Las Vegas Real Estate Still Struggling

The widely proclaimed rebound in the housing market has not spread to the Las Vegas housing market. As a result of the recession’s effects on the building and gambling industry, home prices in Las Vegas continue to decline. See the following post by Tim Iacono from The Mess That Greenspan Made.

During the 2009 housing market "rebound" (a rebound that may or may not prove to be sustainable), there has been one "non-participant" out in the Nevada desert - Las Vegas.

As noted here the other day, while the 19 other cities in the Case-Shiller Home Price Index have posted one or more month-to-month gains, with prices in some areas now more than ten percent higher than the lows seen in late-2008 or early-2009, home prices in Sin City just keep going down.

According to this story in the Las Vegas Sun, it doesn't look like that's about to change.

The sagging economy will weigh on the Las Vegas real estate market and boost foreclosures on residential and commercial properties, according to a panel of local business executives.

The group, composed of a lender, a bankruptcy attorney and a consultant, said the Las Vegas recovery will lag not only the nation but competing markets such as Phoenix.

Michael Shustek, CEO of Vestin Group, a real estate lender and asset manager, said many residential foreclosures have been limited to low-end homes, but a wave of foreclosures at the higher end of the market is coming.

After flying high a few years back, Las Vegas and Phoenix have been in something of a competitive death spiral (again, see the latest multi-colored chart for details), though the latter seems to be mounting a rebound with three consecutive monthly price gains since May.

Neither should be proud.

Based on a starting index value of 100 in January of 2000, the Las Vegas index stood at 106 as of August while Phoenix could only muster a 108.

Yes, that would be six percent and eight percent gains, respectively, after almost ten years.

Unfortunately for Las Vegas, the trend is still down.

The key to predicting the real estate market is what’s happening in the economy and in gaming and construction — two industries that were hit hard, said Gregory Garman, an attorney with the law firm Gordon Silver. Las Vegas isn’t Detroit, but it’s in a tough spot when it comes to absorbing real estate, he said.

“We have high unemployment and two industries that are not anywhere close to the verge of recovery and a stagnant if not shrinking population base,” Garman said. “When you look at those things weighing against us, it is going to (take awhile) until some of this (housing) inventory gets absorbed.”
...
“Look at how many condo towers you are seeing empty,” Shustek said. “I did the lending on Towers 1 and 2 at Panorama. We sold out. Tower 3 has 15 closed units in that whole tower. It is frightening out there.”

Wells said that homebuilders can’t compete with existing homes selling for $70 a square foot and that the lack of job growth will hinder that recovery going forward.

The experts predicted that even the addition of 12,000 jobs at CityCenter, slated to open in December, by itself won’t fuel enough additional economic growth or create enough jobs to offset the tens of thousands of jobs Southern Nevada has recently lost.
“We have 180,000 unemployed in the state,” said William Wells, managing director of RSM McGladrey, a business consulting and accounting firm. “That is the part I am concerned about. Where is (job growth) going to be to put more rooftops out there and fill some of these homes.”

Wells predicts the housing market will suffer through what he calls the “W” effect with prices going up, down and back up again. The concern is what happens with the Federal Reserve and need to raise interest rates to keep inflation under control. That will keep a lot of buyers from the market, he said.

“I think the other thing we have to put in perspective is when is the residential market back. How do you define ‘back’?” Wells said. “Back to what, because it is not going to achieve the unreachable numbers we had in 2003 to 2006. I think people are coming to the realization that there is a new baseline. That was something that was unsustainable, and going forward you will have to manage your life a little differently.”

Home prices in Las Vegas are now down 55 percent from the peak reached in August of 2006.

It wouldn't be surprising if 2006 prices are not seen for another twenty years, maybe longer.

If you think that's far fetched, consider that, from current levels, average annual gains of four percent per year would see a return to those lofty levels in 22 years, whereas, three percent gains would take 29 years...

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

Las Vegas Real Estate Horror Stories

Talk about bad timing. 1,500 individuals put down significant deposits to buy pre-construction real estate in the $8.4 billion City Center project in Las Vegas during the height of the housing boom. Now their properties have lost about half of their value before they have even been finished. See the following post from The Mess that Greenspan Made for more on this.

