For someone who writes bearishly about real estate almost daily, it will surprise some to hear me be completely and unabashedly bullish. I am very bullish on Las Vegas. I will put my money down there, and let it ride.
By Eric Fry — Aug 3, 2010, 2:03 PM
Over the weekend, your California editor jumped the border into Nevada. He took a spur-of-the-moment road trip to Las Vegas with his co-editor, Joel Bowman.
During their two-day romp in Sin City, neither editor engaged in any activities that needed to “stay in Vegas.” No drunken debauchery to report…or not report. No big-ticket gambling losses…or small-ticket moral lapses. Just the same old wholesome living with which they routinely bore themselves.
While most of the tourists were busy losing their money and sleeping off hangovers, your editors were busy gathering macro-economic data points. After all, Las Vegas may be famous for its ostentatious casinos, but it is infamous for its outrageous housing bust.
No city in the country throws a better housing bust than Vegas.
Although the residential real estate market in Las Vegas has been stabilizing for the last two years, home prices remain more than 50% below the peak levels of 2006. “In 2000,” the Las Vegas Sun reports, “the median price of existing homes was $134,500. That shot up to a high of $285,000 in 2006, but in 2010 prices have been running slightly more than $120,000.”
I want to take a moment to think about the numbers given above. In 2000, the average annual mortgage interest rate was 8.05%, and the stable median home price was $134,500 in Las Vegas. If you borrowed 80% of that amount ($107,600) the mortgage payment would have been $793.28. Today, a 30-year fixed rate mortgage can be obtained for 4.56%, and the median home price is $120,000. If you borrow 80% of that value today ($96,000) the mortgage payment would be $489.85.
The median home in Las Vegas – a 3 bedroom 2 bath detached property — can be owned for less than $500 per month.
It that isn’t affordable, I don’t know what is. The house is cheaper, and the cost of debt is much cheaper. Anyone living in Las Vegas who is choosing to rent when they could buy is a fool. Anyone thinking of investing in Las Vegas, now is the time — not because prices will come roaring back (they won’t) but because the price-to-rent ratio is outstanding, and unless you are buying in the worst neighborhoods, I don’t see how prices could go much lower. Unlike the inflated markets in California – the foolishly percieved safe havens — the property values in Las Vegas really can’t go much lower, and although appreciation is years away, the rental stream makes ownership there very rewarding.
I personally plan to acquire all the Las Vegas real estate I can buy. And no, neither Ideal Home Brokers nor the mystery fund I might know something about is going to invest in cashflow properties there. I am not selling you on Las Vegas because I will profit from convincing you. I am bullish on Las Vegas real estate because I perceive it as the best buy-and-hold value we will see in our lifetimes.
I know it is hard for the kool aid intoxicated to get their minds around buying properties that will see no appreciation for ages, but realistically, there isn’t going to be appreciation in any real estate market for ages. The best, and in my opinion, the only good reason to buy-and-hold real estate is for the rental cashflow. You want perpetual cashflow, not a cashless asset that requires taking on debt to convert to spending money.
Not surprisingly, mortgage defaults and foreclosures have been soaring over the last three years. “Since January 2007, Nevada has ranked No. 1 in the nation in foreclosure filings [as a percentage of total mortgages],” the Sun continues. “[Among cities], Las Vegas was ranked No. 1 in 2009 and will be near the top again in 2010.”
And to judge from a recent report by the New York Fed, Las Vegas will not be surrendering its “No. 1” position any time soon.
“Although the official home-ownership rate for Las Vegas is a respectable 58.6% as of August 2009,” DailyFinance observes, citing the Fed study, “the ‘effective’ rate is more like a dismal 15%… How is the ‘effective’ home-ownership rate different from the official one? The authors of the New York Fed study removed those homeowners who have negative equity – those who are ‘underwater’ and owe more on their mortgage than their home is worth.”
In other words, 58.6% of all Las Vegas residents may own a mortgage, but only 15% of them own a home.
The overhang of distressed mortgage debt is why a recovery will take forever in Las Vegas. All the debt must be extinguished. For those waiting for house prices to go up, the crushing weight of all the other homeowners who are giving up will keep foreclosure inventory high for many, many years. The one scenario that could make prices go lower is if interest rates move significantly higher before unemployment improves. With the entire housing stock trading at a 20%-40% discount to rental parity, a modest increase in interest rates won’t significantly harm affordability like it will here.
