Risky Vegas

The Risky Vegas Market

by Doug French by Doug French

Countrywide Mortgage CEO Angelo Mozilo believes that the "housing market officially turned south in January," according to Banc Investment Daily, and that some overheated markets may see prices plunge by up to 40 percent. Mozilo mentioned Las Vegas as one of those risky markets.

But nary a discouraging word was spoken at the Las Vegas Annual Housing Outlook hosted by local title company sales representative Richard Lee and Dennis Smith of Home Builders Research, held last week at the Las Vegas Convention Center. Close to 1300 attended, hanging on every word as to what is happening and what will happen with the Las Vegas housing market.

After last year’s record number of closings that fell just short of 39,000, Smith expects the market to rebound in the second half of this year and finish with closings near last year’s record number. But the market will need to improve greatly. According to Smith, new subdivision traffic count is down 20 percent in the first eight weeks of this year and net sales per subdivision are down 24 percent.

But builders I talked to at the Outlook don’t believe Smith’s numbers. They say their traffic numbers are half what they were last year and cancellations are soaring, with the primary reason being potential homebuyers can’t qualify with the higher mortgage rates. Buyers who can qualify are able to play competing homebuilders against each other for free options and upgrades.

Smith told the Outlook crowd that more cancellations don’t bother him. “Historically, [builders] told their sales people if you don’t have a cancellation rate over 20 percent, you’re not selling enough homes,” he said. That’s easy for him to say, he’s selling reports, not houses.

Builders who have completed houses to unload and the clock ticking on fully disbursed construction loans are evidently bothered. According to one commercial appraiser I spoke with, there is at least one Las Vegas builder with standing inventory that is offering eight per cent commissions to outside realtors who bring buyers to their project. Two years ago, outside realtors were persona non grata at new home subdivisions.

One builder with a project in the busy southwest confided that he dropped his prices $20,000 per unit to compete with the handful of large publicly traded builders that have projects surrounding his. Unfortunately, that move just prompted the big builders to drop prices more. He described competing in that market area as a "bloodbath."

Even the resale market is soft. "You won’t be able to get that much for your house," a young realtor with three phones attached to his belt told his buddy in the locker room at the gym the other day, "it’s a buyers’ market." It wasn’t that long ago gym rats were bragging about having a dozen new homes in escrow that they intended to flip, making "stupid money" before construction was complete.

But Mozilo’s prediction of a 40 percent price crash in Las Vegas seems unlikely. Just short of 7,000 people move to Las Vegas each month. Job growth was up seven per cent in 2005. The unemployment rate was only 3.5 percent in December, and as Richard Lee points out, building cranes abound on the Strip and beyond. In the 15 years between the opening of Steve Wynn’s Mirage in 1990 and the Wynn Hotel and Casino, which opened last year, $15 billion was invested on the Strip. During that time there were never more than 23 cranes in the air at any one time, according to Lee. Currently, 38 cranes dot the skyline and over $25 billion worth of projects are in progress or considered imminent.

Lee told the Outlook crowd the often-repeated Las Vegas investment wisdom preached by local old-timers: "if there is one crane in the air, buy a couple houses, if there are two cranes, buy some land, and if there are four or five cranes, buy anything!" Given the current housing market softness, now doesn’t seem the time to "buy anything," but those who have followed that advice in the past have made fortunes.

Over-building in Las Vegas is difficult given that the supply of residential land remaining inside the BLM disposal area is only 60,279 acres — a less than ten-year supply — and the shortage of qualified labor. “It’s a situation that nobody predicted. The No. 1 problem is construction costs and lack of skilled labor,” Richard Lee recently told the Las Vegas Review Journal.

Deutsche Bank recently completed a study that suggested that MGM Mirage’s $7 billion Project CityCenter alone could use more than half of the licensed subcontractors in Las Vegas and the chairman of large building contractor Perini, told Wall Street analysts and investors in a recent conference call that the limited number of trade workers, general contractors and subcontractors limits the growth in Las Vegas for now.

“You’re competing against a billion-dollar monstrosity,” Jim Stuart, co-founder of Centra Properties and a partner with actor George Clooney in the planned Las Ramblas condo project told the Review Journal. “The gaming giants can afford to play in this market and anybody other than the three or four biggest companies in town have tremendous pricing issues to deal with.”

While gaming companies demand more labor and materials for construction on the Strip, the increasing barriers to entry in the suburban Las Vegas housing business will keep the major homebuilders gaining market share, keeping prices higher than a more competitive market would. Last year the top ten builders closed 61 per cent of new home sales (excluding condo conversions). A decade ago, 179 different builders sold less than 20,000 homes in the Las Vegas market. Last year only 97 builders remained to close nearly twice that amount. This market power by the big builders will only increase as labor continues to be in short supply, land prices remain high, and entitlement processes at the various municipalities elongated.

Billions of dollars are being invested in Las Vegas to provide aging Baby Boomers and Gen-Xer’s a place to go and gamble away their retirement money. Gaming executives know that Americans love to drink, gamble and party when times are good, and especially when times are bad. Wagering on a housing crash in Las Vegas is likely a bad bet.