Gambling Capital Is Flush With Empty Houses

By Joel Achenbach
Washington Post Staff Writer
Thursday, October 30, 2008

LAS VEGAS There are 6 million empty homes in the United States. Or 6.2 million, to be slightly more precise. Empty houses are normal to some extent -- part of the usual friction of building, selling, renting. But ask the people who study the numbers, and who understand the "overhang" in housing inventory, and they'll tell you: This country has about a million homes too many.

Thousands of them are right here. From an airplane, this valley appears to have been flooded in a biblical deluge of subdivisions. Las Vegas, a dusty rail stop a century ago, has been the fastest-growing urban area in the nation for two decades and is now a desert metropolis of 2 million people. The vast majority live in developments that sprawl to the edge of the mountains.

The overabundance of houses in Las Vegas and elsewhere played a major role in creating the nation's financial crisis -- and, via toxic securities, the global financial crisis. The road to recovery also goes through the housing market. What's taking place here is something of a war of attrition, empty house by empty house.

It'll take a couple of years to burn through the excess inventory, estimates Jeremy Aguero, principal analyst with the Las Vegas research firm Applied Analysis. "We're probably looking at an overhang of about 28,000 homes," he said.

The solution, local executives say, will come not from Washington policymakers but from the market itself. When there are too many houses, builders stop building them. That has already happened, and many Vegas home builders have gone out of business. Construction workers, meanwhile, suddenly find themselves dealing blackjack.

People here have concluded that the reestablishment of a functioning housing market will require pain and patience. And sometimes a bulldozer. At one development in Henderson, the model homes suddenly looked too luxurious for the post-crash economy, said Kipp Cooper, government affairs director of the Greater Las Vegas Association of Realtors. So the builder obliterated them and put up more modest, cheaper model homes.

Things are bad in a housing market when a "tear-down" is a house too nice to be left standing.

A Downward Spiral

Steven Lu is shopping for a house. It's a lot like scavenging, for there are thousands of foreclosed "bank-owned" properties. Banks sell them at steep discounts, eager to get them off the books. A savvy buyer will have the keen vision of a buzzard.

Lu lives part time in Los Angeles and most of the time near Shanghai, where he runs two factories. He's an investor, and is particularly interested in foreclosures. Las Vegas and surrounding Clark County had 11,250 foreclosed homes on the market at last count. "A bank house is cheaper. It's below the cost," he said, poking around the planned community of Mountain's Edge.

Lu eventually made an offer on a four-bedroom foreclosed property on Soda Canyon Street in the southwest part of town, said his real estate broker, Coco Wang. When built at the peak of the housing boom in 2005, the house sold for $354,000. But like so many people, the owner watched the value plummet. The owner defaulted, and the bank put the house back on the market for a song -- just $149,000. Speculators swarmed.

This has been the pattern in recent months: lots of activity around the roadkill, but few sales among new homes. There's a vicious feedback loop. Untold thousands of homeowners find themselves "underwater" in their mortgages, owing more on their houses than the houses are worth. Many homeowners and speculators have decided that the best financial move is simply to give up, and abandon the property. "Jingle mail" is the industry term for when someone mails the house keys to the bank.

That leads to more cheap houses being dumped on the market, and still lower prices -- a downward spiral.

In major cities across the country, there was an average drop in home prices of nearly 18 percent from August 2007 to August 2008, according to a Standard & Poor's/Case-Schiller Home Price Index study released Tuesday. But the pain isn't distributed equally. Phoenix's 30.7 percent drop edged out Las Vegas, at 30.6 percent, for the most precipitous drop in prices. Miami came in third with a 28.1 percent decline, just ahead of San Francisco at 27.3 percent.

Economists say it's essential for housing prices to stabilize. Right now the trend line looks as though it's falling off a cliff.

"When we hit the bottom is the question. But momentum is still definitely downward," said David Seiders, economist for the National Association of Home Builders.

All those empty houses aren't helping.

"We've got to get through it, clear the inventory," said Nicholas Retsinas, director of Harvard University's Joint Center for Housing Studies.

