Day Twenty Two: The Mandalay Bay Hotel ($95)
Yesterday, I wrote about Zappos CEO Tony Hsieh's plans to regenerate downtown Las Vegas by moving his company's 1,100 employees to a new campus in Fremont East. One of the side effects of the move, I mentioned, is that many of those employees are now looking to buy houses closer to downtown. And for those buyers, Internet tycoon-turned-Las Vegas housing expert Tom Anderson has some good news: there has never been a better time to buy a home in Vegas.
"In August 2006 [Las Vegas] house prices were 134% higher than they were in January 2000," he explains, "but as of January 2011, prices are back to around those 2000 levels. When you adjust that for inflation and current wages, homes here have never been more affordable." And it's this affordability which makes Las Vegas such a haven for property speculators. "You've got a lot of investors -- and some regular homeowners -- making all-cash purchases in Vegas right now. In fact over 50% of monthly home sales in Vegas are all cash-purchases, and have been for a few years."
By "all-cash", of course, Anderson means houses bought without mortgages, either by people with lots of money to spend, or -- more frequently -- by those who are buying real estate as an investment. Given how many people lost their shirts on Vegas housing investment the first time around -- more on that in a moment -- Anderson's 50% statistic surprises me. But that's because I know dick-all about the world of property investment.
Explains Anderson:
A homeowner who has a good amount of savings, but who bought at the peak [of the market] with little to no money down -- which is how many loans were back in 2005 and 2006 -- may choose to do a strategic default and buy another house in cash. Investors are doing a lot of buying and flipping of REOs, short sales and houses that are auctioned off before they reach REO status. An investor can buy a house all cash, fix it up and sell it for a small profit: they might make $5-$10k on a $150-$200k house. Investors are also holding properties and renting them. I've met a number of people who've started funds or raised money to buy and flip and/or rent houses in Vegas. For the end-user or buyer who has good credit, there's quite an opportunity: get an FHA loan and only put 3% down on a house that is priced near or below building cost.
Sounds amazing, right? And it is, for professional investors or cash-rich homebuyers like the ones Anderson describes. For a whole other class of people, though, the story is much, much less rosy.
When Anderson talks about "REOs", he's referring to "Real Estate Owned" properties -- a neat euphemism for a home that is owned by a bank or a government agency, following an unsuccessful foreclosure auction. In other words, many of these homes that provide such a profitable opportunity for investors today previously belonged to home buyers who couldn't afford to keep up mortgage payments on them.
Erika M. Wright is a partner in the firm, Miller & Wright, which provides bankruptcy services for clients who lost everything when the Vegas housing bubble burst. "We do what we can to help people," she says, "but we're often their last resort, and many of them come to us too late."
The story Wright tells is one we're all familiar with, because it happened right across the country -- and the world. Around 2006, the harsh realities of economics finally caught up with the real estate bubble: mortgage payments were missed, homes were foreclosed and a global financial meltdown ensued. And with Vegas being a major epicenter of housing hype, so it followed that the city was hit harder than most places. As the Las Vegas Sun reports, people moved away in droves -- and continue to do so -- as Vegas ceased to be the land of milk and honey it was sold as. As building engineer Tyler Young told The Sun: "If I'm going to be looking for another job, I'm going to live where I want to live... you need to go to a place where you can better yourself and have a future. Here, it's just going down."
And for those who couldn't afford to leave: put simply, the last few years have been pretty good times for bankruptcy lawyers.
Wright wouldn't say anything so mercenary, of course. And nor would she say that a lot of what went so wrong for Vegas homeowners can be traced back, not to misfortune or misselling by banks, but to basic human greed. What she will say is this...
"At the height of the housing bubble, you had people who were buying houses, seeing them increase in value by $100,000 in no time, selling them and saying 'now I'll buy five more houses and do the same with those'"
"So, they wanted to make a quick profit, and they screwed up?"
Wright concedes that in some cases, greed was a factor, but insists that in many others, banks were just as culpable: encouraging customers to take mortgages they shouldn't have and sending out a message that -- contrary to all the laws of economics -- houses in Vegas would just keep increasing in value. "There was so much land here that people just kept building and building."