Having visited Las Vegas last fall as financial markets were crashing, it was odd to see how remarkably cheery the City Center sales staff were in peddling condos for what will probably rival the construction boom in Dubai as the great White Elephant of a now bygone era.

In fact, when asked about plunging real estate prices and global financial markets that were following suit back in late-September, the sales staff almost appeared to be living in some parallel universe where asset prices only go in one direction - UP.

The response to this query was either a "deer-in-the-headlights" look or a brief moment of agitation before a well-honed sales instinct could wrest control back from what was clearly a more emotional (and more genuine) reaction.

Well, apparently, those who signed on the bottom line for condos a couple years ago (with move in dates this fall rapidly approaching) are all too aware of what's been happening in the local real estate market and they're none-too-happy about it.

According to the latest data from the Case-Shiller Home Price Index, Las Vegas property values are down some 33 percent from a year ago and a stunning 52 percent below the peak in 2006, around the time that many of the City Center sales were made.

The Wall Street Journal provides the following update on the project and the plight of the soon to be none-too-proud owners of some of these condos.

One of the costliest and highest-profile condominium developments in the country -- the $8.4 billion City Center project in Las Vegas -- is facing a revolt from some early buyers.

Some buyers who signed contracts are demanding significant price reductions, and have hired a law firm to take their grievances to the project's principal developer, gambling company MGM Mirage. Others want their deposits back. Some are using a Web site, citycentercondodepositgroup.blogspot.com, to air their grievances.

So far, buyers have put down $313 million in deposits on 1,500 units in the 2,440-unit complex. Those who agreed to buy early on now fear they will take possession of condos whose market values are far below what they agreed to pay. Many of the contracts were signed in 2006 and 2007, when Vegas was booming.

"It is simply not possible by any stretch of the imagination to close on the units at the contracted price," said Mark Connot, a partner with Hutchinson & Steffen, a Las Vegas law firm hired to represent a handful of buyers demanding price reductions. "Our position is they need to adjust the price to market value. And until that's done I don't think they will find any buyers."

It's funny how contract law is seemingly being ignored these days and how those who are clearly not "too big to fail" think they're entitled to be bailed out somehow.

Well, maybe funny isn't the right word there.

Perhaps disturbing would be a better one.

While the group of disgruntled owners may be able to negotiate from a position of collective power, they seem like a rather sad lot in the process. Most people who put down $100,000 on a million dollar condo that might now be worth only about $500,000 would surely just walk away and chalk that $100K up to experience.

What surviving mortgage company would lend $900,000 against that condo anyway?

Then again, what do the buyers really have to lose at this point?

Their entire downpayments have surely been sucked into the asset deflation abyss already, along with another $10 trillion or so of supposed "wealth" around the world, and if they walk away now, they may never get to ride the monorail.

The 67-acre project, due to open in November, includes 5,000 hotel rooms and 2,440 condos rising in sleek towers over the Las Vegas Strip. The development will have a public parks system, its own monorail, fire department, mall and theater.
...
The City Center condos range in price from $600,000 for a smaller studio unit to more than $9 million for an expansive penthouse suite built atop of the Mandarin Oriental hotel. So far, the most expensive unit under contract is a 3,910-square-foot suite at the Mandarin for $9.4 million, or $2,392 per square foot.

It is unclear how many buyers are agitating for better deals or for deposit refunds, but real-estate analysts in the area have raised fears that a good portion of them may no longer be able to secure financing and could just decide to walk away, leaving their units empty.
...
"You have 1,500 condo buyers right now who wish they'd never put this thing into contract and most of them have some kind of relationship with MGM Mirage," said one buyer who put a $600,000 deposit on a $3 million unit, and would like to get his deposit back. "It's tricky for MGM Mirage. You make your best customers angry."

This should be interesting to watch this fall.

Any word on how Donald Trump is doing these days?