Complicating matters further is the economic recession. Fewer jobs, lower salaries, a depressed stock market: These things don't inspire people to buy houses. It may be 2012 before the housing industry is once again operating at a normal, sustainable pace of about 1.5 million new homes a year, said Robert Denk, another economist with the builders association.

But lower prices do juice the market. In that sense, the problem of declining home values is also part of the solution. Mark Zandi, chief economist at Moody's, said that housing prices probably need to drop an additional 10 percent nationwide before the market will become stable.

"Prices need to come down further so that housing becomes affordable again so that it makes sense to buy rather than rent," he said.

A Flooded Market

The entire country has been affected by the housing crunch, but there has been particular carnage in the once-scorching real estate markets of South Florida, Southern California, Phoenix and here in Las Vegas. And of all these places, Vegas may be the one where the disaster is most visible.

In 2006, with prices peaking, builders plastered together a startling 36,000 new homes. Speculators waved cash and bought several houses at a time, figuring they could flip them just months later. It was a can't-miss game, like playing craps on the Strip with loaded dice.

The joke was that every valet parker and stripper in Vegas had a real estate license. About 20,000 people were trying to sell property. Buyers swarmed the valley, many of them from California or overseas.

"These people weren't required to have any significant money down, were not required to verify their income, and they were allowed to buy four or five at a time," said Cooper, of the Realtors association.

He said he knew the market had gotten out of whack when, one day at an off-Strip casino catering to local residents, a valet told him he was selling one of his houses -- just one of them -- for $1.2 million.

The boom sucked in a lot of ordinary people who normally may have been more cautious with their money. Las Vegas had always been a place with cheap housing, a town where a construction worker or a hairstylist could afford a decent home. But as the prices soared, people worried that the market would leave them behind forever. Some people of modest means took out whopper loans, 100 percent interest, with a "teaser rate" of, say, 3.9 percent that would adjust upward in a couple of years. Surely, they figured, they'd be able to refinance as the value of their house rose.

In 2004, housing prices rocketed 52 percent in just 12 months, and builders couldn't slap houses together fast enough.

"We couldn't get a sign in the ground before these properties were sold," Cooper said.

Las Vegas homes have a signature look, a desert theme: tile roofs, stucco walls, and a tiny garden or patio. Houses are separated from one another by a block wall. Indeed the neighborhood is almost invariably a walled compound, with limited entrances. Wood can't last in the desert, so concrete is king.

Now empty homes in some neighborhoods are watched by security cameras, because thieves will rip out copper pipes, appliances, anything that might fetch a price on the black market.

In Mountain's Edge, a sign looms over a vast expanse of gravel, mounds of rocks, an unused street and some low walls, almost like a three-dimensional blueprint of a neighborhood yet to be built. Or maybe like an archaeological ruin. "Trissino," the sign says, is coming soon: "Interest List Now Forming." But at midday on a Tuesday there were no construction crews, nor any hint that this economy needed yet another neighborhood.

Rod Gumke, 62, drove up in his pickup truck, pulled over to the shoulder and nabbed a flattened, battered-looking orange construction cone. Gumke pours concrete, but his industry has half the work today that it did a couple of years ago, he said.

"The market is flooded with resales," he said. He threw the beaten-up construction cone into the back of his pickup.

"I can't afford a new one. Trying to save money. They're $50 apiece."

Casinos to the Rescue

This desert metropolis has a knack for doing things big, of upping the ante, going all-in. The good times are great, the bad times calamitous. This place is like a vast experiment in unbridled capitalism.

There is hope on the horizon, in the form of luxury casinos rising on the Strip. The largest project, CityCenter, is a $9 billion venture that includes residential and commercial space as well as hotel rooms and casinos. Casino tycoon Steve Wynn will open Encore, another luxury hotel on the Strip, in a couple of months. These projects and others will create 130,000 new jobs by 2012, Aguero predicted.

More gambling and more people have always been the strategy for success here. Said Cooper: "People have lost a lot of money betting against Las Vegas."

View all comments that have been posted about this article.

© 2008 The Washington Post Company