LAS VEGAS: 2006 STARTED A NEW ERA

Implications: Las Vegas started a new era in 2006.

Traditional residential statistics presented in this article and in many others like it have overlooked a major change in the market.  That change will impact the Las Vegas residential market for the next two decades.

Analysis:

LAS VEGAS: 2006 STARTED A NEW ERA

Most forecasts about the 2006 Las Vegas real estate market missed the target. Now, many published “analyses” about what happened in 2006 appear to be even more short sighted. Worse, they are negatively—and incorrectly -- coloring forecasts for 2007.

Las Vegas began a major transition and a new real estate era in 2006. But you won’t find that in the traditional numbers.

The traditional statistics reported in this article are essentially accurate. But, these so-called “traditional” numbers are distorted. And, they are distorting our view of 2007. Ask yourself two questions:

1. What changed in 2006 that allowed Las Vegas housing prices to defy both the laws of economics and gravity? After all, prices rarely rise when sales decline. And, especially not when inventory supply goes through the proverbial roof!
2. Why did sales of lower priced condominium conversions “tank” when the median price of both new and resale homes rose?

The answer to both questions is: Las Vegas began a major transition and a new real estate era in 2006. Las Vegas is transitioning from a “suburban” market to an “urban” market. People who live outside Las Vegas can only see the “Strip” and downtown. But, Las Vegas has been a market of suburbs from its inception. Now, those suburbs – Summerlin, Green Valley, Henderson, North Las Vegas, Centennial Hills -- are becoming urbanized

The reason is simple: Land is very expensive in the Las Vegas Valley -- $750,000+ per residential acre. Like Manhattan in the 1880’s, huge immigration (Las Vegas has doubled its population to two million in the last decade) has placed a premium on every square foot. Not to mention that the Federal Government owns about 89% of all the land in Nevada.

The cost of land is forcing residential builders to go vertical. Sixty new high-rise and mid-rise developments were announced in the last 18 months. They won’t all get built. But, enough will survive to make vertical a new component in the Las Vegas housing mix. More importantly, traditional numbers don’t tell us what happened in the Vertical market.

Here are facts that haven’t been published:

-As of January 1, there were 21,609 high-rise and mid-rise “homes” on sale in the Las Vegas market.

-A total of 13,556 were under construction – of which 90%+ are under contract. Another 8,053 units are about to begin building with more than 60% sold.

-That means that we have about 17,000 sales unaccounted for in our “traditional” numbers. Plus, we have another 23,000 vertical homes in the pipeline. Not to mention their impact on median price levels!

-Consider this: The best selling “subdivision” in Las Vegas in 2006 was a high rise – the MGM Grand Signature closed almost 1,000 units in two buildings.

Why are traditional numbers distorting our view of 2007? Well, obviously, they don’t include vertical. But, equally important, traditional pricing and inventory figures are also misleading.

Take a look at new home prices. The figures cited in the article include apartment-conversions, traditional single family residential and attached and both Mid-Rise and High-Rise. Last year, we came to believe that the lower prices of conversion product offset the higher prices of Hi-Rise and Mid-Rise.

But, in 2006, conversion sales were considerably less than last year -- while Hi-Rise and Mid-Rise continue to grow in importance. If we look at ONLY Single Family Residential and Traditional attached product, the last two months of the year would have been negative, but the overall year was still up 6.6%.

There is great concern that while the large supply of resale homes will diminish, it will significantly slow recovery. There is great hope that the lack of new home permits will bring the market into balance.

In fact, from September through January, only 4,422 new homes have been permitted. More than 13,000 new homes were sold during the same period.

If we continue to see new home permits decline, will that impact the size of our existing home inventory? The answer to that question is second quarter demand. The measure of 2007 will be taken early ... and it will be new home statistics.

A note of caution here. Las Vegas has 542 active new home subdivisions, the highest number per capita in the nation. So, watch three numbers very carefully in the first quarter:

(1)  The number of new home sales

(2)  The number of new home permits

(3)  The average sale per subdivision.

Those numbers will tell us if the recovery begins in the second half of this year or the beginning of next year. Remember, real estate runs in cycles. We are at or near the bottom of a cycle.

Here’s a final thought: It used to be that in order to sell a home, you had to have an entertainment center. Now, in order to sell a home, it has to be in the center of entertainment.

Las Vegas is not building urban villages. It is building Entertainment Villages … on and off the “Strip.”

It’s the beginning of a new era in Las Vegas real estate in many more ways than one.