The commercial real estate market in Las Vegas is almost as distressed as the residential market. Office vacancy rates have plummeted from about 8% in 2000 to 24% recently. Therefore, even if the Vegas real estate market is recovering, a lot more recovering will be required to restore stability…and rising prices.
Given your California editor’s familiarity with these macro-economic data points – and his unfamiliarity with Vegas itself – he expected to roll into a tawdry wasteland last Friday when he rolled off of I-15 onto Las Vegas Blvd. He expected to find clusters of low-budget tourists roaming the sidewalks of half-empty hotels. He expected to find deserted casinos in this gaudy patch of desert…and cut-rate pricing on everything.
But he found the exact opposite. The place was packed – every square inch of it – and priced for boom-time conditions.
On Day One of his visit – a Saturday – most of the best-known hotels on the Strip were either sold out or offering rooms at Midtown Manhattan prices. On Day Two, hotel room rates dropped sharply, but the crowds remained at capacity. All along the Strip, the casinos and restaurants were bustling, while the sidewalks and poolside lounge chairs were packed to capacity.
Finding a lounge chair anywhere close to Mandalay Bay’s wave pool required Green-Beret-style recon missions…or a lot of money. High-rolling hotel guests could chose to roll out $250 to $1,000 to rent a cabana…for one day!
The cabanas were full.
I have told people on many occasions that I strongly believe in the economic recovery of gaming and tourism in Las Vegas. Once the rest of the economy begins to improve, the unemployed start going back to work, and people have two nickles to rub together, they will put one of them in a Las Vegas slot machine. A reviving economy in Las Vegas will signal the end of the recession better than any government report.
Where is all this money coming from? How on earth could the sluggish US economy play host to such seeming prosperity?
Your editor has no decisive answer to these questions, but he does have indecisive guesses:
First up, he observed a very large percentage of “ESL” tourists. The crowded sidewalks featured almost every language on the planet. Apparently, Vegas appeals to foreigners.
Secondly, your editor suspects that Vegas has become a leading “staycation” beneficiary. Vacation destinations like Paris, Venice and Cairo are as expensive as they are distant. So why not go to Vegas, which enables tourists to visit the Eiffel Tower, the canals of Venice and the pyramids of Cairo…just by strolling from one end of the Strip to the other. Better still, these sites offer valet parking and free booze.
Whatever the exact causes, the Las Vegas economy appears to be recovering. Sin is still selling.
Drunken debauchery will always be popular. Once people can afford it again, Las Vegas will be there waiting to take their money.
One busy weekend does not necessarily make a trend. But the official numbers seem to support your editor’s first-hand impression. Tourist visits are on track to jump 3% this year to about 37.5 million, which would be the largest number of visits since 39.1 million tourists visited Sin City in 2007.
Vegas may not have returned to its peak prosperity, but neither has it descended into anything resembling a bust. Perhaps, therefore, the Vegas housing bust is drawing to a close…no matter what else is happening in the rest of the country.
As we noted in yesterday’s Reckoning, the weight of stubbornly high foreclosure rates – coupled with stubbornly high unemployment rates – continues to weigh on the national housing market.
I have written that Gaming Interests Could Save the Las Vegas Housing Market. Maybe someday I will raise the billion dollars required to save their housing market. I hope nobody there is holding their breath.
Art and science of distressed property investing
Finding a distressed property market is not difficult, and anyone who understands business math enough to compute a rate of return can measure which markets are a good deal in today’s dollars. That is the science.
The art of distressed property investing is recognizing which of these markets the conditions are temporary and in which markets the distress is a long-term problem. I am bullish on Las Vegas because the local economy will recover there. The distress is temporary.
There are many distressed property markets where I am not bullish. Detroit, Michigan, may never recover. They may end up bulldozing a significant portion of their empty housing stock. Here in California, I wouldn’t touch Bakersfield, Fresno, or Santa Maria. They are too far from major population centers to see spill-over economic growth, they are seeing varying degrees of demographic shifts and out-migration, the school systems are awful, and their local economies are not very diverse. The fringe markets within 90 miles of major population centers will recover eventually, but the overhead supply of foreclosures will take quite some time to work through.
In short, not every distressed market where the price-to-rent ratio is good is necessarily a good investment. Those markets where economic recovery is likely are the best investments, and Las Vegas is at the top of my list.