Saturday, December 01, 2007

Las Vegas Housing Bubble Update

I’ve lived in Las Vegas for 12 years and had the rare opportunity to watch our Valley housing market explode with the largest, quickest, most irrationally exuberant run up in prices ever witnessed (back in 2005 Lost Wages {Vegas} was rated the fastest growing city in the US and housing prices better than doubled in less than five years).

Knowing that prices were rapidly rising and with interest rates soon to rise, I started (in late 2003) seriously researching housing issues. Eventually I decided to act on my basic understanding of the problem and ultimately sold my home late in the mania phase (end of 2004--just a bit early, but no one can pick THE top), and made out quite well.

Later, though completely out of the housing ownership market and now renting, I continued on with my voracious research and gained a much better understanding of the myriad of complex economic issues that impacted this housing bubble. I eventually tried to pass my knowledge on to those around me, but to many, I was merely a gibbering lunatic who didn’t know what the heck he was talking about. In due time, I became frustrated with my unsuccessful attempts in convincing these media-hyped & fed, brainwashed individuals, so I decided to take to the web--to possibly help others who were themselves trying to understand the developing situation. Ultimately, I started this Blog back in December 2005 with my first post.

Though I didn’t specifically target Las Vegas’s housing bubble in my routine posts, I did occasionally address this booming Valley bubble market (see links below):

Las Vegas—A House of Cards Bound to fall

Las Vegas Housing Inventory Breaks 20,000 Mark

Las Vegas Housing Party is Nearly Over

Today’s post (LV housing bubble update) is based on recent developments in the market, so please allow me to share with you some new data and current media releases that (I believe anyway) irrefutably prove that my Las Vegas bubble predictions have been correct (thus far anyway—as we have much farther to deflate):


Prudential Americana Group Filed For Bankruptcy
Nov 28, 07: Prudential Americana Group, one of the largest residential real estate firms in the Las Vegas Valley, is filing for Chapter 11 bankruptcy so it can reorganize its debts while continuing operations.

Prudential Americana is the second big Las Vegas realty firm to seek bankruptcy protection in recent months.

Jimmy Dague, president of Vision Properties doing business as Century 21 Advantage Gold, filed for Chapter 11 bankruptcy protection in August 07.


Nevada First in Preforeclosures
Nov 27: Nevada leads the nation in the actual number of preforeclosure filings through October with 40.5 preforeclosure filings per 1,000 households.

Nevada had 30,276 preforeclosure filings through October, an increase of 106 percent from last year. The state's per capita rate of 4.05 tops
Florida (2.86), Arizona (2.05) and Colorado (2.04). also showed Nevada was No. 1 in real estate owned filings, or properties owned by the lender, at 10,703 through October, or 1.45 per capita. Real estate owned filings climbed to 54,418 nationwide in October, up 24 percent from 43,941 in September.

The numbers are grim for hundreds of thousands of homeowners trapped by rising mortgage payments, stagnant home prices and tightened credit markets, President Alexis McGee said.

31,000+ Clark County Foreclosures
Based on Realtytrac Data, > 31,000 homes in Clark County are in some state of foreclosure


Mortgage Meltdown
Nov 28: U.S. homebuilders meeting in Las Vegas said the housing market probably will weaken in 2008 as foreclosures rise and banks tighten lending standards.

Demand has deteriorated in many markets, limiting the prospect of a rebound in new home sales, chief executive officers for
D.R. Horton and Beazer Homes USA said Tuesday at a JPMorgan Chase & Co. conference at Mandalay Bay.

Next year "is going to be worse than '07 for us and for the industry in general," said
Donald Tomnitz, CEO of Fort Worth, Texas-based D.R. Horton, the fourth-largest U.S. homebuilder.

The housing slump that began in 2005 has erased about $36 billion in stock market value for the largest 15 homebuilders this year through Monday. New home sales dropped 23 percent in the year through September.

California and Florida housing markets continue to weaken and the Las Vegas market is "soft," Tomnitz said. New home sales in Phoenix will likely worsen in 2008, he said.


Existing home sales (median prices)
Based on Data, existing home inventories have increased >25% and median prices have dropped >10% YoY


Ryland reduces prices; Deep Discounts
Every Ryland Homes community across the United States will offer special savings on quick move-in homes during the Ryland Homes Savings Spectacular Nov. 9-11, said Dana Rogers, Ryland's vice president of sales and marketing.

The builder will offer unprecedented savings at all of its communities, including those in the
Las Vegas area, Rogers said.

