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Jeremy Aguero, a principal analyst with Applied Analysis, remains optimistic about Las Vegas’ future, saying, “This economy has weathered storms before and I certainly believe it will weather this one.”
By J. Patrick Coolican (contact) 
, Michael Mishak
Sunday, April 5, 2009 | 2 a.m.
Keith Schwer
Alan Schlottmann, a UNLV economist, criticized report Aguero wrote for homebuilders, saying it downplayed danger of massive inventory build-up.
Paul Krugman, the Nobel Prize-winning economist and New York Times columnist, issued early warning about the housing bubble.
Sun Archives
- Vegas PBS offers 'Recession RX' (4-3-2009)
- Economic slowdown predicted through end of year (4-2-2009)
- Economy forces Centennial Hyundai to close its doors (4-1-2009)
- Real estate investment trusts report large losses (3-30-2009)
- Vegas visitor profile: Older, spending less (3-28-2009)
- Building, casino job losses fuel jobless rate (3-27-2009)
- Professionals pessimistic about speedy economic recovery (3-20-2009)
It’s April 2008.
Las Vegas is in the midst of a housing meltdown. Nevada’s foreclosure rate has led the nation for most of a year. Defaults and repossessions are on the rise. And home values are 30 percent off their high marks.
Enter Jeremy Aguero, a principal of the consulting firm Applied Analysis and the region’s most prominent economic forecaster. Delivering his annual report to the business community, Aguero acknowledges the bad news. His survey shows homeowners and entrepreneurs wondering when the market will hit bottom after 20 years of explosive growth.
Comfort, though, is found on the first page of the report, titled the Las Vegas Perspective. Aguero says the economy remains sound, due in large part to the unprecedented amount of investment under way on the Las Vegas Strip.
“The coming years will witness some of the most creative resort projects ever to enter the market, while infrastructure improvements will pave the way for longer-run expansions,” Aguero writes. “These factors will continue to spur one of the nation’s most resourceful and resilient economies forward.”
In the weeks after Aguero’s presentation, however, a series of unfortunate events blew through Las Vegas like a desert sandstorm.
Growth on the Strip screeched to a halt and turned backward: visitor volume fell, gaming and sales revenue declined, unemployment rose and the housing crisis deepened.
Aguero was not alone in missing the crash. Others in Nevada’s relatively small ranks of economic analysts saw conditions as much sunnier than they were, including leading UNLV economist Keith Schwer and gaming industry analysts.
Their opinions reassured businesses considering expansion and Nevadans considering major purchases. Go ahead. No need to hunker down.
Elected officials likewise moved forward. Even as airlines pleaded with the Clark County Commission to stop a planned airport expansion last summer, commissioners marched on, saying new resorts would create new demand.
Some saw it coming
So just how did economic forecasters miss so badly — and continue to miss even as late as last spring?
In many ways, the crash was predictable, especially for a town built on tourism and discretionary income. As early as 2006, a small group of national economists warned that a housing bubble had created trillions of dollars in illusory wealth — and that its bursting would set into motion a series of events that would topple the economy.
In 2006, New York Times columnist and Nobel Prize-winning economist Paul Krugman explained it like this: “Over the last few years, most good U.S. economic news has been the result of soaring home prices. Spending on new houses created jobs and poured cash into the economy. Consumers borrowed against the rising values of existing homes and went on a buying spree, spending more than they earned for the first time since the Great Depression.”
That fall, New York University economist Nouriel Roubini, who had been predicting a housing-led recession for months, not only declared the real-estate ride over, he said “it’s going to be a nasty fall.”
Some outside economists looked specifically at Nevada and saw major problems.
David Shulman, senior economist at the UCLA Forecast and a former analyst for Lehman Bros. who retired well before the company went bankrupt, co-wrote a report on the housing bubble for the firm’s clients in 2004. The report singled out Las Vegas for its soaring home prices.
The Las Vegas bubble had burst, he wrote.
In fact, the bubble appeared to continue for nearly two years, fed in part by local fervor and despite what Shulman saw as clear cautions. “Building houses for construction workers is inherently unstable,” Shulman said. “People should have known that.”
