High Rises and High Time Preferences
by Doug French by Doug French
Fifty years ago a Life magazine cover asked — “Las Vegas — Is Boom Overextended?” After all, three hotels had opened in the spring of that year costing a total of $15 million and two more were opening that summer including the $5 million Dunes. "Had Las Vegas pushed its luck too far?" Life wondered.
Nearly 30 years later, Malcolm Baldrige, while serving as Secretary of Commerce in 1984 was quoted as saying, "the current boom in Las Vegas could last four more years."
But, of course here we are 20 years later, and Sin City continues to boom.
What Life Magazine and Poor Malcolm failed to grasp is what really makes Las Vegas — Las Vegas. The town is ground zero for high time preference. People go to Las Vegas to have a good time, blow their money and maybe be a little bit naughty. After all, "what happens in Vegas, stays in Vegas (or according to the Palms casino "didn’t happen at all")". Let’s face it you don’t go to Vegas to be civilized or prudent, just the opposite. As Las Vegas Mayor Oscar Goodman told the Denver Post: "People don’t come here from the Midwest to go to an AA meeting,"
Thirty-seven million people come to Las Vegas each year to get in touch with their wild sides. And, it appears LV will easily break last year’s attendance record. The city’s convention attendance is up over 13 percent from last year’s record. Hotel occupancy is over 90 percent, with the average room rates 14 percent higher than a year ago. Even car traffic is up 5 percent. High gas prices: Who cares?
Of course, tourists come to town to gamble. In fact gaming win topped $1 billion in Nevada for only the third time ever in September. The other two months with over a billion dollars in win? April and May of this year. Gaming win is up over 12 percent from a year ago.
But Las Vegas is not all about gambling any more. For example, last month the Rolling Stones played at the MGM Grand (sponsored appropriately enough by those "Sponsors of the American Dream" Ameriquest Mortgage). A seat in the 9th row was being hawked in the secondary ticket market for over $5,500. Even nosebleed seats were fetching over $200.
For those looking to enjoy a steak before the concert, Craftsteak in the MGM is just a few steps away from the concert hall where for a mere C-note you can have its 10-ounce Kobe fillet mignon. Yes, Las Vegas has some of the highest steak dinner prices in the world. Bill Bonner recently lamented that a good steak dinner in London costs $28 as opposed to only being $5 in Buenos Aires. Well, finding a good steak dinner for $28 in Las Vegas is mission impossible. Las Vegas Review-Journal gossip columnist Norm recently wrote that $50 steaks are so plentiful on the Strip that he couldn’t count them all. At the top of the price list is the Shintaro in Bellagio, their 10-ounce Washugyu Kobe tenderloin goes for $190.
People everywhere complain about $2 to $5 ATM fees. But, at Scores Las Vegas gentlemen’s club the ATM fees are ten percent of your withdrawal amount. And don’t think you can take out just $10 for G-string stuffing. Your withdrawal choices range from $100 to $500.
Strip club patrons are so coveted in Las Vegas that the clubs pay bounties to cab drivers of up to $100 per head (even higher than the $60 per head figures mentioned in newspaper reports), allowing cab drivers like Dana Lane to live in the upscale gated community of Seven Hills. "I don’t live in Seven Hills because the cab company pays so well," Lane told the Review-Journal.
Las Vegas is now one of the shopping capitals of the world. The Venetian sold its half a million square foot Grand Canal shops for $1.5 billion last year. Those shops average nearly $900 per square foot in sales each month.
Speaking of retail, the labor market is so tight in Las Vegas, that retailers are worried they won’t have enough help for the upcoming holiday shopping season. Headhunters from Citibank actually pretend to be shopping in the malls for big-ticket items like sofas or chairs, when in fact they are trolling for potential employees for the bank’s credit card—processing center.
Vegas restaurants are also struggling to find employees. One café owner in town pays his employees $150 if they bring someone in with them that gets hired. And he says he has to fend off Wynn Resorts, which has representatives that scout for potential employees in local restaurants.
