and in run down neighborhoods from abandonment will suffer greatly. Other than that, people will continue to move here either bringing money from retirement, bringing their business (no state tax)or showing up to work and contribute to the economy. Will people stop coming here to gamble?
Doubtful but possible.

We have a long ride and only time will tell. Diversification will conquer all. Own real estate, 401k's should include bonds, blue chips, and international funds, buy some commodities (Randy would be a great Gold salesman), pay off all debt and maybe have a few guns and bottles of water for when all of the Contrarian's predictions come true. NostrasRandius.

Come again.


contrarian2day said...
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vegas crash watcher said...

Stef and the the anonymous "you know who" should change their names to Pollyanna. It's going to be a lot worse than they can imagine. There are already about 20k empty houses in the valley.
I say 80% down from 2006 prices.

contrarian2day said...
This comment has been removed by the author.
contrarian2day said...

DOW FALLS 361 On Credit Worries:


Dollar is falling through the floor:

Today's LVRJ: LAS VEGAS ECONOMY--Indicators plummet to '07 low
"The downturn in Las Vegas' real estate market, combined with a 5.4 percent decline in gaming revenue for August, dragged the Southern Nevada Index of Leading Economic Indicators to its lowest level of the year." (Merely the beginning)

Stef, you're my bud, but you must admit that I've been right on everything (aside from timeline) we've discussed over the last 2+ years regarding this economic downturn.

2 years ago, you said housing would never fall in the valley. Well, I think today's inventory and price data prove me right.

I told you the dollar would tank--We're at the lowest levels EVER recorded.

I told you gold would soar--We're at a 28 year high!

I told you the Stock market would tank--As you know I have a $250 bet with someone that we'll see 12,000 close by EOY 07.--Yet TBD

The biggest problem we have right now is CREDIT MARKETS HAVE DRIED UP (no one can get a loan without $$ and good credit) AND BANKS WILL SOON START FAILING. THIS IS THE BIGGEST ECONOMIC CRISIS IN OVER 80 YEARS!! Drop the glass of Kool-aide and look around. This is HUGE AND VERY SCARY!