Her partner in the firm, Shawn Miller, explains just how ridiculous things got: "we saw bidding frenzies on properties, with prices in no way relative to actual values. People were buying multiple properties sight unseen. Meanwhile construction companies were building high-rises out in the suburbs. You need high-rises in cities like London or New York where space is at a premium, but not in Vegas."
"So what did the buyers think they were going to do with all these houses and high-rise condos?" My question could have been rhetorical: it's clear there wasn't a lot of rational thought being put into the question.
"Actually a lot of the homes were sold or rented to the construction workers who were arriving to build all the new houses," explains Miller.
I laugh. I can't help it. "So people were buying houses to rent to builders who were building new houses to sell to people who then rented them to builders?"
"Yes."
"And the banks were encouraging this?"
"Yes."
"But why? Surely the banks can't be that stupid? Surely they could understand how unsustainable it was?"
"Oh, they are that stupid," Miller deadpans. And he should know. Before joining Miller & Wright, he worked as an attorney representing those same banks.
Whatever the cause -- stupid banks, greedy homebuyers, whatever -- the result is the same: "You go down to the square near the bankruptcy court and there are whole communities of homeless people living there," says Wright. The problem is the housing collapse coincided with a rise in unemployment. At the end of last year, the national (U.S.) unemployment rate was 9.5 percent; in Las Vegas it was 14.8 percent. "If people have jobs then bankruptcy offers a way to get creditors off their backs for a while so they can start to rebuild their lives. But if you don't have a job then very soon you're back where you started, and you can't file for bankruptcy again for six or seven years."
"So why," I ask, "are the banks so quick to foreclose? Isn't it in their interests to try to work with the homeowners to get something back?"
"Some of the local banks are willing to do that," says Wright, "but for the larger ones... many of them don't own the debt any more. They sold it to someone else, who sold it to someone else. Our clients come to us with letters from companies they've never heard of, demanding repayment." And for those banks who do still own their debts, it's often a question of either not caring -- "you have to understand that there aren't people at banks making human decisions, they just look at numbers and make an instant call" -- or of not wanting to set a precedent -- "if they renegotiate one person's debt then they worry that everyone will come to them wanting to do the same. They foreclose to set an example."
It's a hell of a way to make an example, but as with so many things in Vegas, one person's loss is another's gain. One real estate agent, specializing in foreclosed homes has created the Foreclosure Bus Tour: a three hour guided tour of other people's misery. For people like Anderson, meanwhile, the availability of REOs represents nothing more -- or less -- than a sensible business opportunity, and a Las Vegas housing market returning to the normal rules of supply and demand.
"Lots of industry pundits say Vegas [house prices] may drop by another 5% this year," he explains, "and they may. But it depends on the neighborhood. There's a condo near downtown Vegas that had bottomed out about 12 months ago, with too many units on the market. A unit in that building might sell for 20/30% higher today than it did last year. The condos in CityCenter are holding on to their higher prices, and the developer won't sell them for less. They've decided to rent them in the interim, rather than sell them at a loss. Tract homes in a neighborhood like Summerlin may be around $110 per square foot, whereas a similar home -- even one built by the same builder -- may go for $65 per square foot in North Las Vegas. It really depends on the desirability of the neighborhood; the building -- in the case of a condo; the floorplan. Like any market, that which is rare tends to hold its value -- you can still get a higher price for a strip view in a condo. And in the luxury market, you'll still see people paying $400 and $500 per square foot in the most desirable neighborhoods."
Of course it's all too easy to paint all of this as a story of the rich getting richer and the poor getting screwed. As a card-carrying liberal Guardian columnist-turned HuffPost blogger, I was temped to do precisely that. In truth, though, Anderson is right: what we're seeing play out in Vegas is simply basic supply-and-demand economics. For every hardworking homeowner who took their bank's advice and ended up paying the price, there were plenty of others who thought they could become property tycoons overnight, and fell victim to their own greed. Likewise for every ghoulish Foreclosure Bus Tour, there's a perfectly decent businessman who understands that a down market is a good time to buy property in the town you love. Especially when you have the cash to do it.