Why was the housing bubble so much worse in Las Vegas?

There is an interesting new Justin Lahart piece, here is one bit from it:

The way Princeton’s Zhenyu Gao sees it, the problem in Las Vegas was that while land was available, constraints were high enough that it took time for homes to get put up — the data on land constraints matches up well with a separate data set on how long it takes to complete the review and approval of residential projects. As a result, it took time for the supply of housing to meet demand.

But investors didn’t appreciate the fact that more supply was eventually going to arrive, and rushed in. Indeed, Mr. Gao shows that areas of the country like Las Vegas fell into a sweet spot, with more investment home purchases than both more land-constrained and less land-constrained areas. Of course, by pushing prices higher the investors invited even more development, and an eventual oversupply of homes that made the bust all the more painful.

I would put it this way: space to build plenty more, and enough slowness in the building process to get over-committed before seeing the supply-side decisions of other investors.  The original research is here (pdf).


Why is gambling so much worse in Vegas? Don't have a clue.

Don't you mean so much better?

Better for who?

Coastal Floridian here. The land constraint model makes sense based on local observation. The worse affected homes were the McMansion housing developments built 5-20 miles inland. They ran up quick following the trend of water-front housing, and supply was constrained due to local zoning and approval (unlike Texas). Homes on or near the water appreciated more during the boom, but fell much less and recovered quicker.

South Florida (where I resided 2006-2008) is squeezed between the ocean and the Everglades, so there's very little room to expand except at the northern end. To some extent the area started tearing down derelict structures or new housing though old wrecks and vacant lots were not always in the most desirable areas.

What are the future prospects for Las Vegas real estate? Are we at the bottom of a downturn, so it's the time to buy? Or, does the glut mean that prices are depressed for the long-term foreseeable future? I've been thinking about where I should live, and Las Vegas is on the list.

The bottom is already past.

I considered buying a rental property in Las Vegas in 2011. I chose Denver instead despite the fact that rental cash yields were much higher in Las Vegas.

I did so because I think Las Vegas will become an urban wasteland like Detroit. Twenty years ago a Las Vegas casino was a hugely profitable endeavor. Casinos were able to generate a dollar of revenue for each dollar. Operating margins were 13-15% so return on assets were 13-15%. Returns on assets averaged 13-15%. These profits encouraged lots of new competition. To differentiate themselves new entrants built hotels built bigger rooms. fountains, convention centers and other amenities. Casinos now generate about 30 cents of revenue on invested capital. Destination casinos now lose lots of money.

Competition outside Las Vegas has also increased with the increased legalization of gambling. The heavy gambler appears to be going to casinos closer to home as average gaming loses per visitor have declined by about a third. When investors can to earn their cost of capital back then investment stops. Supply declines until prices can increase enough to restore an industry to profitability.

I think Las Vegas is 25% overbuilt today, As this capacity disappears jobs will disappear and demand for housing will decrease. In addition the number of gaming tables and slot machines declines by about three percent a year which will further impact employment and housing market demand.

The Vegas housing bubble sounds a lot like the comic book bubble.

Yes, that's what I pointed out in 2008:

California vs. Texas
September 30, 2008

... In defense of Bush and Rove, it was natural for them to misunderestimate the financial scale of what they were propagating because they are from Texas, where land prices have been saner than in California ever since the bursting of the first oil bubble a quarter of a century ago. At present, Texas ranks only 15th out of 50 states in per capita foreclosure rate, far below most other highly Latino states. That's because land costs in Texas are dramatically lower than in most other states with heavy Hispanic concentrations, keeping recent homebuyers from getting in over their heads so badly. I visited San Antonio in April 2007, at the height of the housing bubble, and saw billboards advertising new 3000 square foot, five bedroom homes for $162,000.

In the flat, well-watered eastern half of Texas, there's an enormous supply of buildable land. Moreover, there aren't many environmental or other restrictions on home development. In contrast, California has a thin strip of exquisite coastal land, mostly locked down tight by strict environmental controls, backed by uninhabitable mountains. The level inland areas become increasingly miserable for year-round habitation the farther east you go (for example, the aptly named Death Valley). Likewise, Nevada and Arizona have significant water limitations, restricting growth to certain areas.

Texas Republicans are prone to blame the limited supply of housing in California on leftwing Not In My Back Yard politics used by greedy homeowners to raise their home values and keep out undesirables. Some of that is true, but there are topographical reasons for limiting development in mountainous California, such as smog and traffic, that aren't easily understood on the Texas prairie.

For instance, the northern exurbs of Los Angeles County, the Santa Clarita Valley, are connected to Los Angeles almost solely by Interstate 5 through the rugged Newhall Pass. The only proposed alternative to this chokepoint would require colossally expensive tunneling through 15 miles of the earthquake-prone San Gabriel Mountains. So, the current residents of the Santa Clarita Valley, who tend to be more Republican than Los Angelenos, raise a stink about exacerbating commute times to their jobs in LA whenever anybody asks for approval of a new development. Thus, the posh Valencia TPC golf and housing development was proposed in 1985 but construction didn't begin until 2000. Other planned developments have been vetoed after long years of hearings.