Also foreseeable long before the crash was a “dual credit bubble” Shulman said the region faced: consumers with subprime mortgages and casino companies with highly-leveraged projects.
“No one figured out how highly leveraged both sides were,” Shulman said. “The lesson for analysts and economists is to realize how important the credit channel is in distorting markets.”
At first, most experts, including the Federal Reserve, called those voices alarmist, predicting instead a “soft landing” for the economy. Those opinions slowly changed, however. Toward the end of 2007, it was clear the housing bubble had burst. Nationally, economists began falling into line.
But Nevada’s leading economic voices were slow to follow, as was true in other states.
Florida, whose economy also relies on growth, rode the real-estate boom until the bust as well. The behavior was driven in large part by the state’s history of adding 1,000-plus people a day for the past 30 years, with only a few exceptions, said Gary Mormino, a historian at the University of South Florida who has written a social history of the state.
Outside of an occasional newspaper article on a housing scam artist, Floridians didn’t hear much bad news, he said. “The doomsayers were not audible,” Mormino said.
Shulman, of the UCLA Forecast, said a psychology is at work among economic forecasters: “There’s a real reluctance to stop the party, especially when the market is telling you you’re wrong. That’s why the mortgage industry continued.”
If you foresee a downturn and “you’re right and early, you lose credibility,” Shulman said. “The vested interests want to keep the boom going. If you say no, you look dumb until the bust happens.”
The Strip was also caught up in the euphoria.
I. Nelson Rose, a gambling law expert who writes extensively about the gaming industry, said casino executives and their consultants showed a sort of “psychosis” in pursuing a series of ambitious expansion projects, especially at a time when the industry’s overall growth was slowing, due in part to tribal gaming.
UNLV economist Bill Robinson, who did see the downturn coming, said part of the problem in Nevada is that the more dour forecasters of the past turned out to be wrong. Those included forecasters who said years ago that Steve Wynn or Sheldon Adelson had taken on too much debt or built at the wrong time, only to see their companies enjoy wild success.
Still, Robinson said recent analysts should have taken into account the debt load taken on by MGM Mirage, which currently owes creditors $13 billion. “People should have seen it. I don’t understand why they took on the building projects and the debt they did. They should have known, they should have seen it, and they should have prepared.”
The analysts for Nevada’s main industry also struggled to see the deep flaws in the business strategy of gaming companies. As gaming stocks started to weaken, analysts seemed conflicted.
In January 2008, Bill Lerner of Deutsche Bank questioned whether Las Vegas would weather a downturn after gaming revenue showed weakness in November 2007. “It begs the question: Does the consumer see things differently than in the past?” Lerner told the Reno Gazette-Journal. “We are in a period of economic weakness in the United States as far as fuel cost, interest rates and housing. These numbers are pretty consistent with lousy numbers across the U.S.”
But that same month Lerner also pointed to the gaming sector’s past resilience and suggested the emerging weakness presented a buy opportunity for gaming stocks, predicting that Las Vegas Sands would soar to $120 a share, according to a story in USA Today. The stock rose to $89 before plummeting. It currently trades at $4.49, up from a low of $1.38.
In an interview Friday, Lerner acknowledged that his stock forecasts were off. He said he was blindsided by decisions by Sands and MGM Mirage to continue to fund development projects even when it was clear it was imprudent to do so, which negatively affected their balance sheets.
He also noted that he was correct in raising alarms about overbuilding in the Las Vegas market in particular.
Other gaming industry analysts were as optimistic as Lerner. “I don’t have a lot of worries about gaming” in 2008, said Jefferies & Co. analyst Lawrence Klatzkin. “It’s not going to be a record year, but it will be a solid year.”
In fact, then-MGM Mirage CEO Terri Lanni seemed to be alone in seeing a tough 2008. He said the company was concerned that the weak housing market and rising gas prices would slow corporate and personal travel to Las Vegas and slash spending here.