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

The Las Vegas Real Estate Horror Show — In Graph Form

We all know that things have been bad in the Las Vegas real estate market, but just how bad is it? A vast majority of the sales happening now are foreclosures, and the exact numbers might be frightening — even to those who don't own a house there. For a graphic depiction read the the following blog post from Tim Iacono.

This report from the Las Vegas Sun carries one of the better graphics that have crossed my computer screen lately depicting the extent to which distressed sales have impacted the local real estate market in and around "Sin City".

Of course, conditions are much worse in Nevada than in most other parts of the country, but large swaths of California, Florida, and Arizona probably have real estate sale figures that are not too different from these. The report by Chris Morris and Alex Richards contains just the following commentary.

When Nevadans started to realize they were at the epicenter of a full-blown foreclosure crisis in 2007, riding a rising wave of loan defaults that eventually turned into auctions and bank repossessions, they didn't really understand what was in store for the real estate market. In the valley today, foreclosure sales largely outpace regular sales, and they drive the median price of single-family homes down considerably — by roughly $25,000 in February.

The graphic really tells the story:

Nice work.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Las Vegas And Phoenix Battle For Real Estate Infamy

So which city was hit harder by the real estate collapse, Las Vegas or Phoenix? To be sure they both have taken serious hits, but only one will go down as the winner. Tim Iacono from The Mess That Greenspan Made looks at the latest reports and gives the latest update on the markets. If your city is not in the top spot, don't fret because there is still lots of time to play catch up.

The September report(.pdf) for the S&P Case-Shiller Home Price Indices shows the 10-City and 20-City Composite Home Price Indices at new record annual declines of 18.6 percent and 17.4 percent, respectively. Price indices for all 20 cities are shown below.
To aid in viewing this graphic, the order of the legend (upper left) reflects the top-to-bottom position of all 20 cities for the current month (far right). As such, the legend order indicates which cities have managed to hold onto the largest real estate price gains since 2000.

Congratulations New York!

You've just surpassed Washington D.C. as the metro area that has held onto home price gains the best in this decade. The bad news is that, with all the recent troubles on Wall Street, this may not last that long.

Not surprisingly, Phoenix and Las Vegas continue to lead the way down, year-over-year home price declines in both areas pushing past 31 percent in September as indicated in red in the table below - the death match continues.

A few other areas are also threatening to crack the 30+ percent annual decline threshold as indicated in blue, notably, San Francisco, an area where the annual price decline worsened to 29.5 percent.
Two areas showed month-to-month improvement - Cleveland and Boston - while home prices in Dallas were unchanged from August. Cleveland was the only region where the annual home price decline improved from a year ago, from -6.6 percent in August to -6.4 percent in September.

David M. Blitzer, Chairman of the Index Committee at Standard & Poor's, noted:

The turmoil in the financial markets is placing further downward pressure on a housing market already weakened by its own fundamentals.

All three aggregate indices and 13 of the 20 metro areas are reporting new record rates of decline. Looking at the returns of the U.S. National Index, prices are back to where they were in early 2004. As of September 2008, the 10-City Composite is down 23.4% from its peak, the 20-City Composite is down 21.8% and the National Composite is down 21.0%

You'd think that things couldn't get any worse for home prices, but they probably will.

This article has been reposted from The Mess That Greenspan Made. The full post can also be viewed on The Mess That Greenspan Made.

Hard Times For The Las Vegas Sex-Trade

Warning: This post contains the words ‘Vegas’ and ‘Bush’ and should probably not be read by children.

As the recession worsens and belts tighten, it seems that some people’s pants are staying up for once, so to speak: Vegas Brothels are being pounded by the recession, with some locations reporting revenue losses as high as 45 percent, according to an article in Newsweek. Lust may be one of the seven deadly sins, but it is apparently not recession-proof.

