Las Vegas Economics & Housing

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.

 

Comments

  1. Mike C.

    Thank you, dear nerd, for adhering to every other economist’s forecast and outlook of this dump. I have to agree with your 3-9 year (I think it’g going to be 6-11 years) recovery. I will never get out of this hell.

  2. BeeGee

    Thank you for the great info! I’m having trouble opening your graphs and pictures but the information is actually encouraging.

    I attended a Foreclosure Recovery workshop about two months ago produced by a few local housing agencies along with Consumer Credit Counselors, Legal Aid of Southern Nevada and reps from HUD, the Federal Reserve and others. The projections forecasted at this event suggested it may take up to 30 years to see home values recover and they said even if their estimates were off by half – that would still take 15 years!

    Do you have any idea what the total number of homes are in shadow inventory now? The banks are just sitting on these properties which is helping to somewhat protect values but it’s a false protection because of the enormous volume of unlisted properties out there.

    And, if I’m following your theory correctly then our big boom in the construction industry and housing market was also directly related to gambler winnings. Is that right? So we really are still just a one industry town? Geez…when are we going to grow up?

    @ Mike. You’re certainly not stuck – like so many others you can always dump and run…and start over elsewhere It’s a horrible decision to have to make but honestly there’s never been a better time. Unless your plan was to spend most of the rest of your life in your current property which doesn’t sound like that’s what you had in mind.

    1. Ted C. Jones Post author

      A few points of clarification.

      First I showed that Las Vegas employment was a function of the winnings from gamblers (not the winnings by gamblers). What this really means is that Las Vegas remains a gambling destination (that also has a large amount of other tourism draws), rather than a tourism destination having a gambling draw.

      Second, while I did not state blatantly, the method I used to estimate regarding how long it was going to take to absorb the surplus housing, it is a reasonable model (not necessarily the best nor the only approach).

      Third, I really made no forecast as to when home prices would reach the lofty levels seen 2005-2007. Since that was pie-in-the sky price ranges, if indeed will be a while before we see those prices–and 15 years would not necessarily surprise me even if the excess inventory moves back to normal levels in the next 6 to 8 years.

      The New York Times had a recent article on foreclosures noting that in some states, there are more pending foreclosures than we would anticipate.

      http://www.nytimes.com/2011/06/19/business/19foreclosure.html

      What is going to slow or expedite recovery in the Las Vegas housing markets will be how quickly and strong the U.S. economy recovers–and that is not a real rosy outlook right now….

      Ted

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