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Las Vegas Housing Boom Over?

Mises Daily: Friday, October 22, 2004 by

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When homebuilder Pulte Homes publicly announced that it was cutting the price of its homes in Las Vegas from five to 25 percent, Wall Street and the financial press immediately began sounding the death knell for the Las Vegas housing market.

Greg Gieber, an analyst with A.G Edwards & Sons, Inc., typifies the view in the investment community. Gieber penned a research report contending that Las Vegas homebuyers have decided to "run and hide."

Gieber decided to come to Vegas and visit a dozen or so new home communities just after the Pulte announcement to see first hand what was happening and was "somewhat astonished to say the least by the dearth of interest in purchasing a home [that] weekend."

Gieber indicates that the tract sales people he spoke with said that traffic had slowed over the past several weeks and that the agents were fielding calls from homebuyers wondering if their companies intended to drop prices like Pulte had.

Gieber admits in his report that Pulte had been too aggressive with its pricing and was $60 to $80 per square foot above competing product. Las Vegas housing expert Dennis Smith of Home Builders Research echoed this view in his latest newsletter. "Pulte raised their prices in some communities more than $150,000 in a week's time," Smith writes. "Many of us thought that they went overboard and failed to realize the consequences of what would happen once the out of state investors left the area."

Unlike many other Las Vegas builders Pulte was slow to restrict investor home sales and now is paying the price with numerous freshly built, never occupied homes lining the streets available for sale and competing against the company's new releases.

Additionally, the company has reportedly fielded 500 lawsuits for having the audacity to lower prices. Ross King, a Denver investor, closed on a 1,900 square foot Pulte home on September 24th at a price of $498,000. After King closed escrow, Pulte lowered the price of that same model to $382,990.

King will be receiving $1,600 per month in rental income from the home, only covering three-quarters of his $2,200 mortgage payment, and none of his homeowners association dues.

"I feel like the biggest idiot. I feel like I was absolutely taken," King told the Las Vegas Review Journal. "I am a smart guy. That's what makes it even worse."

Las Vegas loves guys like Mr. King who have an unshakable belief in how smart they are yet seem to be horribly challenged in the math department.

Anyone who has been paying attention has noticed the incredible increases in the supply of housing product brought about by the price explosion in the spring of this year.

In February the Multiple Listing Service (MLS) contained 1,400 listings of available resale homes in Las Vegas. By April that number had grown to 8,654, and by September the number was 15,758. At the same time, homebuilders have pulled permits for new construction at a frenzied pace. Through September, permits were running 47.4 percent ahead of last year's pace.

At the same time demand has slowed. In February new home model traffic averaged 100 customers and 3.5 net sales per week. By August, traffic had fallen to 50 shoppers with 2 net sales per week. Last week's traffic at Pulte's 19 subdivisions averaged 28 customers per tract according to Metrostudy and the company wrote 31 sales contracts, but had 32 people cancel.

Thus, the Las Vegas housing market has gone from less than a month's supply of available homes to a five or six month supply according to Lee Barrett, President of the Greater Las Vegas Association of Realtors. An inventory level that is similar to other markets.

So the price system works. High prices send the signal that more of a product is needed and suppliers come to the rescue with more of that product and prices fall.

So what was a sellers' market is now a buyers' market.

However, at least one Las Vegas housing expert doesn't believe the buyers' market will last much longer. Stephen Bottfeld, executive vice president of consumer research firm Marketing Solutions, told a capacity crowd at his quarterly Market Perspective seminar that Las Vegas is "not on a bubble, but on the edge of a boom."

Bottfeld projects 2005 to be a record year for housing in Las Vegas with 30,000 new home sales and a jump of 22 to 25 percent in the median new-home price to the mid-300,000's.

He believes the market will begin its ascent in April after the standing inventory is absorbed.

Bottfeld, like Harry Dent Jr., believes that "demographics are destiny." Baby boomers are receiving and will continue to receive the greatest wealth transfer in history and many of these boomers are migrating south of the 35th Parallel. Las Vegas will attract its share of these rich refugees.

Bottfeld pooh-poohs those who use traditional measures that indicate housing has become too expensive in Las Vegas. The median incomes published by government and university sources don't take into account the shadow economy in Las Vegas. Valet parkers who take home $150,000 a year and cocktail waitress making $125,000 annually are counted as $6.75 per hour workers by those preparing wage studies, according to Bottfeld.

Rental rates also have nothing to do with home prices Bottfeld told his audience. The pool of renters is disproportionately skewed to young adults. Thus, rents are weak because there are fewer young people renting apartments and houses than when the baby boomers were in their 20's.

Job creation is also strong in Las Vegas Bottfeld points out. There are more than half a dozen new hotels or major hotel expansions currently under construction. Not to mention 50 high-rise condo projects proposed and four major retail malls.

And people are moving to Las Vegas to fill those jobs. On average, over 7,200 people each month move to Las Vegas. Bottfeld says that Las Vegas has the best "brand name" of any city in the country and is what movies were in the 1930's — "the great escape."

The Las Vegas housing market is far from dead. But will it roar ahead after this brief hiccup as Stephen Bottfeld predicts? Is demographics Vegas's destiny? Who knows? But, one may recall that Harry Dent, Jr. used demographic studies to predict that the Dow Jones Industrial Average would reach 40,000 by 2007.