Banking and Marketing

Real estate market to get worse before getting better

By Phoebe Sweet / Staff Writer

Keith Schwer, executive director of the Center for Business and Economic Research at UNLV, addresses attendees of Preview Las Vegas in 2002 at the Cox Pavilion. Staff File Photo

The stormy economic year ahead will be characterized by disheveled coiffure, garbage cans on the lawn and a migraine headache, especially for residential housing developers.

The economic downturn in Nevada, which is mild compared to housing slumps in other parts of the country, will last at least through 2007 and into 2008, according to Keith Schwer, executive director of the Center for Business and Economic Research at UNLV, during the 2007 Mid-Year Economic Outlook at Green Valley Ranch on June 6.

Schwer predicted subpar growth ahead for Southern Nevada, a continued slow housing market and slowing job growth.

"There is going to be some unpleasantness ahead," Schwer said. "The economy is growing ... but at a slower rate. We really think that's what the rest of 2007 is going to be, into 2008."

But Schwer said about 30,000 new hotel rooms coming online in 2008 and a decrease in excess housing stock will help the economy recover by the second half of 2008.

But before the economy improves, the residential real estate sector will continue to lag, dragging down the Southern Nevada economy with it.

Schwer said there has been a greater decline in jobs for construction in Nevada than nationally, since construction makes up a larger sector of the local economy

"Our state will be impacted ... more than the rest of the nation," Schwer said.

Schwer also said the tourism industry, which employs one in three workers in the state, is currently flat, since it is difficult to improve upon 90 percent occupancy rates.

"We should expand," Schwer said. "It's an economic signal."

Although the recovery from Sept. 11, 2001, was slow, Las Vegas is back to rapid-expansion mode and needs more rooms to come online soon.

Once more rooms come online, job growth rates will improve and the increased demand for housing will help improve the construction sector, he said.

"We're not going into a recession ... where the whole economy goes into the drain," he said. "When you have this much investment and this much under way ... they're betting that the economy is going to be good in five years."

Southern Nevada's short-term challenge will be lack of room capacity. Over the medium term, airport capacity will strain the economy, and long-term national and international tourism competition will draw tourists away.

"We have to continue to look at the whole leisure experience," Schwer said. adding that everything from cramped flights to long taxi lines can drive tourists away. "We have to think of new ways to do this, otherwise we become old. We become Atlantic City."

Schwer stressed that although the rate of job growth has declined, particularly in construction, the number of jobs has not actually fallen and unemployment remains low.

He said the falling number of housing permits is actually a positive sign that the market will correct itself, since the sooner the valley runs through its excess housing stock the sooner the residential market will pick up again.

According to Schwer's calculations, if the number of houses permitted in 2007 and 2008 falls to 27,000 from 32,000 in 2006, the rescission won't end until after 2008 because there will still be 8,000 excess homes on the market at the end of next year. If 24,000 are permitted each year, the slump will be nearly over by the end of 2008. If 21,000 are permitted each year, demand will outpace supply by 4,000 homes by the end of 2008, ending the slump.

Schwer said the faster prices come down, the sooner the market will correct itself.

In the meantime, he said developers should look to make money through niche markets, especially affordable housing.

"Even though housing is going into the tank, there is still money to be made," he said.

The average single family home now sits on the market for an average of 55 days, down from a high of 67 days at the beginning of the year. Condos sit on average 56 days, down from 64 days.

Among Schwer's predictions for Southern Nevada for 2007 and 2008: the number of hotel rooms will increase 4.3 percent and 7.2 percent respectively, visitor volume will increase 2.3 percent and 4.9 percent, population will increase 3.8 percent and 4.6 percent, personal income will increase 6.8 percent and 7.2 percent, gross gaming revenue will increase 4.1 percent and 5.5 percent, housing units permitted will decrease 35.2 percent and then increase 20.5 percent from that lower 2007 number, and Clark County employment will increase 3.8 percent and 4.3 percent.

Phoebe Sweet covers banking and marketing for In Business Las Vegas and its sister publication, the Las Vegas Sun. She can be reached at (702)259-8832 or by e-mail at phoebe.sweet@lasvegassun.com.

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