A small fraternity
Aside from gaming industry experts, Nevada has relatively few economic analysts. The two most prominent are Aguero, who has a degree from UNLV but is not an economist, and Schwer, an economist who runs UNLV’s Center for Business and Economic Research, publishing a monthly economic analysis as well as issuing an economic forecast twice a year.
Aguero is the best known. He’s done work for a blue-chip roster of clients, including the Nevada Development Authority and the Southern Nevada Homebuilders Association.
In late 2007, Aguero did a study for the Southern Nevada Homebuilders Association detailing the softening of the local economy, and the housing market specifically.
“There is little doubt that the Southern Nevada’s residential market is experiencing one of the worst downturns in the region’s history ...,” he wrote. He also noted “the region’s economy continues to report signs of weakening.” He noted consumers’ heavy debt loads and slackening consumer confidence.
But Aguero predicted a soft landing. “Based on historical business cycle trends, the timing of major resort project openings and a review of current conditions, we expect that the residential market will see evidence of a gradual recovery by late 2008.”
He continued: “Moreover, we believe that there is a very real potential that a housing shortage, and more specifically, a workforce housing shortage, will emerge by late 2009 or 2010.”
In interviews with the Las Vegas Sun for this story, Aguero defended his firm’s work and said the Sun is unfairly cherry-picking only those findings that turned out to be untrue. He also noted that almost no one predicted the swift and sharp downturn.
To his credit, Aguero began sounding the alarm on foreclosures in 2006 and said the rapid increase in hotel capacity would exert downward pressure on room rates.
“We try to analyze the market based on the best available information,” he said. “There are certainly things we’ve gotten right and certainly things we’ve gotten wrong.”
He said the recession was unforeseeable.
“Do we believe that when we did the (housing) report and modeled out employment, growth and expectations, that a housing shortage would come earlier rather than later? Yes,” Aguero said. “Did we foresee the type of global financial catastrophe in the last quarter of 2008? Surely, we did not.”
Throughout the winter of 2007-08, Schwer repeatedly referred to the $30 billion in Strip construction as the savior of the state’s economy. As late as April 2008, with the state reeling from the downturn and government facing a nearly $900 million deficit, Schwer continued to beat the drum. He pinned some hope on the 2008 federal economic stimulus plan.
“It is hard to see a big recession coming,” he said at the time. “We aren’t falling off the face of the earth.”
Other local analysts did see the storm gathering much sooner. Those included UNLV professors Robinson and Tom Carroll, as well as John Restrepo of Restrepo Consulting Group and vice chairman of the Nevada Economic Forum.
They had more sober assessments, which ran counter to the interests of the industries hoping to sustain the boom.
“I’ve been told I’m too negative,” Restrepo said in an interview Friday. “But what am I going to do? I gotta call the good, the bad and the ugly.”
Robinson and Carroll said they found the upbeat analysis by more prominent local forecasters a bit baffling.
Robinson acknowledged the difficulty of foretelling economic conditions, but said he was always a little surprised that optimistic assessments continued even as housing appreciation became obviously untenable.
“I sold my house in 2005, and people said to me, ‘Why are you selling?’ I told them, ‘Because if I don’t sell it now, I won’t be able to sell it until 2010.”
Carroll said Nevada has “a lot of self-styled experts. They find out what the client wants to hear, and then they produce it. It reinforces the groupthink that got us into this mess.”
Alan Schlottmann, a UNLV economist and executive director of the Theodore Roosevelt Institute, a research and consulting think tank, said through a spokesman the 2007 report Aguero wrote for the homebuilders was factually flawed because it miscalculated the enormous and rising inventory of unsold homes.
Forecast changes quickly
Although Schwer recognized the crash late, he turned quickly. Less than a week after giving his upbeat assessment last April, Schwer had new numbers in hand.
“We’re getting a clear signal that the economy is headed toward recession,” he said.
All 10 indicators in Schwer’s economic index trended negative, for the first time since it was established in 1990. Job growth slowed, unemployment rose and new home permits dropped nearly 70 percent. Population growth slowed, visitor volume slipped and gaming revenue fell.
