The Surprising Investor Impact on the Las Vegas Shelter Industry

Implications:     Las Vegas has been unfairly characterized as a real estate market that will continue to melt under the stress of mounting inventory, the sub-prime crisis and lack of affordability. The impact of those forces on Las Vegas has been more severe on sales than on prices.       Overall, resale prices are off a scant 1.6% in the first seven months of this year.  Traditional new home prices are off +8%.  But, when you add vertical to traditional, new home prices are off a tiny one tenth of one per cent.    This market may turn around much more quickly than most analysts suspect. It is entirely possible that  the return to normalcy in Las Vegas may be sparked by renewed investor interest.

Analysis:  

Yes, one of the major underlying -- and overlooked -- causes of this year’s national real estate melt-down has been the unbridled greed of "greater fool than me" theory investors … and of those who serve such investors. Now, the Mortgage Bankers' Association provides hard evidence that is exactly what happened to  Nevada and Las Vegas (which accounts for 71% of the State's population).

In statistics released late last month, they note that the Silver State leads the nation in the percentage of residential real estate mortgage defaults for investors – both in the prime AND sub-prime categories.

Nearly one third (32%) of all prime mortgage defaults in Nevada were for non-owner occupied properties.   Nearly one in four (24%) of all sub-prime loans in default went to investor property. 

About one in three (29%) of all prime home loans made in 2005 went to investors, the nation’s highest percentage. About one in 7 (14%) sub-prime residential loans went to investors.

And, these statistics are probably shy of reality because many “investors” lied. They said they were primary buyers. So, perhaps the Mortgage Bankers Association figures are understated.

Many analysts believe the greatest impact from the loss of the investor market will be on Hi-Rise condominiums. The annual appreciation of that shelter product jumped 40% in 2004, 25% in ’05 and another 5% in ’06. Interestingly, such analysts overlook the traditional “new home” portions of the market, which skied more than 45% in 2004, 17.2% in ’05 and 14.8% in ’06.

The major difference between the two market segments  is that Investors generally declare themselves as investors in the Hi-rise (urban) market – particularly for condo-tel product. And, unlike traditional product, investors are NOT walking away from Vertical product as they are walking away from "traditional" shelter product (i.e., suburban single family homes and non-mid-rise condominiums). They understand that prices in the vertical  portion of the market -- particularly near the Las Vegas "Strip" -- may  rise in the foreseeable future ("Strip" land continues to be more and more valuable ... as is the shelter product located on or near the "Strip.")

Marketing Solutions quarterly new home buyer survey typically found that 1 in 5 new homes sold in Las Vegas went to second home buyers and investors between 1994- 2004. These were siphoned off by Hi-Rise in 2004 and after.

No matter how badly investors fare today, we don’t expect them to return in force to the traditional new single family market in the near future. But, we do expect them to be a continued major impact on  the Vertical market here -- which is the future of Las Vegas.

One analytical element that is consistently overlooked is that the Las Vegas market is in transition from a suburban to an urban market.

Look for the opening of the  3,200 room La Palazzo in December to refuel investor interest in the Las Vegas market.  That will be followed by the market entry of Wynn Las Vegas by mid-2008.  The upscale nature of these resort products will appeal to those who invest ... or wish to own a second home in Las Vegas.

It's the ultimate irony ... the forces that helped cause Las Vegas' shelter industry problems in 2007 may be responsible for helping to solve them in 2008.