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March 12, 2007

Tags Booms and BustsThe FedInterventionism

Last week was news worthy for two divergent organizations that lived large in 2004 but whose fortunes have dried up a scant three years later with the punk housing market. One of organizations will likely be but a footnote in boom history. The other will unfortunately live on.

New Century Financial Corporation, the nation's largest independent subprime mortgage lender, faces a criminal probe, has stopped making dodgy new loans and may soon be calling their customers for bankruptcy attorney recommendations. New Century is not alone as over 20 subprime lenders have gone out of business or availed themselves of bankruptcy protection in the past year.

The company's stock price sank to $3.21 on Friday, a far cry from the heady days of 2004 when New Century's price climbed to well over $60 per share. That year the company was in the process of doubling its assets to just over $19 billion from just short of $9 billion at year-end 2003, on its way to over $26 billion in assets by the end of 2005.

New Century netted over $800 million in income from 2004 through the third quarter of 2006, yet Chris Brendler, a Stifel Nicolaus & Co. analyst, believes that New Century's value if it were liquidated could be negative $63 million, and "in a 'fire sale' situation, likely lower."

Also riding high back in 2004 was the Bureau of Land Management (BLM), the keeper of the nations lands. Then Fed Chief Alan Greenspan was goosing the now unreported M3 money supply at a 20% annual rate during part of the year and plenty of that money was rushing into red-hot Las Vegas real estate.

The BLM controls 87 percent of the land in southern Nevada and has typically held semi-annual auctions since 1998 to sell some of its hoard to real estate hungry investors. Three short years ago 2,000 people, including 460 who took the trouble to register to bid, packed the Sam's Town Live concert venue in hopes of finding bargains. None were found; the BLM made out like a bandit setting what were then new records both in terms of the total amount of land sold ($707,185,000 worth) and price per acre ($279,299). The total sales figure was more than double the $309,769,500 total appraised value of the parcels.

With the real estate boom still at full throttle in the fall of 2005, the BLM held its second auction of that year selling about 3,000 acres of government land for just under $800 million. George Bush was even making noise at the time that he wanted to re-direct some of the BLM land sale money to pay for the War on Terror.

But the Commander in Chief missed the bubble window. Last week, less than 100 people showed up at the BLM offices for the spring auction, and few were bidders. Only four parcels totaling 25 acres were sold for a total of nearly $12.5 million. This after only one BLM auction was held last year when only 22.5 acres were sold for $9 million.

The pickings were so slim the BLM didn't even bother hiring an auctioneer. Despite selling just four parcels, BLM Field Manager Juan Palma couldn't keep track of bidders, amounts, and even misplaced some parcel locations according to Las Vegas Review-Journal reporter Hubble Smith. Back in the day, auctioneer Mike McKee would sell parcels for three and four times appraised values in less than 30 seconds.

Of course the bidding for BLM land doesn't start at zero. Parcels are nominated for auction by the local municipalities after developers have expressed interest in buying the land. The process takes 18 months to two years with an appraisal being completed to determine the starting point for bidding. In a hot market the appraised values are too low, given that historical comparable sales are used. In a slow market the values are too high for the same reason. Thus, most of the parcels put up for auction the last two years were not bid on: the 2004 and 2005 prices just don't make the land feasible for development.

With Las Vegas homebuilders pulling only about 1,000 permits per month right now, nobody sees the need to bid up the price of land. But they might be wrong. Strip investment drives the Las Vegas economy and there is $33 billion worth of projects on the Strip with announced completion dates under way. Include projects without announced completion dates and the amount grows to nearly $49 billion. As First American Title Vice President Richard Lee pointed out recently, in the 15 years from the building of the Mirage to the completion of the Wynn, there was $15 billion spent on the Strip. There will be more than double that invested over the next five years.

Besides resort investment, population growth drives the Las Vegas economy. In 1980, 463,000 people lived here, now it's 1.9 million. Economic consultant Jeremy Aguero points out that drivers license surrenders have slowly drifted down since 2003, and the 4th quarter of last year saw the fewest number of turn ins since 1999. But, in migration is still healthy, and the Las Vegas valley is expected to have three million residents by the year 2020.

Many assume that the jobs being created in Las Vegas are for the hotel industry. Not really, Aguero points out that business and professional services employment is the fastest growing job category, growing 13,000 jobs or nearly 12 percent. Leisure jobs only grew two percent last year. Las Vegas is still very dependent on the construction industry for employment with 12.3 percent of the workforce in building, which is double the national average. But there is still a shortage. "There are craftsmen that are making $90,000 to $100,000 a year, with overtime, and project managers earning up to $250,000 annually," according to Robert Potter, chairman of Affordable Concepts and 2007 president of Associated General Contractors, Las Vegas chapter. "I won't announce recent hires in the paper anymore because it's advertising for my competitors to come and steal them."

Although there are eights months worth of resale home inventory on the market, double what it should be, there were the fewest number of residential permits pulled in the fourth quarter since 1993. And, the ratio of employment growth and residential permit activity may be poised to rise, according to Aguero. Generally, a healthy ratio is 1.3 new employees for every new housing unit. But right now, employment is growing at 5 percent while permits are down 25 percent.

It's not likely that employment growth will slow down with all of those high-rise cranes dotting the Las Vegas skyline. In Aguero's view, homebuilders need to bring more homes to the market to avoid another huge run-up in prices.

Wall Street research analysts see it differently. A.G. Edwards analyst Greg Gieber wrote in a report entitled "What's Not Happening In Las Vegas" that home sales in Las Vegas have not rebounded and believes new home pricing "will remain soft until 2009 or later." Gieber wrote that he was shocked at market conditions in Las Vegas.

But every homebuilder I've talked to tells me that traffic and sales are improving. And while the publicly traded homebuilders are shedding land holdings to make analysts like Gieber happy, some very savvy local homebuilders are scooping up those parcels, recognizing that the Las Vegas valley has but six and half years worth of traditional single family land left for development unless the BLM expands its land disposal area. An employee of one large public builder admitted to me that although they've sold a couple parcels recently, he believes they will be buying again by the end of the year.

If history is any judge, financial meltdowns like what's happening in the subprime arena prompt the Federal Reserve to act in the only way it knows how. The Fed's playbook was written with its inception in 1913 and anointed by easy money cranks like Alan Greenspan and his successor in crime Ben Bernanke along the way.

The coming tidal wave of bailout money creation may not save New Century. But, the Las Vegas BLM office shouldn't lose auctioneer Mike McKee's number.



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