"It takes a lot to impress today's home buyer," Rogers said. "That's why we're going big and offering savings of up to 25 percent or more off the base price of the home."

Rogers gave specific examples illustrating the extent of the discounts. At the Providence community, the price of the Pearl residence, home site No. 199 in the Auburn Collection, will be reduced from $442,990 to $316,990 -- a savings of $126,000, he said. The Angora residence, home site No 167 in the Ellingwood neighborhood at Mountain Edge, will be reduced from $541,790 to $393,790 for a savings of $148,000, he said.

Lennar Real Deal—HUGE REDUCTIONS MUST SEE (Very Small Sample Below)

REAL ESTATE: Everything must go
Builders are sparing little expense in a bid to entice hesitant buyers into a soft housing market.

Virtually every major builder in the
Las Vegas Valley has pushed big sales this fall, and the price breaks have been steep.

Pulte Homes marked down prices 15 percent on certain models, with discounts of up to $80,000 on some completed new homes during one October weekend. The builder's Del Webb subsidiary sliced $55,000 from some of its asking prices. Rhodes Homes has offered as much as $100,000 off on finished houses. Lennar Corp. has slashed prices on some models by about a third; Lennar cut the cost of a 5,000-square-foot home in its Earlstone community from $911,490 to $662,490, and a 4,498-square-foot home in its Silver Creek subdivision went from $807,290 to $612,290. Centex Homes has clipped $25,000 to $100,000 off the prices of some of its existing homes, and is ponying up as much as $21,000 in closing costs on some models. American West Homes' valleywide "liquidation sale" on Nov. 10 and Nov. 11 featured savings of up to $143,000.

After Astoria Homes dropped prices on standing inventory by as much as $200,000, or 27 percent, Oct. 12-14, traffic at least doubled across the board at Astoria communities, and even tripled in some cases, said Tom McCormick, the company's president.


Data signal slowing construction
Southern Nevada's construction industry showed more signs of slowing in the third quarter, the Las Vegas chapter of Associated General Contractors reported.

Taxable construction spending fell 14.8 percent over the past 12 months to $3.13 billion, largely a result of declining residential building permits. After three years of high-volume development, Las Vegas has experienced a 46 percent drop in single-family permits and 56 percent drop in multifamily permits.

Clark County has the nation's sixth-highest foreclosure rate and has one of the highest concentrations of subprime and adjustable-rate mortgages, the AGC market brief noted. Many housing analysts suggest the trend will worsen in the next 12 months as some 2 million mortgages nationwide reset to higher interest rates.

Construction employment fell 1.2 percent from a year ago to 108,500 in September, representing 11.6 percent of Southern Nevada's total employment base.


Nevada Taxable Retail sales falling
Taxable sales in Nevada faltered yet again in September, marking the sixth straight monthly slide in a key revenue generator for state government.

Thursday's report showed a statewide 1.5 percent drop compared with September 2006, tabbed to the
housing slump as well as a growing reluctance overall to spend.

"People may not have as much discretionary
money. That's how I read it," state economist Jim Shabi said.

Taxable sales are the state's biggest source of revenue, and the Department of Taxation report shows the general fund portion of the state budget is down $24.4 million, or 2.3 percent, from Economic Forum projections a third of the way into the 2008 fiscal year.

Collections on
business tax and license fees as well as excise taxes also are lagging, the report showed.

Last month, Gov. Jim Gibbons directed state agency heads to prepare contingency plans to cut spending by 8 percent.

State Tax Revenue off the mark
CARSON CITY -- State government's financial woes worsened Thursday, when the Department of Taxation released reports showing tax revenue falling further behind projections.

Revenues from four major taxes -- sales, business payroll, insurance and real property -- were below expected levels for July through September, the department announced Thursday.

As a result,
Gov. Jim Gibbons might have to cut more than the anticipated $285 million from the state's $6.8 billion, two-year budget when he hacks state spending in January. "It is certainly going to make the hole bigger," state Budget Director Andrew Clinger said. Gibbons has refused to identify where he might cut.

Clinger denied that Gibbons has asked state agency directors to request employees voluntarily take two weeks off without pay to avoid layoffs. That option, however, might be gaining favor with department directors, he said. "The departments are looking at anything they can to make the cuts," Clinger said.

SOUTHERN NEVADA 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.

The October index, based on August data, dropped to 132.67, with six of the 10 series contributing negatively. Its down from 133.46 in September, but remains slightly higher than a year ago. The index has relinquished its gain from the beginning of the year, when it stood at 132.98.

