Wednesday, July 13, 2005 | 11:07 a.m.
Warnings of possible stagnation cooling the red-hot Las Vegas housing market continued on Tuesday.
Christopher Thornberg, senior economist with UCLA's Anderson Forecast, said the rapid housing appreciation happening nationwide is not supported by traditional economic fundamentals.
"Housing prices are growing at a rate of something like 10 percent a year (nationally)," he said, speaking at Colliers International's Summer Trends event.
Thornberg said that with low interest rates and record home construction numbers, there is little logical reason for prices to be climbing.
"There is just no justifiable reason for prices to go up, except pure speculation," he said. "This is basically a pyramid scheme. This can only work as long as people are coming in at the bottom end. Unfortunately, you are running out of them."
Thornberg credited "crazy, high-risk loans," like the interest-only and option-adjustable-rate loans that allow people with lower incomes to afford high-priced homes for keeping the market hot. Rising rates or a drop in property values, he cautioned, would bring problems for those buyers.
While he indicated that the first sign of problems would likely be a drop in sales activity, he said that the irrational behavior of the market makes future movement difficult to predict.
"That's the very definition of irrational," Thornberg warned.
The news also is better in Las Vegas than other markets. While some areas could see a rapid drop in prices, he added that the rapid employment growth in Las Vegas should insulate the market from such a drop.
"Prices won't necessarily go down, but they can flatten," he said. "In six years, you're still in the same place whether it goes down rapidly and flattens out or stays flat."
John Restrepo, principal with the Restrepo Consulting Group LLC, also said at Tuesday's event that limited land supplies in Las Vegas should serve to prevent overbuilding and the potential for more lasting market problems.
"That's one thing that could mitigate the bubble (Thornberg) talked about," he said. "There is a certain level of restrictions in the valley that's constantly causing some problems with the cost of land. That could end up being one of our saviors."
Still, Restrepo said that consumers and developers should proceed carefully.
"We do have a tendency here in Las Vegas to say 'We're different,' " he said. "But there are some warning signs to watch."
The economic ramifications could ripple through Las Vegas, Thornberg said.
"You guys got off easy in the last recession because it was led by businesses, and this is a consumer economy," he explained. If a housing market correction sapped the energy out of the economy, it will start with consumers.
"The wild card is what kind of tourism you have here," Thornberg said.
His comments echoed recent statements made by analysts from the Federal Deposit Insurance Corp.
Last month, the FDIC singled out Nevada for its nation-leading 6.7 percent job-growth rate in the first quarter. Las Vegas also was singled out for creating jobs at a rate of 7.6 percent in the quarter.
Since the fourth quarter of 2003, FDIC statistics showed double-digit, year-over-year housing appreciation rates in Nevada, with the biggest gain coming with a 37 percent year-over-year jump in the third quarter of 2004. During that time, however, the greatest gain in per capita personal income came with a jump of 6.1 percent in the fourth quarter of 2004.
"Annual home price appreciation in Nevada moderated slightly in the first quarter 2005, but gains still ranked first nationwide," the FDIC report said. "However, home price growth far outpaced increases in per capita personal income, suggesting continued declines in housing affordability."
Barbara Ryan, associate director of the FDIC's Division of Insurance and Research, said that the run-up in Nevada home prices caused affordability in the state to decline by 24 percent.
Richard Brown, chief economist for the FDIC, said if a correction did occurr in the Las Vegas -- or Nevada -- market, it would be more likely to come slowly.
"There's a question with affordability. Are prices likely to snap back suddenly?" Brown said. "It usually happens with what we call a sticky downward. People are reluctant to part with their homes at depressed prices. Then the disparity is resolved through periods of stagnation, allowing incomes to catch up with prices."
"Now, that may seem like a bust for people who can't sell their homes," Brown added.
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