It seems that when it comes to what people want on their tables, some people still think food is more important than strippers. My faith in humanity is restored. But how are Vegas' other tables faring? Vegas casinos, too, are on a losing streak and Wall Street doesn’t expect a turnaround in the near future. Though a major tourist draw, casinos are viewed as competitors by brothels in Vegas, so if the casinos aren’t performing either, just where is the money going? From the Newsweek article:

"Some of these brothels are out in the middle of nowhere so fuel prices have an effect,” says Dennis Hof, owner of the infamous Moonlite Bunny Ranch. According to the U.S. Energy Information Administration, diesel on the West Coast now costs $4.87 per gallon. That means truckers could easily spend $1,000 to fill up their tanks, leaving them with little extra cash and less likely to take a detour.

It seems the money has gone from the pimps to the pumps. In attempts to make ends meet, brothel owners have considered increased advertising and have begun offering specials, including big economic stimulus packages. To the first 100 customers who bring in their economic stimulus checks, the Moonlite Bunny Ranch has offered at half-price "The $1,200 George Bush party—three girls and a bottle of champagne." Perhaps they should offer the Bill Clinton package for cigar lovers, too.

A quickie courtesy of the government is not going to help the sex industry very much, and though it may be hard to swallow, brothel owners may need to relocate entirely. Nevada law prohibits brothels from operating in towns of more than 400,000 people, so options are limited. If this Strip is out of the question, the Belt may be a better option: The Capital Beltway, that is. After all, the only whores making money these days all work in D.C.

As I’m no fan of the sex-industry, I probably shouldn’t be giving them any more ideas, but here’s another one all the same. As gas prices increase, more Americans may begin to rely on mass transit. Perhaps brothels should work out a shuttle system to bring in their Johns (and their Benjamins). Earlier this year, Seattle opened a streetcar referred to as the South Lake Union Trolley (the S.L.U.T.). If there’s any place in this country where people are shameless enough to be seen entering a bus bound exclusively for houses of ill-repute, it’s Vegas. They can run a service from the Airport to the Brothel and call it the A to B Shuttle, or any number of fun names:

• The Busty Bus
• A Streetcar of Desire
• Las Vegas Park and Ride and Ride
• The Meat Wagon
• or Chitty Chitty Bang Bang: The Magical Car

Next stop: Solvency!

The Water Crisis: Saving For A Sunny Day

Summer is approaching, and with it comes anticipation of all its pleasure: picnics, barbecues, baseball, summer vacation and life-destroying drought. From San Diego to Atlanta, from below the Texas border to the Rockies, people of the Sun Belt are bracing for another summer of watering the lawn with their bathwater...at night...wearing a ski mask to avoid hefty fines. Just what are people doing to prepare and conserve in these hard-hit places? Let’s start with my old hometown, Atlanta...

To celebrate Sunny Perdue’s “Take a Shorter Shower” month, Stone Mountain Park premiered its Snow Mountain attraction last November. The 1.2 million gallon slush ball was conceived to give sunny Atlanta a most deserved winter wonderland, but apparently a bunch of prissy naysayers who like taking showers more than seeing children happy shut the attraction down after opening day. Reprehensible isn’t it? What had they to complain about? Besides this:

“Snow blowers were pulling water from the DeKalb County water system, instead of the park's lake because park officials wanted the snow to be pure white.”

People in Georgia wanting something to be pure white?! NEVER!

Ahem...

In a state where there are no natural lakes (the main reservoir, Lake Lanier, is a flooded town that routinely stuns and drowns swimmers with debris floating from the bottom), and where most of the watersheds have been paved over for parking lots and tract housing (Georgia’s lack of natural barriers made it prime for unchecked growth for the last decade), one would think that the legislature would have a better contingency plan than “Screw over Alabama and Florida” but that’s what it boils down to. Water wars between the three states have been flaring for over 15 years, and last year saw a particularly nasty clash between Georgia and Florida when the Northern Aggressor—in a rare, bipartisan decision—voted to divert millions of gallons of water that had been promised to Florida to protect endangered mussels and sturgeon in the northern lakes. Meanwhile, the hundreds of golf courses across Georgia kept their sprinklers on. As long as they can pay for it, who are we to stop them?

This smacks of an “almighty dollar” scenario that may play out on the other side of the country in Vegas, whose reservoir at Lake Mead is tapped by aqueducts to many surrounding cities. That reservoir is already at half capacity and declining rapidly. According to a report published by researchers at Scripps Institution of Oceanography, UC San Diego, Lake Mead may be bone-dry by 2021.