"The Las Vegas economy in August performed at less than a stellar rate," economist
Keith Schwer of the Center for Business and Economic Research said.

Residential building permits continue to plummet by more than half and commercial permits are off nearly 20 percent. Taxable sales fell 5.2 percent in August. Housing has "taken a bite out of the robust expansion" of the past few years, he said.

Based on the data above, I hope that you are now inclined to believe that my Las Vegas Housing market forecasts have, thus far, been correct. With that, I would now like to state for the record that I believe Commercial Real Estate is the next bubble to pop.


Commercial Real Estate Bubble Economicrot
Back in early 2006, my Blog was mentioned in a BusinessWeek article discussing the fact that there were many folks ranting about the housing market bubble, but few thought that there was a Commercial Real Estate bubble. I quickly fired back that we would, in due time, see this one pop too. Though, at the time, I did feel we would be in a recession by now and that Commercial Property would have already followed suit, I do believe the first signs have finally appeared and the Commercial Property Bubble is ready to let out some major pressure.

Commercial Real Estate next: WSJ & Calculated Risk
The value of commercial real estate, which nearly doubled in the past seven years, is now starting to decline due to the credit crunch, according to a report set to be released today by Moody's Investors Service.

The report found that the value of commercial property declined 1.2% in September from the previous month. Particularly hard hit were apartments in the West and office property in most states other than California.

The report is an early sign that the commercial-property sector is being dragged down by the growing reluctance of lenders to extend credit for anything related to real estate.

Historically the Commercial real estate market trails the residential real estate market by about a year and half. So it appears the CRE slump is right on schedule

Commercial Real Estate next
Nov. 28 (Bloomberg) -- In the bond market, commercial property investors are about as creditworthy as U.S. homeowners with subprime mortgages.

``Commercial real estate is a full-blown bubble that feels very much at a bursting point,'' said Christian Stracke, an analyst in London at CreditSights Inc., a fixed-income research firm. ``There's a fairly toxic mix of factors at work.''

The cost of derivatives protecting investors from defaults on the highest-rated bonds backed by properties more than doubled in the past month, according to Markit Group Ltd. Prices suggest traders anticipate defaults rising to the highest level since the Great Depression, according to analysts at RBS Greenwich Capital in Greenwich, Connecticut.

The seven-year rally in offices and retail properties ended in September when prices fell an average of 1.2 percent, according to Moody's Investors Service. Banks worldwide are holding $54 billion of unsold commercial mortgages, according to data compiled by New York-based Citigroup Inc. that includes fixed and floating-rate debt.


Growth in LV has been absolutely phenomenal over the last decade--a decade of prosperity driven by 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 is however coming to an end! Credit has started to dry up, (right now it is mainly influencing mortgage credit--months from now it will impact a myriad of other areas—Commercial credit, Car loans, Credit Cards, etc) and the huge party bills are coming due.

As stated in previous posts, Las Vegas’s economy has been 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. When tourism & discretionary spending finally start to decline (due to National negative savings rates, rising inflation and falling home values), gaming revenues will drop, hotel occupancy rates will fall, and thousands of layoffs will follow.

Those locals 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!

Currently, with housing values falling, the wealth effect is under strain and many people are having difficulty understanding what has happened to the housing market, while most are still holding on to the false hope it will recover somewhat quickly. In the meantime, these folks have a mortgage that must get paid, all while coping with higher gas, food prices, tuition, insurance, energy bills, etc. Many are already strained to the max and the black hole of upcoming teaser rate mortgage resets will finally set them over the edge. (Note: refinancing will not be an option for those who have purchased within the last 3 years because they are already underwater; additionally many who have owned for decades used the cheap rates and housing boom to extract available equity--to live beyond their means; so they too cannot refinance). This same problem is beginning to impact millions from across the nation!!!

Additionally, the home ATM machine that people used to draw money out of regularly has finally dried up, so they have ended 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!!!

BOTTOM LINE: When tourism starts to wane, due to people running out of discretionary cash, gaming/hotel industry layoffs will follow, cascading the impacts of the already doomed Valley housing market, as more locals will be unable to meet their monthly mortgage obligations. Reduced spending levels, increasing layoffs, magnified home foreclosures and tightening credit conditions will cause a doubly painful domino effect on the Commercial real estate market and in due time, the impacts will be extremely painful to the entire economy. State Tax revenues will tank, crys for budget cuts will prevail and the government layoffs to follow will only exacerbate/compound the situation.

I think one of my readers summarized the situation best: “ Las Vegas 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.”

Guess only the future will tell...



