Media Confusion—Perhaps the most confounding result of the overbuilding is the resulting media confusion. The media—the national media in particular—are now full of stories about Las Vegas and compare our situation to the gloom and doom of prior recessions and to the situations in other areas, such as parts of Florida, as noted earlier, does indeed have truly disastrous conditions. The media confusion is borne of at least three factors:

Factor One: The media cannot decide what is good news or bad. One day we read that prices falling is bad news; the next day we read that Las Vegas prices have gone so high that they are now beyond anyone’s ability to pay them, and that the bad news is high prices.

So, media writers, which is it? Would the Las Vegas economy actually benefit from lower prices—many politicians who want to stimulate increasing levels of homeownership at affordable levels think so.

And just so that we in the housing business don’t feel like we’re being singled out here, think of the debates about Wal-Mart: Is it a benefit that Wal-Mart can offer low prices and therefore enhanced shopping access to numerous Americans, or are Wal-Mart’s prices, as the result of its low-cost business methods, a problem? The media cannot decide here, either.

The media seem to have other motivations in its reporting on housing’s contribution to the economy, including:

Employment: During the housing cycle’s run-up over the last 10 years, housing became perhaps the single biggest factor in the nation’s economy because of its direct (construction workers) and indirect (materials and equipment) employment.

As housing starts decline, not only do construction workers lose their on-site jobs, but a lot of factories building appliances and carpets cut workers, too. Many analyst reports actually complain that the slowdown of housing starts is bad news (another source of bad headlines), when from a housing market perspective, the slowdown in new starts is the best news of all!

Credit: The media are also full of stories about how foreclosures are rising in many markets, including, of course, Las Vegas. But, are these foreclosures a housing problem or a credit problem?

The Federal government has consciously maintained an easy monetary policy since the dot-com bust five years ago. As a result, interest rates have stayed low, and with increased housing prices, many people have used their houses as ATMs, taking out cash through re-financing of equity. Others have purchased houses beyond their means through relaxed mortgage instruments (interest-only loans, negative equity loans, etc.) which also were created in part by the Federal government’s backing of Fannie Mae and Freddie Mac.

Yes, it is indeed sad when a family loses its home, but in most cases today (as distinct from foreclosure increases in earlier times), the foreclosure results from a credit problem, not a housing market problem.

The largest problem that I see with media reporting, however, is that it does not keep its reporting or the numbers that it covers in perspective. Richard Lee of First American Title Company recently cited a headline that read, “Las Vegas housing prices fall 5%”. He then noted that housing prices have increased at least 25 percent per year for at least the last five years, and rightly concluded, “Big Deal!”

Finally, we must acknowledge that the media have a special place in their heart for Las Vegas. Las Vegas is “Sin City” and much of the Strip’s entertainment is based on fantasy, so many in the media like to treat our market as something unreal.

The local industry played into this position perfectly with its tendency to announce any and all projects, without regard to their realistic prospects for success. It seems that in the 2001 to 2005 period, all someone needed was an idea, a brochure and a public relations agent, and viola, he became a developer with a project.

The local industry and the local press announced astounding numbers of projects with even more astounding numbers of units. There was no apparent scrutiny as to how realistic any of these projects could be given the realities of construction economics, market pricing, approval timing, etc. This gave the national press a feeling that the local industry behaved as a roulette wheel, and real estate success was a game of chance instead of the hard work and correct decisions that it is everywhere else.

Most knowledgeable observers knew the fall would come—and we cannot blame the media reporting for that—don’t shoot the messenger. That the local market enjoyed some dramatic success for a time only increased the anticipation for the correction. Remember, “The bigger they are, the harder they fall.” This feeling of comeuppance, I believe, accounts for some of the underlying tone of media reporting about Las Vegas’ future, and I also believe, about buyer skepticism, especially those second home buyers from elsewhere.

It would be facetious to suggest that the media could ever be consistent with its reporting on the housing industry—there are numerous publishers and reporters with numerous points of view and reporting objectives. The media should really be a marketplace of ideas. My suggestion is that they report accurately, and try harder to keep things in perspective.

Buyer Skepticism—With the media reporting about softening conditions, and with existing marketplace conditions, prospective buyers have become skeptical and tentative. If they perceive that conditions may worsen, they quite appropriately wait for prices to fall and terms to improve further.

Most buyers are also pleased that conditions have changed—many were tired of competing at auctions or being priced-out during the run-up period, and now feel that turn-about is fair play.

My experience indicates that this buyer behavior is perfectly logical and to be expected. Buyer hesitancy will last until buyers conclude that conditions are turning around once again, and they should not wait because prices are once again increasing.

Downside cyclical behavior—This leads to a very important point: the behavior of market cycles is not symmetrical. We all know what smooth cycles look like in plotted on a graph; remember your high school math regarding sine waves. This is indeed what price cycles look like in the up phase; look at stock market reports as well. In up markets, volume increases as well as the up cycle matures. And, this is exactly what happens in real estate: more people trade-up as the up cycled progresses and builders build increasing numbers of new homes to accommodate the trade-up and the new entrant buyers, and existing and new home volumes both increase.

But, this is not what cycles look like on the downside, especially real estate cycles. Usually what happens is that when a market reaches its top, more buyers decline to purchase, and volume slows. Buyers realize market changes first; sellers are reluctant to acknowledge the new reality and usually refuse to reduce prices. Buyers simply do not buy. So, instead of supply and demand adjusting as a function of lower prices, market activity simply stops. No one can sell into a declining market because no one will buy into a declining market -- why would an intelligent buyer purchase a home today at today’s price if he believes that tomorrow’s price will be lower? He won’t. Again, market activity stops, and without transaction data, it is impossible to discern exactly what is happening.

Thus, the first stage of a market slowdown is suspension of transactions—and that is exactly where we have been in the Las Vegas residential market for the past several months. Realization and observation of this condition is the second step in approaching a recovery (remember, the first step is to recognize that we have a problem).

Read Part III

Jim Noteware, principal of Houston-based Noteware Development, specializes in infill projects in rapidly growing urban areas. In addition to Brickwater Condominiums in Las Vegas, the company is developing Sevilla in the Moon Valley area of Phoenix and The Jamestown adjacent to Candlestick Park in San Francisco.