Therefore, in California, unlike in Texas, it takes many years for increases in housing supply to catch up to increases in demand. That's why the loose credit policies of the Bush years turned into higher home prices in California than in Texas. To be precise, a Los Angeles home averaged 2.6 times the price of a Dallas home in 2001 and 4.7 times in 2005. Even in 2005, the median Dallas home only cost a sane 2.8 times the local annual income, while the median Los Angeles home cost a ridiculous 12.7 times what the median Angeleno was making.

Also, keep in mind that Las Vegas and Phoenix were in competition with inland California for people wanting to cash in their homes in Los Angeles, Orange, and Ventura Counties (home to about 13-14 million people). California's Inland Empire (San Bernardino and Riverside Counties) has lower home prices than the the coastal counties, but they are still under California environmental impact laws that slow construction. Nevada and Arizona tend to be between California and Texas in lag times on new construction. (Also, unlike Texas, Nevada and Arizona have a lot of land tied up in Indian reservations.)

So, when a lot more new housing finally started to come online in the Inland Empire around 2006, that in turn decreased demand in Las Vegas and Phoenix from those Southern Californians who, all else being equal, would prefer to move 100 miles inland than 350 miles inland.

Oh, so prescient SS SS zzzz. In fact, Robert J. Schiller, who knows a thing or two about bubbles, wrote about how land constraints influence land prices as early as 1999, in his book "Irrational Exuberance", I believe if memory serves both the first and second editions had the example of Milwaukee as a place where a bubble is less likely to happen than coastal cities hemmed in by the sea and mountains.

But the surprising thing about this paper I suppose is that Las Vegas, being wide open (like Milwaukee) did in fact have land constraints of some kind.

Shiller's really is prescient about bubbles, being able to call them before they even exist.

It's funny how Milwaukee's East Side just hasn't seen any development ...

In contrast to the East Side of Chicago, which enjoys regular police patrols, at least according to a 1974 hit song:


I always thought that like Chicago, Milwaukee's Eastside was called Lake Michigan.

There's a fundamental reason why states dominated by urban areas that are hemmed in by deep water tend to vote Democrat:


Those California mountains, the Coast Ranges are hardly uninhabitable, in fact they are amazingly expensive real estare, but you are never going to get a permit. Oh they will say it is landslide risk, just like the coastal commission, but I am a geologist, that stuff can be mitigated. What makes it even worse than the coast is that almost all of it is forest service land.

So it is all artificial supply restriction. Sure it is cheaper to build on the flat, but the real cost differential is permitting. Outside places like Portland or Ottawa with a legal growth boundary, it is not very difficult to get permission to cover good farmland with houses, but a bare eroded slope in a central location, never. Of course there are already isolated houses in these places, but take a look at who owns them.


Here's my account of the political war waged over The Edge of U2's plan to get permits to build five houses on his 156 acres of land in Malibu:


California Republicans are hardly laissez faire. They love land use regulations as much if not more than anyone else. Land use restriction really is a war against the politically weak by the politically powerful. It is an incumbent protection racket.

Exactly. My (Republican) beach city actually has a 2-story limit for residential properties.

It is similar what you pointed in 2008 but not the same. Also backed by data not intuition.

In Las Vegas, there's a lot of land to develop. The lag in houses offer that raised prices was only because it takes some time to get construction permits authorized. Eventually the permits were obtained and the houses build ending in oversupply. Where's the oversupply in California?

Places like Hemet and Victorville, both 100 miles from LAX.

Interesting lead, I played with the data from the Federal Housing Finance Agency house price index per city. Please look at the graph: http://tinyurl.com/qcmn9ks

Is there a reason why house price index increase is another time + 25% between 2012Q4 and 2013Q4?

This is probably true for every major urban area. In Seattle, for example, the nice parts of town and the Ritz suburbs are doing very well but the hinterlands are still 30-40% below peak because they were never all that desirable in the first place. Las Vegas is worse off than other cities because it doesn't actually have any desirable neighborhoods close to the city center.

Ritzy, not Ritz. It's Google's fault.

"But investors didn’t appreciate the fact..." So, you had a lot of Dumb Investors. Isn't that how it's supposed to work? If you make dumb investments, you lose money.

A thing to remember about Las Vegas land development is that 87% of Nevada land belongs to the federal government, and turning any of it over to private ownership requires an act of Congress. Las Vegas is ringed up federal land. Just yesterday a bill to de-federalize 660 acres to Las Vegas and 645 to North Las Vegas was before the House Natural Resources Committee, and was stalled because all the various interests aren't reconciled yet.

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