In an interview, Schwer said that although he identified the risks of the housing bubble in 2005, he stuck rigidly to the technical definition of a recession as he watched the effects of the collapse. A recession usually is defined as a downturn in four key areas — employment, income, sales and industrial production — for two consecutive quarters. In Nevada, Schwer weights heavily gaming revenue, visitor volume, employment and sales.
Schwer said his forecasts relied on two sets of assumptions. One was that Strip construction would be completed. The other was that this downturn would go the way of the previous two recessions — the early 1990s and the one following the tech crash/Sept. 11 period, meaning business would bear the brunt of adjustments with little effect on consumer spending.
“You don’t want to make a call too early that it’s a recession,” he said.
The effect of the credit crunch wasn’t clear until spring 2008, he said. “We saw a lot of adjustments on the homebuilding and finance side,” Schwer said. “We had to wait to see clearly it was coming from the consumer side as well.”
He added: “It wasn’t a perfect storm. It was a series of train wrecks.”
“Will I make mistakes?” Schwer asked. “Sure. It’s not easy (to forecast). No one knows the future for sure. But it seems like we were honest about what we were able to see at the time.”
What lessons have local forecasters learned?
In his annual Las Vegas Perspective presentation last week, Aguero devoted half of his program to the torrent of bad news about the region’s economy, joking that a piece of sky had hit him on the head that morning.
Nearly every economic indicator was red, he said, including debt, unemployment, gaming revenue, jobs, population and home values.
But Aguero ended on an up note, highlighting the state’s business-friendly tax climate, its potential for solar energy and, yes, its weather.
From a historic context, he said the state was “well halfway” through the recession. “This economy has weathered storms before and I certainly believe it will weather this one,” Aguero said.
For his part, in an interview, Schwer summarized what he has learned.
“Yes, recessions come. No, Las Vegas is not recession-proof. And what happens nationally is really important.”
Sun reporter Alex Richards contributed to this story.
most of the "news" we get in this town is nothing more than massaged and highly polished press releases from public relations people that is then "cut and pasted" into newspapers and websites.
that's why every 3 weeks we get a press release from some real estate "expert" that says "we are close to the bottom of the housing market" and they are wrong every time, yet no "reporter" has the guts to ask "why are you always wrong?"
the ONLY economic indicator that matters to las vegas is the number of people flying into town. period. and that has been down month after month for nearly a year. we live and die based on tourism.
Some saw it coming??? LMAO, I did!!
When houses go up like popcorn and you can't sell your house because there are too many new ones, HELLO!!!
Hey, does anybody see our roads and schools crumbling right now? Or am I the only one driving on Sahara by the strip? Wait, maybe in 5-10 years our Republicans/NEOCONS will "see" that.
I agree, Steven. The hotels believed that they could always get top dollar for their rooms, the show venues expect, and still expect, people to pay that $200 plus for a show ticket, the airlines always believed they could charge totally outrageous air fares to and from Las Vegas.....because people WILL pay and will ALWAYS come to Vegas! Well, now the chickens are coming home to roost! But, the one bright side is: when the economy does start getting better, Vegas is probably in a better position than most cities to bounce back. And I hope TPTB at all those casino/resorts, airlines, etc. learn a huge lesson from all of this. Our country is going to change when all this is over. Maybe even go back to the 1950's way of thinking of save money, don't buy on credit and don't live beyond your means. Hopefully, Vegas will change with the rest of the country. People will always come here, but gone are the days of paying exhorbitant room rates, big bucks for some aging rock star's show (regardless if he is a legend) and $10 for a drink.
"Some saw it coming??? LMAO, I did!!"
vegasj - you are so right! How come the residents that LIVE here saw the housing debacle coming back in 2005/2006 - so why couldn't these "so-called experts" see it? For the builders it was pure greed, for the zoning folks it was greed (I'm originally from Chicago - so you can't tell me palms weren't greased and permits were given out for just about anything regardless of the location - sit in your yard and smell gas from the Shell station right behind you or listen to the trucks pulling into Albertson's at 3:00 am!!). It was a disaster waiting to happen. And now they're surprised?????
