HOUSING HYSTERIA
A REAL LOOK INSIDE VEGAS' MARKET
BY DOUG FRENCH

Last year Las Vegas was one of the hottest housing markets in the nation with the median price of a new home increasing 38.5 percent, while the resale median increased just short of 39 percent. Are these price increases the wave of the future or an anomaly?

A year ago there were waiting lists hundreds deep for new homes and there were less than 1,500 resale homes on the market. But, now there are more than 10,000 resale homes listed for sale and builders are offering thousands in incentives to sell homes. What a difference a year makes.

The price increases in 2004 can be traced to the permitting activity in 2003. While the number of closings each month rose from 1,500 to over 2,700 units during 2003, builders steadily pulled approximately 2,000 permits per month until the fall of that year when they pulled less than 2,000 permits in October and just more than 1,500 in November. This lack of permit activity left the market with no supply in the spring and summer of last year and prices skyrocketed.

Speculators, both out-of-state and local, sought to take advantage of the market tightness, driving prices even higher. Over 15 percent of all Las Vegas home purchases in 2004 were by investors, with that percentage likely being 20 to 25 percent in the first half of the year, according to Dennis Smith of Home Builders Research. 

Builders saw what was happening and pulled permits as fast as they could, approximately 15,000 in just four months of the spring and early summer. At the same time, Las Vegas residents joined the action and 13,000 homes were listed for sale last summer. As Smith said recently, 2004 was really like two entirely separate years; the first half was no inventory and huge price increases, while the second half saw plenty of inventory and no price increases. 

But what was once a Las Vegas market strong suit, affordability has now eroded — and did so at a quick rate. In 1995, the median price of a new home in Las Vegas was $125,100. In 2004, the new home median edged over $290,000. Most of that increase has come since the turn of the decade with annual price increases in the late 1990s being typically less than five percent. Other than 2002, when Las Vegas was still recovering from 9/11, the new home median has increased at double-digit rates annually with the most explosive increase coming in 2004. Annual changes in the resale home median have been similar. 

Clearly it is not income that is driving housing prices in Clark County. According to the U.S. Census bureau, the median household income increased from $30,746 in 1990 to $44,616 in 2000, just over a 45 percent increase, while the median home price has rocketed over 130 percent. The median income has not budged since 2000. 

Commentators in Phoenix worry about affordability in their city where the median new home price finished last year at $211,640 (27 percent less than Las Vegas), while that city’s median household income at nearly $50,000 beats Las Vegas by 10-plus percent. 

As Merrill Lynch economist David Rosenberg told Barron’s, “much of the move in real-estate valuation has not been due to income generation, per se, but rather due to loose financial-market conditions and an increasing level of exuberance.” 

Land for residential housing in Phoenix can be purchased for $50,000 per acre, a price Las Vegas builders paid here in the late 1990s. Residential land in Las Vegas is currently selling from $600,000 to nearly $1 million per acre in some master planned communities. 

What is the difference between Las Vegas and Phoenix? Both cities have good economies and good weather and are magnets for retirees. The answer is land availability. Phoenix builders and developers can just drive a little further outside of town and buy out another farmer. In Las Vegas, the Bureau of Land Management owns 90 percent of the ground and it takes an act of Congress for the government to sell it. 

Smith and First American Title’s Richard Lee, both housing experts, estimate that there are just over 60,000 acres of land available in Clark County for residential development. The market absorbs 5,500 to 6,000 acres per year, thus there are 10 or 11 years left of residential land. Plus, according to Smith and Lee, more than 21,000 of these available acres are already spoken for within master planned communities. Steve Bottfeld, real estate market analyst and owner of Marketing Solutions believes that there is less than seven years of available land left. 

With more than 6,000 people per month moving to Clark County, it is no wonder that homebuilders are bidding up the price of land so that they have inventory to build upon. 

But as builders pay more for land in Southern Nevada, will home prices continue to increase? Smith believes that it will take all of this year to work off the accumulated inventory and sees the median new home price increasing 8 percent in 2005 and another 7 percent in 2006. At a recent presentation, Smith told the crowd that some builders believe the median price may actually decline in 2005. Resale homes will increase 2 to 3 percent this year and 5 percent next, according to Smith. 

Bottfeld sees the market much differently. He believes that 2005 will be the best year for Las Vegas housing ever. In his view, the inventory overhang will be cleared by the end of the first quarter and a new boom will begin in April. The median price of a new home will increase 22 to 25 percent in the second half of this year according to Bottfeld, while the resale median will go up 16 to 20 percent. 

Bottfeld believes that demographics are Las Vegas destiny. Millions of people live above the 38th parallel and many will be moving south. The next great migration is headed this way as every seven seconds someone turns 50 years old. 

And with Las Vegas running out of land, where is the housing to be built? High-rise condos. Over 50 projects are either on the drawing board or already started. The condo wars have begun. 

The two guys most bullish on the condo craze are Lee and Bottfeld. Both use the term “Manhattanization” to describe future Las Vegas development. Lee compares the surrounding off-limits BLM land to the ocean and rivers surrounding Manhattan. Bottfeld takes the analogy even further comparing how Manhattan was developed at the turn of the 20th century with how Las Vegas is developing at the turn of the 21st century: limited land, economic renaissance, high rise boom, development of suburbs, brand identity for entertainment, development of luxury housing. 

Most of these condo units are reportedly sold at prices from $600 to $1,000 per square foot (compared to $200 per square foot for homes). But how many people intend to actually close the sale and move in? One casino employee told Liberty Watch he has five units under contract and an airline employee in Kansas City explained he was buying one of Donald Trump’s units. Both are banking on the certainty that they can sell their units for big profits before the projects are completed. These stories bring to mind one about shoeshine boys giving out stock tips right before the 1929 crash — and the one just a year ago when speculators were bidding up the price of homes. LW