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Las Vegas, the neon city in the middle of a desert, has seen its housing market expand and collapse in the blink of an eye. But Las Vegas is a town where millionaires are made overnight and even real estate investors can win big.

Las Vegas’ neighborhoods are still recovering from the slump caused by overbuilding, speculation and subprime lending. Foreclosures line the streets and planned luxury high rise condos on the Las Vegas Strip are incomplete or sitting vacant. Looking ahead, changes to the job market and lending industry are about to put new pressure on Las Vegas’ housing market.

“The change in the market over the last three years has gone from an extreme hyper lack of supply to a severe glut,” Sean Brown, CEO of the National Association of Residential Real Estate Investment Advisors (NARREIA), said. “We’ve gone from [a] market where it was a cash flow positive, below national median house price…to something where you’re going to have negative cash flow...unless you do some bizarrely creative financing on it, which has gone away with the implosion of the lending industry.”

However, with the amount of commercial construction planned on the Strip, thousands of new jobs may emerge after the projects are completed. And with new jobs come demographic—and economic—growth.

A development being built in downtown Las Vegas
Some projects are stalled, but construction continues for many businesses and condos
Growth

“Taking a conservative approach, we’ve got 20,000 rooms being delivered, which represents 100,000 jobs,” Scott Meservey, Las Vegas real estate agent and NARREIA advisor, said. “Our current job market is sitting at 900,000 positions to service a valley of two million people, so you’re talking about a 12 percent forced increase in the job market.”

A number of hotels, casinos and other businesses are in the works on the Strip, Chris Whittaker, real estate agent with the O’Keefe Whittaker Group, said in an e-mail interview. The Venetian is opening a 3,000 room tower at the end of the year. City Center, a luxury casino-hotel-condo complex, is opening in November 2009 and will create 20,000 to 30,000 new jobs. And Donald Trump is building a new tower. Additionally, Whittaker said he estimates that $30 billion will be spent between Sahara and McCarren airports.

“We have another $15 billion of already approved projects...over the next five years,” Meservey said. “Over the last 15 years, there has been $15 billion [spent] here since the Mirage went up. So we are looking at, in the next five years, as many dollars spent…as has been spent here in the last 15 years.”

“A client of the company...has acquired more than 100 homes in Las Vegas,” Tim Kuptz, owner of a Las Vegas RE/MAX real estate brokerage, said in an e-mail interview. “His strategy is simple. Whenever he thinks there are a good number of construction cranes in the skyline, he buys more homes. Today there are 42 cranes on the Strip alone. He is buying again.”

Housing prices

While Las Vegas may be cheap compared to other global tourism destinations, the city’s housing prices have been mercurial in the last five years.

SalesTraq reported that the median price for new homes in the Las Vegas Valley was $309,241 in August, 13 percent below its peak in April 2006, according to the Associated Press. Economists predict that the housing slump in Las Vegas could last another three years and cause prices to drop 15 percent, according to the Associated Press.

Some real estate experts, taking the job market into consideration, have another opinion on the matter.

“I don’t think it’ll be a housing shortage,” Brown said. “I think, because people will be keeping an eye on it...that as soon as they see any kind of demand come back, they’re going to turn the floodgates on again. But I do think in the next 18 months to two years we’re going to see a very nice turnaround in this market because of the increased demand.”

An overhead view of the suburbs surrounding Las Vegas
The valley is enclosed by mountains, which will limit the possible amount of expansion
The current supply of homes is sitting at nearly 24 months, according to Kuptz.

“In April 2004 we had 2,100 homes in the MLS, and every person cashing their equity to buy homes is a crazy market,” Kuptz said. “Four in 10 were investment homes with most of the money coming from California. Today we have 27,400 homes in the MLS. More than 48 percent are vacant on the market.”

With that kind of inventory, builders aren’t building much, and it’s undoubtedly a buyer’s market. (For more information on overbuilding in Las Vegas, see our article on the Top 5 Overbuilt U.S. Markets in 2007.)

Las Vegas Valley Area

The Las Vegas Valley area looks promising for rental property investors. While home prices are less expensive in outlying areas, the valley is where home prices are likely to appreciate most in the future.

“You have to realize that the valley of Las Vegas is surrounded by mountains,” Brown said. “There is a finite amount of land in Las Vegas Valley and all that land has been purchased by builders....Once that stuff is built out...then we have to spill out into the valley up toward Moapa...but you’ll no longer be in the inner ring.”