Why did the cities, especially Henderson, allow home and commercial builders to go wild with speculative and unsustainable construction? Let's drive up Gibson (yes, the mayors road) to the top of Horizon Ridge. We have:
Vantage Lofts. 1/2 done. Bankrupt. Ugly, looks like an abandoned car wreck.
Then 4 office buildings, only one being used. One has plywood windows-nice. Top of the hill we have a terraced home development. Stopped after they cut the dirt. Next door, we have pile after pile of "solid waste". Rocks and dirt. For sales signs everywhere. Black Mountain looks like a tornado hit it.
So this begs the question-Didn't the City have any plan to control growth? Do they simply stamp the plans to keep their inspectors fat and happy? Any thought that the ugly Vantage Lofts doesn't fit in with the small commercial and residential neighborhoods nearby? Now the inspectors have nothing to do, so they're hiding out in the Redevelopment Office-whatever that is. We now officially live in an sh*th*le town thanks to our public loafers. And thanks to Mayor Jim for a poor job-12 years of nothing....
What do WE see now that others don't??
Republicans think our roads, healthcare, schools, environment are great!! All they say is NO to Obama and him wanting to fix these areas.
Credit Card ratess: Neither Dems or Repubs want to address this one. I wrote Reid and all his basically said was suck it up in his email back to me!! He did have sympathy....LMAO, yeah right!!! Instead throwing a trillion at the banks, they should have paid off credit card debt and regulated how high card companies could go with rates. 27.99%?????
GUNS: Assault weapons KILL PEOPLE, NOT rabbits, ducks, or deer!!! This Constitution Right is WAY outdated when assault rifles are involved!!
vegasj, not to dissuade your rant, but SOMEBODY has to PULL the trigger. To say that guns kill people is to say that your keyboard wrote your post.
Back to the point, experts are generally people who get PAID for their opinion. Normally they are paid by the highest bidder.
I have lived here all my life and I saw the writing on the wall back in 2005/2006 as well. Local government hooked on money will always side with developers. Residents don't line their pockets.
It doesn't just take degrees to be able to analyze- it takes natural brains and natural analytical talent. This community needs to remember the names of those who did see it coming, and ask their opinions in the future. I don't have an econ degree, but I could have told you that there would be plenty of houses on the market when the many ARMS coming out readjusted. That's just plain common sense. But I didn't know how large the problem was, and how much it permeated the rest of the country, and even the world. But, then, I'm not in the business or econ field at all. Where are those people? Is anybody on first in this state? This article is really eye-opening. Nevada: the blind leading the corrupt.
Kind of reminds me of the current economic forcast from Pelosi/Reid/Obama, as good of forecast as they demand from the forecasters.
It is like "global warming", a concencous build on delivering the news the buyer wants. If you disagree with warming and it coming from man made CO2 you are out of work.
I wonder who will be left to right about how did so many get it so wrong. Maybe some European newspaper will write about the decline of America's obamanation after the collapse.
VegasVegas provided a great link to read. The people giving this guy grief are unbelievable. I was wondering about this correction in the 90's.
Forecast, Predict? Republicans came out with an alternative budget that was the EXACT same thing that got us into this UNpredictable mess, what a joke!! It was April fools day, so I guess this article today and their budget should be worth a few good chuckles and a spit on the ground.
The reason that the experts got it so wrong is that they were paid, handsomely, to produce results that conformed to the policy needs of the economic and political elite of the region. As with the very real economic collapse, the same thing that happened in Vegas happened in the Southwest, in the United States, and globally - but as with the economic collapse, it was and is most dramatically, nakedly obvious here.
It could be called greed, and greed is an aspect of it, but the systemic way that research is preverted to serve narrow interests is something bigger. For an example, look at the publicly financed "study" produced by Aguero and friends in 2003 for the Southern Nevada Water Authority, working on behalf of the Southern Nevada Home Builders Association. The study "proved" that any government effort to temper region's hyper-growth would lead to economic apocalypse.
The fact that the growth was in fact fueled by easy credit, expensive government market intervention and policies, and an epic real-estate Ponzi scheme referred to as "the bubble" was ignored.