I have heard people suggest that Vegas is protected by the vast wealth contained there, which will allow the city to simply buy water when it becomes necessary... I’m sure those generous casino and hotel moguls will be just thrilled to share with everyone. Might I add that this would necessarily be at the cost of towns that would see their water supply go to a higher bidder? Is this really an ideal scenario to anyone? And can one be sure that Vegas’ coffers won’t dry up as well? Casinos are not recession-proof, and if Cirque du Soleil has to start performing their hit water show “O” in a vat of urine, Vegas may lose its appeal and the house may finally lose a round. Benjamin Franklin said in his Poor Richard’s Almanac: “When the well runs dry, we shall know the true worth of water.” One can only hope that whoever has it will accept feather boas and sequined thongs as payment.

The Lake Mead crisis is complicated by a 1944 water-sharing treaty with Mexico, which guarantees that a certain minimum of potable water from the Colorado River reach the Mexican border. A desalination plant was built just north of the border to make good on this promise, but by the time the river reaches the Colorado River Delta—half a century ago, a two million acre expanse of wetlands and lagoons—it is a mere trickle, and the surrounding area is a salt flat.

Elsewhere, tensions over the Rio Grande water supply continue to rage in South Texas and Mexico. A decade-long water-debt to the U.S. by Mexico was resolved in 2005, but only after an estimated $660 million of losses because of failed crops in the Texas Valley. Texas is seeking redress through NAFTA in Canadian courts for these losses, and the soured relations between the two states show no signs of improvement.

During the worst years of the drought, the government did what it could to aid Southern farmers by funding updates and improvements to irrigation systems, but reservoirs throughout the Sun Belt are still pitifully limited, and rampant growth in cities such as Vegas and Atlanta and Phoenix (which seems to have the soundest approach to the water crisis of the three) threaten to turn these towns into dust bins in a matter of years. As much as some people would like to believe it, this is not a problem that money alone can solve. Only real planning and foresight will be enough to protect these cities from complete desiccation.

If you choose to invest in any city threatened by drought, then do not fail to research the city’s contingency plans and make your own. Increasing interest in sustainable housing is making additions such as home reservoirs more accessible. For those living in drought-affected areas, such considerations may become absolutely vital, and so for those investing in these areas, having a house whose residents can actually take a shower may make the difference between a hot-ticket and sand trap. Now...I’m off to the golf courses!

What Happens In Vegas Devalues In Vegas

The Las Vegas real estate market has been notoriously hard-hit by the foreclosure crisis: 51 percent of unsold homes in Vegas are now vacant. This has presented investors with a large selection of single-family properties for investment. In a market such as Las Vegas with an abundance of vacant homes, investors should view such purchases as long-term investments and know that it may take several years before a home turns a profit. But what about some of the ultra-lux homes? According to a recent article in the Los Angeles Times, luxury homes in Vegas may be second only to a Fried-Scorpion-on-a-Stick Stand in terms of bad investments:

“About 1,000 houses are listed for sale in Las Vegas for $1 million or higher, more than 600 of them built since 2004. But unless they've been constructed in the last year or two, the properties are considered out-of-date, making them all that more difficult to sell, real estate agents say.”

In a town where Hank Overalls becomes Mr. Henry Tuxedo and Lucy Dressbarn becomes Lady Prada von Guccistein overnight, in a place where the word of the moment is always “New!” whereas “Classic” and “Established” are maledictions, it is only natural that the homes be as extravagant and aesthetically bankrupt as their occupants. The trouble is—in case you don’t know—Las Vegas is situated in a flat, hostile desert, and there isn’t much in the way of a view or an established neighborhood. With acres of land available for development and only an impotent Bureau of Land Management to moderate it all, one developer after another (and sometimes the same one, over and over) has created the next “hot” neighborhood, and residents have followed:

“One developer, Christopher Homes, recently opened a neighborhood of homes in the hills west of the Strip selling for $1.7 million to $3 million. Several houses have sold to residents of adjoining neighborhoods who lived in their houses for less than five years, including homes built by the same developer, said Erika Geiser, the company's vice president.”