But the delightfully tacky Hooters has no trouble attracting job applicants. The company will be opening their Las Vegas hotel in February of next year, and last month they held a casting call for Hooters Girl positions: 800 young women waited in line over two hours vying for only 200 spots.
Even UNLV sees the handwriting on the wall. Forget higher learning, the university is partnering with Cendant Timeshare Resort Group to develop a full-scale timeshare program. UNLV already has 125 students enrolled in timeshare courses, offering an introductory class in marketing and a capstone course in strategic management issues, but a class in timeshare sales will be offered next spring and there are plans to expand the program into a major within the next few years.
Conspicuous consumption, as Thorstein Veblen called it, is what Las Vegas is all about. Even Mayor Goodman embraces the attitude, quickly admitting to anyone, including third graders he spoke to not long ago that he’s addicted to Bombay Saphire Gin and sports betting. Former FBI agent Rick Baken says Goodman is "the poster child of being able to rationalize immorality."
Downtown, the only area where Mayor Goodman has any control (the strip is County land), Las Vegas is now battling with High Point, North Carolina to be the furniture capital of the world. The World Market Center in downtown Vegas opened for business this summer with over 1.3 million square feet of home furniture display space. Phase two, adding 1.6 million square feet is under construction with a scheduled opening in January 2007 and a phase three was just announced that will add another 2 million square feet in 2008. By 2015, the project will ultimately total 8 buildings with 12 million square feet on 57 acres.
Even though High Point already has 12 million square feet of display space they should give the Furniture Capital crown up now. Attendance at High Point’s fall show was way down, and one salesman said; "If Vegas had a bigger facility, I don’t know if anyone would turn out to High Point." Of course furniture vendors would rather come to Vegas. Just for emphasis Mayor Goodman told the press that if he had to live in High Point, North Carolina, he’d kill himself.
In addition to capturing the furniture market, Vegas is being called upon to rescue the Miss America Pageant. It was just announced that after being run into the ground in Atlantic City, Miss America will be sashaying across the stage at the Aladdin Hotel Casino in Las Vegas starting next year. “There’s a lot of excitement in the city, and we hope to infuse that into the pageant,” Paul Villadolid, vice president of programming for Nashville-based CMT, said. “Las Vegas echoes our vision to attract a broader and younger audience.”
Hans Hoppe explains the Las Vegas boom in his book, Democracy The God that Failed.
Hoppe points out that man prefers earlier goods over later goods, and for more over less durable goods. This is the phenomenon of time preference. The rate of time preference is different for everyone and determines "the height of the premium which present goods command over future ones as well as the amount of savings and investment."
The lower the time preference rate, the earlier the onset of the process of capital formation, and the faster the roundabout structure of production will be lengthened. Civilization is set in motion by individual saving, investment, and the accumulation of durable consumer goods and capital goods.
Children have very high time preferences, living "day to day and from one immediate gratification to the next," Hopper explains. As we become adults, our time preferences fall as we save for future obligations. Old folks have higher time preferences, because they have little time left.
Hoppe describes high time preference individuals as drifters, drunkards, junkies, vagabonds, daydreamers, or simply just happy-go-lucky gay sorts of fellows who work as little as possible.
Time preferences tend to fall except if property rights are violated, and, in the words of Hoppe, "the process of civilization is permanently derailed whenever property-rights violations take the form of governmental interference."
This government interference reduces a person’s supply of present goods and raises his effective time-preference rate. Also, expected future goods are reduced by these systematic property rights violations, thus time-preference schedules are raised.
What Democracy and government have done is to retard the natural tendency of humanity to build an expanding stock of capital and durable consumer goods. Man, instead of becoming increasingly more farsighted and providing for ever more distant goals, is tending toward decivilization. As Hoppe describes, "formerly provident providers will be turned into drunks or daydreamers, adults into children, civilized men into barbarians, and producers into criminals."
That sounds like an average night in Las Vegas to me.
Joining the tourists in Las Vegas are new residents. Over 7,200 people per month move to Las Vegas. That’s 10 people per hour. The town’s current population is 1.7 million and some predict four million residents by 2027.