Anonymous said...

The real takeaway from all this is that even if XYZ Builders drops the price on their 5,000sf McMansions from $800,000 to $600,000, they're still making a fat profit on the <$100sf it cost to build the tract, but the happy new discount owner is now stuck for $3522.07 a month and another $965.55 a month bump-up for zero down, easily $55,000 a year with fees, taxes and services. Add in cable, power, water and sewer, HVAC, gas and groceries, you gotta be two-earner slaves to live today! Much easier to take Real Estate 101 then move back to Atlantic City and jack some fixed-income Mom and Pop out of their 50's Craftsman with teaser-to-squeezer, then flip the repo after you take over the next, which is the real story here. The Hope Alliance bailout is only going to help the brokers, banks and bond holders, and help keep inflated housing prices permanently super. You and me and Mom and Pop and all of US are SOL on the Neo Frontier. Maybe that's what the new Homeland Security internment camps are for?

Anonymous said...

Pretty scary to think of the long-term impacts caused by years of cheap credit and overindulging consumers. Agree, this will probably end badly

Anonymous said...

Excellent, accurate overview Randy on which I would like to add the following points from my experience only since moving here in 2005 from Washington DC to wait for the downturn to buy investment property which came and went in August 2007. I am out of here next year anyway given the awful economic fundamentals for the area as you describe not to mention others.
-The principals of Prudential Americana and C21 Advantage Gold, FN I believe and Mr. Dague as you cite, are hardly amateurs and have decades of experience here. The fact such pros are filing for Ch. 11 should be telling enough to the remaining of those with heads in the sand.
-In the summer of 2006 I wrote an article about investing in the land of falling comps that was met like in your experience with either silence or strange virtual looks. As for you enough said considering the way things have gone since March 2007 when the slide began to a greater degree.
-Builder discounts off the "list" price? HA! Talk about BS and a real shell game! C'mon the savvy locals know the fix is in and know better than that please!
-I must remark that a decline in construction employment of only 1.2% cent is hardly a bad or even telling sign. I would bet that most of that number are illegals who have fled for greener pastures. However we can be assured of great declines over our short winter.
-Your anticipation of the pop in commercial real estate is spot on, and the moguls on the Strip will lose big short-term and have to, much like Citigroup, court more foreign financing via countries with massive trade surpluses like UAE and China as did MGM Mirage's/Kerkorian's Project City Center a few months ago.
-I met up with a old friend of mine who works at a fine jewellery store on the Strip a few nights ago, and I asked him how was 3Q2007. His comment was that it was down and sucked, and then I asked if a lot of business was coming from Europeans and Canadians, to which he responded that was most of the best sales. Comments? Reply to :)

Randy said...

My thanks to all of you for posting up.

Anon 5:10--I'm aware of the camps but hope it never comes to that.

Paolo--Appreciate your feedback.
Regarding the strange looks: It's actually kind of ironic because many of the folks I tried on warn early on are now coming to me asking for advice. Problem is: There is not much advice to offer when they are already upside down and can't Refi or sell.

Their only option if they can't swing the reset payment--mail the keys back to the lender and take the credit hit.

Regarding the local economy: I believe we're just warming up and haven't seen nothing yet.

Thanks again for posting up your thoughts.

Best of luck in your future endeavors

chriscd said...

Nice post. One caveat that may soften or even "save" the commercial side of things.

Commercial Real-estate loan rates are usually taken with relatively good rates with balloon payments. You wouldn't see the loans being given at 1% teaser rates. So in theory the holders won't be facing interest rate shock.

If they haven't been able to develop the land, when the balloon payment is due, they may be able to take another loan and the new rates will be lower.

The question becomes, how long can they hang on. I think if they can hang on for a couple of years, they will be okay.

To Anon: RE: The $600,000 loan. Given that credit standards have tightned, the people buying a $600K loan can probably actually afford it.

Another big impact will be the property tax issue. As loans foreclose it is possible those payments will lag and/or really hit some banks hard having to pay them until they can off load the property. This will hurt more than the banks. Small cities will be greatly impacted.

Anonymous said...

Wow - wished I'd had you as my advisor...
I bought a new house for 255K in March of 07 -
the builder is now selling the same model for 178K.
I have excellent credit and have never "skipped out " on any responsibility in my life.
But can't think of anything that will give me more relief than to turn over my keys and ruin my credit.
Buying a house was the worst mistake I've ever made.

Rob said...

Ditto on what anonymous just said. I'm in the same boat, having bought a house for listed at 144K (two years later).

Unknown said...

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