Housing market likely to flatten, experts say

July 13, 2005

By Kevin Rademacher
LAS VEGAS SUN
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.

Real estate can now be ‘stolen’ legally

Terri Choate

7/7/2005 01:09 pm

The thing to note about real estate is it’s real: its touchable, walk-able, dig-able. It’s a tangible asset. It invites participation. What can you do with it? It invites dreams even as it may lay fallow in the present. Or maybe you can use it now. Maybe you can live on your real estate for 87 years or vacation on it, or if it’s a plot in the vast countryside, you can at least go have a picnic there. Real estate is too large to fit in a back pocket, and it’s doesn’t disappear, say, in a stock bust.

Yet now it can be taken—i.e. ‘stolen,’ legally. And that’s because five liberal Supreme Court justices have been wise enough to recognize big dreams can supercede your selfish little plans. So, using the power of eminent domain, your friendly local government can take your property and give it to the big dreamers.

Of course there is a catch. The big dream must have a public purpose (sigh of relief).

But wait (sigh of despair), the court majority defines public purpose as increasing the local government’s tax revenue or employing more people. Where, oh where, I ask, is there a local government that doesn’t smile on increasing its revenue?

‘Eminent domain’ has a long history in British, and subsequent American, common law. In Great Britain, the term used is more descriptive: ‘compulsory purchase.’ Governments have long been able to take property for ‘public use,’ such as to build a highway or bridge which have, then, public ownership. The 5th Amendment to the U.S. Constitution limited eminent domain further; property could not be taken ‘without just compensation.’

Over time, chinks developed in this wall of protection for the private property owner. Property began to be taken for uses that did not always have public ownership. States used eminent domain for private roads and irrigation ditches that had public use and benefit.

But probably the largest departure from a strict definition of public use came in the 1950s, when the Supreme Court encountered urban renewal and liked it. Removing unsightliness (‘blight’) was ruled justification for the taking even of individual property in a renewal area that did not reveal blight (Berman v. Parker, 1954). Such renewal projects, although authorized by a legislative body, are accomplished by private agencies with public-sounding names as, in the most recent case, New London Development Corporation.

On June 25, the Supreme Court ruled in Kelo v. New London, that the private New London Development Corporation could have the property of 15 waterfront homeowners in a neighborhood described as working class, but acknowledged as not blighted in the majority opinion, to support a redevelopment project that will include a large facility for Pfizer pharmaceuticals and perhaps a luxury hotel, condominiums and a river walk.

Suzette Kelo bought her home a few years before the project’s launch in 2000 and remodeled it extensively. She doesn’t want to move. An elderly neighbor has lived in her home for the entire 87 years of her life. The home has been in her family for over 100 years. She doesn’t want to move. A 79-year-old widower doesn’t want to move. But maybe these are sob stories that shouldn’t concern us until the knock is on our door.

I hear a tap: The Institute for Justice, which brought Kelo’s case to the court, reports threats to use eminent domain to hand private property over to new private owners exceeded 10,000 between 1998 and 2002. In her dissent to Kelo, Justice Sandra Day O’Connor said, “The specter of condemnation hangs over all property. Nothing is to prevent the State from replacing any Motel 6 with a Ritz-Carlton, any home with a shopping mall, or any farm with a factory.”

If you are poor, the tap grows louder: In a separate dissent, Justice Clarence Thomas noted: “Allowing the government to take property solely for public purposes is bad enough, but extending the concept of public purpose to... any economically beneficial goal guarantees that these losses will fall disproportionately on poor communities....

“Of all the families displaced by urban renewal from 1949-1963, 63% of those whose race was known were nonwhite, and of these families, 56% of nonwhites and 38% of whites had incomes low enough to qualify for public housing, which, however, was seldom available...”

We have an ironic dichotomy here. The five liberal justices (Stevens, Ginsburg, Breyer, Kennedy, and Souter) have ruled for upscale, corporate interests against the interests of 15 working class households, and the four conservative justices (O’Connor, Thomas, Scalia, Rehnquist) have supported the interests of those less economically enabled.

Of course, there is another way to read this: we have five liberal justices supporting an extension of government power verses four conservative justices who would rule for the individual. I believe this is the correct perspective. How odd that this case creates such strange bedmates as AARP and the NAACP filing amicus briefs with the court in defense of the home owners, right along side the libertarian Reason Institute.

The proper use of eminent domain is an issue of concern in Nevada. Here in Fernley we haven’t had a great deal of commercial development. Do you doubt it will come?

Nevada had a particularly nasty property seizing in Las Vegas in 1994 when property owned by the Harry Pappas family was seized and razed for a casino parking garage (The Fremont Street project). Mrs. Pappas was offered $450,000 for her property, but refused and sued the city. She won her case in district court, but lost in the Nevada Supreme Court in 2003.

In 1998, JFK Jr.’s “George” magazine looked at the Pappas case in naming Las Vegas one of “the 10 most corrupt cities in American (www. nevadaindex.com).” The magazine pointed out that up to that point Las Vegas had spent $700,000 in attorney fees defending the seizure, adding that “although the slot machines teem with cash, Las Vegas’s city coffers are far from flush.”

In 2004, the city’s coffers suffered another blow when a four and one-half million dollar settlement was reached with the Pappas family. Who can tell if there has been any benefit to Las Vegas citizens from the $29 million parking garage that sits on a portion of the former Pappas property. The question is, apparently, moot.

Who can tell if there will be a benefit to the citizens of New London, Conn., when the 15 waterfront homes are torn down and replaced with redevelopment. That question is moot also. In his majority opinion, Justice Stevens deferred to the judgment of the City of New London that there will be benefit without any review.

So what is your property and my property worth in the grand scheme of things? The answer may be not much if we’re within the boundaries of a grand scheme of things. Woe to the church in or abutting a commercial zone. Woe to the homeowner in an area needing a facelift, especially if an assembly plant wants to come to town. Woe to the rancher who doesn’t want to turn his land into a suburbs.

Since the court majority is of a modernist bent, i.e. not inclined to look into the original intent of the founding fathers to protect property, threatened property owners are not to be helped by judicial restraint. There remains legislative relief. US Senator John Cornyn, a former Texas Supreme Court justice and Texas attorney general, introduced a bill into the Senate on June 27 to protect property from transfer through eminent domain when federal money is involved and the property owner objects and when the transfer is for economic development.

However, funds are fungible, and redevelopment may well be financed with state or local funds. In that case, state legislative action is the best bet to hold off takings. But state legislatures are often tuned into local government wishes and in any case may not buck a majority popular will to redevelop. Even if there’s a potential threat to all property owners, at any given moment the focus is only on a few beleaguered holdouts. So as we shrug, we hope there is some truth to the internet rumor that the town of Weare, NH, has received a request to begin the process to build The Lost Liberty Hotel at the location of Justice David Souter’s home. Without a doubt this is an opportunity to fill the coffers of Weare with mucho gold bullion.

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