Las Vegans are experiencing a harrowing drop in the value of their homes, as the bloom has come off the mid-decade housing-boom rose.
Local experts never expected the market to be this volatile. An angry Stephen Bottfeld, vice president of Marketing Solutions, told his Crystal Ball seminar crowd last July that there is "no way homes will lose 30 percent in value this year, or next year or the year after… or all three years put together."
Unfortunately, Bottfeld is being proved wrong. After literally decades of steady growth in the price for southern Nevada housing, prices exploded from 2003 to 2006, fueled by the Federal Reserve's low interest rates, loose mortgage lending standards and population growth. The median price of a new home was just under $200,000 in 2003, but three years later it had climbed over $140,000 to almost $340,000 at the market peak in 2006 – a 70 percent increase.
Now, just two years later, $283,000 will fetch the median new home. And, with over half the 23,000 resale homes listed on realtors' Multiple Listing Service (MLS) being vacant and likely bank-owned or candidates for short sales, prices are likely to fall even further. "Most homeowners who bought into communities built after 2005 are going to owe more than their house is worth," ReMax Platinum realtor Steve Hawks told the Las Vegas Review-Journal recently.
But buyer stupidity, population growth and loose lending doesn't explain the volatility entirely. Randall O'Toole gets to the heart of the matter in his book The Best-Laid Plans: How Government Planning Harms Your Quality of Life, Your Pocketbook, and Your Future. O'Toole explains that when local governments plan growth in their communities, these policies not only make housing prices less affordable, but this planning "makes housing prices more volatile."
So when demand is strong, supply-reducing city hall policies serve to increase prices. The agonizing flip side, however, is that "small reductions in demand, such as during a recession, can cause prices to plummet," explains O'Toole.
Studies by Harvard economics professor Edward L. Glaeser and Joseph Gyourko have found that when an area restricts housing supply and then experiences a $10,000 increase in housing prices during one period, relative to national and regional trends, that area will subsequently lose $3,300 in housing values over the next five years.
"Such housing cycles occur almost everywhere," Professor Glaeser wrote in a May 2006 Rappaport Institute Policy Brief, "but the dollars involved are far bigger in metropolitan areas with restricted housing supply such as many parts of California, New York City and Boston."
O'Toole puts Las Vegas in the same supply-restricting category as these cities due to ownership by the Bureau of Land Management (BLM) of 87 percent of Clark County land. "[S]uburban land will be a major component of the cost of housing only if there are artificial restrictions on land use such as urban-growth [or Federal] boundaries," O'Toole maintains.
But it is not just homeowners who suffer from these boom and bust cycles exaggerated by government policies. In his study of the Boston housing market, Edward Glaeser found its "boom-bust cycle was associated with significant dislocation in the regional economy." Over time, both income and employment decline in regions experiencing these severe housing cycles.
Glaeser points out that high-cost housing drives employers and potential employers away from a region. Most business people want a stable workforce in which their employees can put down roots in a community by purchasing homes. Las Vegas prides itself on being a place where middle-class wages and benefits are paid by Strip employers, and where even hotel maids can own their own homes. But as median home prices rose from just over three times median income levels in the early 1990s to six times median income by 2006, local politicians have begun exploring workforce-housing ordinances that would make matters even worse.
It's clear that the current housing malaise has affected the entire nation's economy. As foreclosures ripple through the economy, workers become less mobile when they can't sell homes for the amount they owe, or bank balance sheets are threatened when waves of foreclosures hit. Either way, "the result is a drastic slowdown of the economy," writes O'Toole. Plus, Las Vegas is currently feeling the pinch with drops in gaming revenue and visitor volume.
Fed-induced business cycles already make housing markets plenty treacherous. The BLM should release its land to private owners before it magnifies and aggravates another boom-bust cycle.
Doug French is executive vice-president for a Southern Nevada bank and a policy fellow of the Nevada Policy Research Institute.