Within Las Vegas Valley, there are some areas that are better for investing than others, such as Seven Hills, Green Valley Ranch, Southern Highlands, and Summerlin.

“Inside the valley, Summerlin on the west side, is a very popular area,” Meservey said. “It’s a little higher end....A lot of your residential infrastructure is already in place, and now you’re looking at an infill of gaming; Red Rock casino; a nationally renowned five-star resort, and all that it brings with it; movie theaters; lots of commercial office space going in.”

“For the average investor, you still can’t go wrong buying a single family home in a master planned community where families want to live,” Whittaker said. “Summerlin has been a top selling community nationally for over a decade.”

The southwest area of town is the fastest growing, according to Kuptz.

“The Henderson area of the valley will present the best long-term hold,” Kuptz said. “The demographics are good, the city is run great and boasts the best schools and more park acres per capita than anywhere else in the valley...during our boom, the western [ZIP codes] of Henderson had the highest appreciation rates. There is no reason to suspect it would change for the future.”

“Newer Henderson...that’s a very popular area, desirable place to live, a very good longer term hold,” Meservey said.

Staying within Las Vegas Valley, close to the center of the city, will likely be a wise move in the coming years. “It’s a natural progression of things,” Meservey said. “The closer you are to the hub, to the center, the more expensive it’s going to be.”

Lights of casinos on the main strip in Las Vegas
Property on the strip is a pricey investment that some investors find to be too risky
The Las Vegas Strip

Given that pricing and appreciation are higher closer to the center of the city, what investor wouldn’t want to try their hand at owning a piece of the Strip?

“There’s been great demand for high rise properties since 2005, when the threat of running out of land in Las Vegas caused developers to think about going up instead of out,” Whittaker said.

However, the luxury high rise market may not be the best choice for all investors.

“[With] the cost of holding these units, the cost of buying and selling these units, they’re going to be lucky to break even,” Brown said. “The fact of the matter is that there is a glut of these properties....To go in there and think that you’re going to speculate and buy on the retail side and turn around and flip these things is entirely impractical and actually quite risky.”

Brown isn’t the only one worried about the practicality of investing in luxury high rises.

“Yes, they are beautiful works of art and yes, you ‘own’ a piece of the Strip, but with prices around $1,000 [per square foot], that’s a lot of money," Whittaker said. "Who is the end user for all these condos? What happens when they get built and people need to sell?”

However, it is possible to find less expensive condos that might present a positive cash flow scenario.

“I...like high rises closer to $400 [per square foot]. with views of the Strip,” Whittaker said. “Compared to what the new stuff is selling for, this is more than 50 percent less. I like anything that cash flows positive which requires 10 percent down.”

Investors may need to look into foreclosures to find cash flow positive scenarios.

Foreclosures

The Las Vegas-Paradise Metropolitan Stastical Area has the second highest foreclosure rate in the country, according to RealtyTrac’s statistics for January through June 2007. Nevada posted the highest foreclosure rates in the country for the third quarter of 2007; one out of every 61 houses in the state is in foreclosure, according to RealtyTrac.

With those numbers, strategies such as flipping foreclosed homes and rehabbing are unlikely to be profitable in Las Vegas right now.

“I believe the flip investment is not a broad consideration in our market today,” Kuptz said. “With short sales and foreclosures occupying the bottom of the market already, and our supply of nearly 24 months of homes, it does not make sense....The margins are not enough for the risk.”

The back of the Las Vegas welcome sign
Buying and holding property long-term may be the wisest investment in Las Vegas
“If you buy a distressed home at a good price and add carpet and paint, you still need to hold it for at least a year before you can try to flip it,” Whittaker said. “It’s too risky right now to try a flip because buying has been softened by the lending restrictions.” 

Buying multi-family rental property is a hot investment right now, however. Rental property has been a good investment in the past and many investors are now buying it up.

“We have lots of tenants here because of the nature of this city being transient,” Whittaker said. “There’s also a trend of homeowners who got foreclosed on and they still need a place to live. This is a very difficult market in our area because a lot of investors are already here buying these apartment buildings like crazy.”

Long-term outlook

For investors willing to weather the ups and downs of the Las Vegas housing market, the wisest investment may be buying and holding property.

“I think the buy and hold is a great opportunity right now with the status of the market being depressed," Meservey said. "I think you can find some real good deals...I think in the next two years, you’re going to see significant returns if you go in smart now.”

“Own any piece of Las Vegas,” Kuptz said. “The prospects are too good for the opportunity to remain long....Many millionaires have been made here. And many more are waiting in the wings.”