The analysts also managed to ignore the damage done by the growth - environmental destruction, the dismantling of our quality of life, and the wholesale devaluing of property values.
The comic part of this tragedy is that we paid for that study and others that propped up disastrous public policy, pushed on us from the business cliques that had only their own interests in mind.
launce is exactly right.
if someone that makes a living out of selling real estate says "we're almost at the bottom. it's a great time to buy a home." you have to pretty much throw that right in the trash can.
and that's essentially the "news" we get anymore.
just like the p.r. types for the casino industry back in september that were saying "vegas is recession proof, people will ALWAYS come to vegas" because if they said "umm, ya, we're screwed" ( which REAL data shows they are ) they wouldn't get that nice check each week.
one good thing about the recession is that i'm dating hotter girls now because their standards are really low. they'll date anyone that will give them a free movie and a dinner. i might have bought my house at the wrong time, but i picked a GREAT time to be single again.
vegasj, Your grasp on what has happened to the economy merits you one shopping cart and a handful of food stamps.
getalife -- got to side with you on this one.
Always follow the money, always looking at who's paying the "expert."
And learn, herd, to recognize propaganda for what it is, then seek the truth.
Because they are not real world experts...they are academics with no basis in reality.
tvegas.....you hit it on the head..."no basis in reality"
Neiman1
Leave it to you to bring Obama into the mix!! Dude, go back into your Rip Van Winkle-like coma. Wake up in the next 20 years and maybe W's grandchildren will be in power and you can have things the way you want. Why are you even still in Vegas since he's beaten us down to a pulp?!?!? Move away. Trust me, we won't miss you. Instead of tearing down, try to uplift. Hope and change!!!
If you live long enough, you get to experience the various changes in economy. So far, this appears to be the worst cycle within 50 years.
Our society has totally deteriorated. The most influential character flaw with this world wide economic fiasco is due to greed. Money is a wonderful thing, but, when you sell yourself out to the devil.........you end up in hell.
How many of the Masters of the Universe are in hell now.
VegasVegas.......thanks for the link! I'ts amazing how people have a problem with admiting that they screwed up......is it arrogance, stubborness.....or just plain ignorance.
I think this is a whole lot of wishful thinking and not much analysis.
Real economists, like Nourini, say we are headed 20-30% lower in home values and have another $1.6 trillion in foreclosures still coming down the pike (assuming the govt does not break all mortgage contracts, especially ARM's and force the banks to renegotiate at fair fixed rates).
We have only seen round one in this disaster.
Contact Harry Reid's office and gently point out to our esteemed Senator that the Obama plan to help people a mere 5% underwater doesn't do a thing for Las Vegas. If they don't force every mortgage company to fix rates, and in some cases lower principle, this circus isn't even halfway over yet.
If there was an 'expert' that was capable of predicting the future with accuracy, who would listen, much less have the ability to take the necessary proactive measures which assured undesired predictions would become unfound?
I was misquoted. Here is a link to an article I wrote on what I see as an economic depression. Prof. I. Nelson Rose.
http://www.pokerpages.com/poker-news/new...
"VegasVegas" that was a pretty "in your face" good news link,...Greed, absence of reading fine print and forethought,...and wishful thinking...when you brush it with a broad stroke thats all it amounts to, really.....
Vegas need to be re named Jericho because its fall is happening as we speak. Vegas was built in the desert with water that belongs to California and the desert is winning.Each time I fly in for the past 20 years I see Lake Mead lower and lower.
There's a saying in the panhandle of Oklahoma that the only people who like to foretell the weather are TV weather forecasters and fools. People who like to foretell the economy are like the latter in the Oklahoma euphemism.
If you think nobody predicted this disaster go to youtube and search for Peter Shiff. He hasn't been too hot about how the crash would carry out but he like many others saw this coming for a very long time.
p.s. the Fox Business report from a few years ago where the brilliant Fox panel ripped Peter apart for saying there is a housing bubble is absolutley hallarious now.
from my post above:
go to you tube and search "Peter Schiff 12-16-06"
Talk about experts getting it wrong...
Peter Schiff 12/31/2006
More like expert @$$hats