Booming Vegas or Real Estate Bust?

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.”

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 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.

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.

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.

Eric Fry
for The Daily Reckoning

The Daily Reckoning