Columnist Hal Rothman: Houses of cards

Hal Rothman

Monday, Oct. 10, 2005 | 9:06 a.m.

Hal Rothman

"Honey," a friend of mine said to his wife after he opened his last tax bill. "I told you we'd live in a million-dollar house some day." He paused and smiled. "I just never thought it would be this one."

Nothing has changed the Las Vegas Valley more than the skyrocketing cost of housing. For the longest time, Las Vegas housing was heaven and haven for ordinary working folk.

Local wages and housing prices were pegged together at about a 3-to-1 ratio. If you made the average household income, somewhere in the mid-$40,000 range, you could own the average home, which cost about $140,000.

The houses were nice, and they exuded hopes and dreams. It wasn't hard to do the math and come out with a smile.

Today, you'd scowl. The cost of the average new home pushes $300,000, and the rise in housing prices has not been accompanied by an increase in household income.

In the last year, household income has fallen for the first time in memory, pushing us below the national average. Prices headed up; income headed down? Sounds a lot like Pottersville.

The rush to get in before everything gets out of reach has set up an unusual and dangerous competition for what seems like increasingly limited places in the middle class. As the premium on housing stocks soared in 2003 and 2004, people routinely paid more than sellers asked, fully expecting the rapid increase in values to continue as far as the eye could see.

As prices rose, all kinds of people flocked to the market. They recognized not only the opportunity to make a buck, but also for some their last chance to get themselves a decent home before it spiraled forever out of reach.

Financing a home in Las Vegas has always been a little different than anywhere else. The number of people with piles of cash and very small W-2s was legion.

Lenders were more generous and more creative than almost anywhere else well before such patterns became national norms. When faced with a dilemma such as the new 6-to-1 ratio between the cost of the average house and the average income, people relied on our legendary economic creativity to find ways to finance homes.

And buy people did, sometimes under ridiculous terms. Low-interest adjustable-rate mortgages, typically fixed for five years or some with balloon payments after the same time, became common, as did interest-only and 125 percent-of-value mortgages.

This wasn't build-equity kind of homeownership. This was something else -- desperate maybe, speculative certainly.

These kinds of mortgages depended on two conditions. The value of the home had to continue to grow and it had to do so quickly. That five-year window in an ARM was pretty tight if the property only appreciated at a 3 percent rate.

We ended up with two common stories in the local real estate market:

I have no sympathy for the speculators who piled on to a hot but risky market -- they deserve their fate. Don't deal the play unless you're ready for what follows.

But people trying to attain the American dream of homeownership merit our concern. These are the same people who a few years before made Las Vegas the "Last Detroit," the last place where you could be unskilled and make a middle-class wage and have it mean something in America.

A few years ago we filled neighborhoods with people who elsewhere would have been on the scrap heap of American economic history.

In that Las Vegas, thoroughly gone now, they could start anew, aspire to better for their children, and if they could control themselves -- always an issue here -- they could fully expect to live comfortably, maybe even own a small boat or a cabin on a mountain lake, and could look forward to a secure retirement.

That door is closed and by all accounts it looks like it'll stay that way.

For a city that makes its living in service, this is a huge red flag, a warning beacon of such strength and power that we cannot look past it. Tourism is the only industry that requires actual people. Everything else can be done virtually.

Las Vegas has a perennial labor shortage. The housing crisis has already made it worse and it will get even worse.

In other tourist towns, people move to outlying communities. Here, those communities don't exist, and when they do they are very far away.

There is no greater threat right now to our long-term stability than the cost of housing. If the patterns continue, it will not be long before the condition of workers affects the quality of service in Las Vegas.

If that happens, we lose the most important edge we have in competition with other communities for the stream of visitors upon whom we rely.

Without great service, even Las Vegas could become an ordinary tourist destination. And nothing will get us there faster than a 6-to-1 ratio between the cost of a house and the average income.

Hal Rothman, a professor of history at UNLV, is a columnist for the Las Vegas Sun.

In Tuesday's Las Vegas Sun: Hal Rothman explores why housing prices increased so fast over the past couple of years.