Where do they come from? The vast majority of those moving to Las Vegas come from California (34 percent). Texas, Arizona and Florida each provide five percent.
And Las Vegas has a land shortage. The federal government owns 90 percent of the land in Nevada and Clark County is no different. The BLM (Bureau of Land Management) auctions a couple of thousand acres every six months, excepting when biologists find endangered weeds on the parcels scheduled for sale, which causes the Sierra Club to file suit, which in turn delays the auctions while a compromise to appease the environmentalists is worked out.
Just last month the BLM held its second auction of the year selling about 3,000 acres of government land for just under $800 million. This auction’s crown jewel was a 2,073-acre piece coupled with a nearby 601-acre parcel in North Las Vegas. The fair market value or minimum bid for the nearly 2,700 acres was set at $522.4 million. The usual suspects bid the price to $639 million, which is $239,000 per acre, nearly 10 times what was paid just four and half years ago, at the May 2001 BLM auction, for the 1,905-acre parcel, located next door, which at the time went for $47.2 million, or $24,672 per acre. The winning bidder four and half years ago was criticized at that time for paying too much.
It is no wonder George Bush wants to direct some of this BLM land sale money to pay for Iraq, Katrina and who-knows-what-all. That $800 million would fade his action in Iraq for what, two days?
There may be a shortage of land, but there is no shortage of air in Las Vegas, so developers with the blessing of the various municipalities are going vertical. Las Vegas is in the middle of a high-rise boom.
The Las Vegas High-Rise Hot Sheet, produced by Marketing Solutions, lists 74 projects, totaling 44,509 units. Twenty-four (24) are under construction, another 21 are pre-selling and there are 29 in the idea stage.
Many of the hotel operators have entered the condo craze. In fact, at the recent gaming conference held in Las Vegas, one of the seminars was entitled: "The future of gaming — non-gaming." It used to be that the most expensive land in town was casino dirt. Now, for new resort properties to "pencil" you must have a residential and retail component. "You cannot (make) a stand-alone casino on Las Vegas Boulevard (work financially)," Vegas real estate expert Richard Lee said recently. "Unless you add a residential and retail component to it, you cannot afford the dirt on Las Vegas Boulevard."
Fifteen billion dollars of development is scheduled for the Las Vegas strip over the next five years. The largest is the $5 billion Project CityCenter by MGM Mirage, which will include 4,250 condo units in its two phases. CityCenter will total 66 acres and include two boutique hotels and 500,000 square feet of retail space. The first stage of CityCenter has broken ground, an employee parking garage that will hold 5,300 cars.
The Cosmopolitan project (located next to Project CityCenter) broke ground in late October and will have 2,700 condo units priced from $500,000 to $1.3 million. The Las Ramblas project will cost $3 billion and have 4,400 units. By the way, two of the partners in Las Ramblas are heart throb George Clooney and Randy Gerber (Mr. Cindy Crawford).
Speaking of celebrities, they haven’t had much luck so far with high-rise projects. Air Jordon couldn’t get his Aqua Blue off the ground, and Ivana Trump’s project can’t seem to attract financing. However, Ivana’s ex-husband, The Donald has a project under construction totaling 2,564 units priced at a $1,000 per square foot.
Many of these high-rise developers claim they are sold out. In fact, according to Larry Murphy at SalesTraq, the average price per square foot has increased 59 percent from $342/sf in the 1st quarter of 2004 to $544/sf this past third quarter.
But just who is buying these units? Are high-time preference baby boomers wanting to leave suburbia and live in cramped high-rise units, but within walking distance of their favorite gaming opportunity, high dollar dining experience and shopping binge? Maybe.
But, I’m a little skeptical. One banquet captain I know told me a couple weeks ago he had deposits down on four high-rise units. Of course he doesn’t intend to move into any of these, but he whispered to me, "you know they will only go up in price."