“‘They feel their residence is obsolete,’ she said. ‘They're looking for something more innovative, more cutting-edge.’”

Cutting-edge, indeed. Like so many glass pianos of yesteryear whose tops are now marred by the fine cuts of straight razors and the occasional syringe, the old homes are indeed pathetic vestiges of a bygone era, and I don’t blame the homeowners from moving on. Here is a table displaying some of the bare necessities that people expect to find in their new homes:

Classic	NEW!
5,000 to 7,000 square feet	8,000 to 10,000 square feet
Walk-in showers	7 foot by 7 foot showers
Granite tile bathtub	Granite slab bathtub
12” by 12” polished travertine tiles in entrance	20” by 20” polished travertine tiles in entrance
Stainless steel counters, glass tiles in kitchen	Stainless steel counters, glass tiles in laundry room
Plastic chandelier	Chandelier made of human sternums*

*May or may not be an exaggeration. Would it be all that surprising if it were true?

All of this is to say, it takes knowing the future of what people will want in a home—and where people will want that home—to win at investing in ultra-lux homes in Vegas, and in the end you’re probably better off the blackjack tables. Take the sad story of Mr. William Derentz, for example:

“William Derentz, who heads the company that runs the annual Harvest Festival in Laguna Hills, bought a 5,400-square-foot home in Las Vegas for $2 million in 2004. He never moved in, since he planned to resell it in a year or two at a hoped-for profit of $1 million.”

Alas, the market tanked and defeated Derentz moved into the house in February, but while there, he will remodel the backyard, adding “his-and-her” cabanas to make it a more competitive seller. He may want to make those “his-and-her” reservoirs instead, given that the Las Vegas real estate market may never recover if it runs out of water first.

More on the increasingly dire water crisis in the Southern U.S. and Mexico in tomorrow’s post: “Water, Water Everywhere, But Not A Drop To Fill My 49 Square-Foot Shower,” or perhaps “The Day After Tomorrow Part II: The Day After Cinco De Mayo.”

Las Vegas Real Estate Developments Running Into Problems

Las Vegas real estate has certainly seen better days. It was announced last week that two of the strip’s major developments—The Cosmopolitan and The Plaza—are now faced with some problems.

The Cosmopolitan is a mixed-use building located by the MGM Mirage’s CityCenter complex. The project was originally budgeted to cost in the range of $2 billion, but rising construction costs put the project closer to $4 billion to complete and Deutsche Bank is now foreclosing on the development. The developer, Bruce Eichner, has been attempting to save the project, but the problems in the credit market have made it rough going. 83 percent of the units have already been sold, according to The Wall Street Journal, and each buyer made at least a 20 percent non-refundable down payment to secure their unit. The development will probably be completed eventually, but how long it will take remains unknown.

The Plaza is a huge project scheduled to open in 2012 on the north end of the Strip, on the site of the former New Frontier. The development was projected to cost around $6 billion. It would offer 4,100 hotel rooms, 2,600 condominium units and the Strip's largest casino at 175,900 square feet. Because of the problems in the Las Vegas real estate market, The Plaza’s developers have decided to put the entire project on hold and construction on the project has been suspended altogether.

The good news for investors in all of this is that, with the various project delays and stoppages, the pipeline of nearly 45,000 new rooms which were scheduled for completion by 2012 will be drastically reduced. With that many rooms coming available at once, the market would have been flooded and rates would have plummeted. We might now see a more gradual increase in the number of units available and less market volatility as a result.

Investing in Las Vegas real estate—be it residential, commercial or otherwise—is certainly a gamble at this time. The market is still unstable and prices will likely continue to fall. However, Las Vegas remains one of the most popular destinations in the world for visitors, and investors with a long-term focus are generally safe investing in such a market. In the short term, I would probably advise against investing in Las Vegas real estate, but investors should watch the market and be ready to jump in when things start to improve.