I spoke this past month in Las Vegas—one of the hardest hit economies and real estate markets in the country.
Employment has finally ceased its downward plunge—but still has yet to really turn the corner.
As shown in the graph, Las Vegas-Paradise employment (seasonally adjusted) still is slightly trending downwards. The non-seasonally-adjusted job numbers saw another 5,100 jobs lost in the past 12 months.
What is true about this market is that, when the U.S. economy does well, the Las Vegas market booms. But when the U.S. economy does poorly, this market tanks. And this makes sense. The market is driven by entertainment and tourism, which do exceedingly well when people have perceived discretionary income, and the Las Vegas market contracts (obviously dramatically) when they expect tough times. The following graph illustrates the percent change in employment for the same month in the prior year since 2002.
Good news is that housing sales (as far the number of homes sold) are at comparatively high levels. But prices are abysmal. And will likely not recover to normal levels for years (more to come on this conclusion).
The graph below shows the annual number of existing home sales since 1996. The number of existing homes sold in 2010 was the third most in history—and that is good news as it is going to take a large number of sales to get all of the excess inventory off the market. And getting rid of this inventory is a prerequisite for prices to recover.
A large component of the problem in home prices was the massive amount of residential construction that took in the Las Vegas market. Residential building permits since 1980 are shown in the next graph. At first, the “Build it and They Will Come” doctrine worked well—but when the U.S. economy got a cold, the Las Vegas market got pneumonia.
Corresponding to this construction was a massive wave of new home sales. In the United States, historically there has been one new home sale for each five existing home sales. But not Las Vegas. As shown in the following graph, 2005 saw almost 40,000 new home sales compared to roughly 55,000 existing home sales. This was a ratio that simply could not be sustained over the long run.
All of this excess has been reflected in home prices. The price series below is the annual median home prices for existing homes. The median home price of $118,656 in 2010 is even less than the $120,000 registered in 1996.
So how overbuilt is Las Vegas today? Typically it takes 1.25 to 1.5 net new jobs to absorb a single dwelling unit. As shown in the table below, since 2003 Las Vegas added 363,801 new dwelling units and only 261,900 new jobs. That means that to absorb the excess, Las Vegas needs to add from 193,000 to 284,000 net new jobs. The most jobs ever created totaled 103,700 in 2006—and that was based on the massive amounts of new construction taking place at that time (a level likely not to be seen in years). At best, therefore, it will take at three years of record growth, just to absorb the excess—and that is not happening today and is not likely to take place for years. The eight-year average job growth creation from 2003 to 2010 was 37,700. Based on this number, it would take from 5.9 years (at 1.25 new jobs per dwelling) to 8.7 years to (1.5 new jobs per dwelling unit) to job-wise absorb this inventory.
To forecast Las Vegas job growth, a regression was made using total Nevada winnings from gamblers as the variable to forecast the number of Las Vegas jobs. The following graph shows the relationship between these two variables. Total winnings from gamblers in Nevada declined 6.8 percent when comparing February 2011 to the same month in 2010 which indicates further job declines (assuming this trend does not change). The red arrow is an estimate from the regression in the total number of jobs that we will see in Las Vegas a year from now (again assuming a continuing decline in winnings from gamblers).
For those interested in the regression, the model and related statistics are shown in the table below. By knowing the $ Billions Winnings from Gamblers in Nevada, we can explain 91.1 percent of all the variability in Las Vegas jobs since 2000. For the statistics nerds like myself, all of the required statistics indicate this is a highly significant model. The P-values on the F and t statistics all exceed a 95 percent level of confidence.
I do not expect price recovery for three to 8.7 years in Las Vegas. And this does not at all mean returning to the record price level seen in 2006 of $285,000, but more likely the lower $200,000 price range (assuming a normalized price increase since 2003 of 3.5 percent, compounded annually).
Today, however, remains a buyers’ bonanza. And low interest rates today makes buying an attractive proposition.
Tell me what you think.