Tom Barrack, dubbed the "King of Real Estate" in a recent Fortune magazine article believes the condo market is an accident waiting to happen. He sites rising construction costs as the catalyst. In hotspots like Miami and Las Vegas, projects sporting lots of pre-sales, when the units are actually built, developers will realize that it costs as much to build the units as they have them sold for. The developers will then try to raise prices, "but most of these buyers are speculators," Barrack told Fortune. "They [the buyers] will either sue the developers to get the original prices or get their deposits back and walk away."
This has already happened with a couple of projects in Las Vegas. For instance the Vegas Grand project has upped its prices from starting at $139,900 to starting in the mid- $400,000’s. According to SalesTraq’s Murphy no one realized just how expensive it is to build high-rise condos.
Las Vegas will continue to be catnip to our high-time preference society, but there are signs of weakness for the near future. Even local Vegas housing expert Stephen Bottfeld, who is terminally bullish on the city, sees a softening and says the boom is over for now. While the rest of county will be mired in what he calls "a Jimmy Carter—like recession," Bottfeld believes Vegas will only muddle along.
In the brand new Aliente master planned community, 65 investor homes have gone into foreclosure. Jerry Brady, a California investor who owns four of these homes, decided to let them go to foreclosure, after his attempt to sue Pulte Homes for lowering its prices was stalled. Joella Roach recently wrote in a letter-to-the-editor published in the Las Vegas Review Journal that her realtor advised her that the home she bought a year ago should only be listed for $5,000 less than she paid for it if she wished to sell it. She’s not happy.
There is a plentiful supply of resale homes on the market with over 15,000 listings on the multiple listing service. When the market was at a fever pitch in April of 2004, there were less than 2,500 listings.
It is currently estimated that there is a 6-month supply of new homes on the market, as opposed to a year and a half ago when there were no new homes to buy and waiting lists thousands of people deep. And, for the first time in a couple years, sales office traffic is trending down as we head toward the holiday season, returning to the days when few homes are sold in Las Vegas between Veterans Day and Super Bowl Sunday.
The Las Vegas division president for one national homebuilder told me sales are slow. He indicates that sales are half what was projected and cancellations are high in all prices ranges. Buyers are skittish with all of this bubble talk he says.
One local homebuilder, who sold his company a year ago to a national builder, calls the Las Vegas real estate market — dangerous.
And one commercial developer I spoke with recently, who has made a fortune developing in Las Vegas over the past decade, has moved virtually all of his activity to Phoenix and Texas. He calls those developers trying to make high Vegas land prices work — suckers.
But while there are some signs of softening: Through September, new home sales totaled 27,374, an increase of 28.6 percent from a year ago. At the same time the new home median price (excluding condo conversions) was $327,276 up 17.3 percent from last year. The existing home median price at $285,000 was up 14 percent from 2004.
Some residential land in Las Vegas is even selling for $1 million dollars per acre. In fact, two small residential parcels were sold at the recent BLM auction for $1 million per acre.
The Las Vegas economy leads many people to think the boom will never end.
One local homebuilder has started holding some of the homes they build instead of selling them, believing their product will only continue to increase in value. Having barely survived the early 1990’s California housing bust, you would think they’d know better.
And, a bank collection officer I know wants to change his compensation structure. Like most bankers, he is on commission for a large part of his income. The more money he collects, the more money he makes. But, there are not enough bad loans to collect right now he complains. I’ve tried to convince him that he’s being shortsighted and that he likely will make much more money in the next few years as numerous small business and real estate borrowers run into trouble. However, he’s not convinced.
Commentators have been predicting Vegas’ demise for years. But, democracy and big government play right into Las Vegas’s hand. The bigger and more intrusive government becomes, the more time-preferences rise, and Vegas seductively waits with open arms, waiting to exploit and cash in on each and every person’s weakness, making it hard to bet that Vegas will ever bust.
Doug French [send him mail] is executive vice president of a Nevada bank and associate editor for Liberty Watch Magazine. He is the 2005 recipient of the Murray N. Rothbard Award from the Center for Libertarian Studies. This is a talk given at the LRC Conference on Gold, Freedom, and Peace.