Las Vegas Housing Market: Why This Recession is Different
Editor’s note: This is the third of a five-part article by urban infill real estate developer Jim Noteware.
Part III
Why is This Real Estate Recession Different than Those in the Past?
Numerous reasons point to why our situation in Las Vegas today is different from those in the past—and those which may now be occurring elsewhere.
Oversupply vs. Under-Demand—To understand the principal reason why things are different this time, we must distinguish between oversupply and under-demand. Our situation in Las Vegas today is clearly one of oversupply. As noted earlier, we have simply built too many housing units in advance of the market’s ability to absorb them at steady (or increasing, as has been the recent market norm) prices. With 6,500 people moving into Clark County each month (about 80,000 per year) in response to employment growing both in numbers (about 40,000 per year) and quality (the fastest growing segment of employment in 2006 was professional employment—12%!), demand is nearly as high as it has ever been, and is arguably higher in Clark County than anywhere else in the country.
Of all the confusion in the local markets, one thing seems perfectly clear—and nearly universally accepted—that job and employment growth in Clark County will continue at similarly high levels for the foreseeable future. No one—that is, no one I know—is predicting a decline in these growth levels. In fact, with housing prices flat, or possibly declining for a period of time, these lower costs might spur even higher levels of growth.
Other real estate recessions have been noted for actual declines in demand. In Texas in the 1980s, the petroleum and financial services industries contracted swiftly and significantly, with large numbers of people losing their jobs. This caused massive out-migration, and the local oversupply of houses was exacerbated by the declining demand. The ripple effects were severe, and the economic decline in places like Houston lasted about five years, before even beginning to turn. Imagine conditions currently in places such as Detroit as the auto industry downsizes, or over the years in older cities such as Philadelphia, Hartford, or St. Louis, which have lost their industrial bases.
Meantime, the housing industry—locally as well as nationally—is, fortunately, reading the signals correctly, and reacting by cutting new production. In Las Vegas as well as other Sun Belt cities, new housing construction has not merely slowed—it has virtually stopped! One of the benefits of new information technology is information flow and information transparency. All industry participants can now get quality information quickly and can make their own decisions. Thankfully, with help from Wall Street stock analysts, most homebuilders are canceling construction and land contracts. They are abiding by the old adage, “When you are in a hole, quit digging!â€
Stable and low interest rates—Another significant factor is that this is the first housing recession since at least World War II that has not been caused by rising interest rates. Recall the recessions of the mid-1970s, the early 1980s and the early 1990s—all were caused and exacerbated by financial market conditions, mostly rapidly rising interest rates. My first mortgage was 10% in 1977; my second was 12% in 1980; and my third was 13.5% in 1985. Today, despite all the talk about housing market problems, rates for mortgages of all kinds remain steady and relatively low in actual and real terms. So, the economy is strong and capital is both readily available and reasonably inexpensive. Again, there are no macro-economic barriers to demand.
Thus, with the Las Vegas growth story, which continues unabated (growth in demand), and with the local industry stopping new additions to supply, the only conclusion to be drawn is that the existing housing inventory will be absorbed in a matter of time. So, the question then becomes, how long? Stay tuned…
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.
