(Mike Chamberlain/The Cranky Hermit) – Few, if any, cities experienced the housing boom like Las Vegas. Arguably, no other city has been hit harder by the housing bust. Recently, it was reported that over 80% of all homes in the area were worth less than the balance on the mortgage.
While other areas may be suffering similarly there were conditions unique to Las Vegas that may help to explain why the bust has been more severe, and why it may not end as soon, as elsewhere.
Far from being a bastion of the free market, the housing market in Las Vegas is heavily impacted by local government regulations and by the federal government. In fact, the Bureau of Land Management quite literally rations land for development in Las Vegas. At least it did when there was a market for raw land, that is.
The federal government owns over 80% of all land in Nevada. Virtually all of the land outside a certain perimeter in the Las Vegas Valley, called the Disposal Boundary, is owned by the federal government. In 1998 the Southern Nevada Public Land Management Act (SNPLMA) became law. It provided for raw land to be made available for development through periodic auctions and for the proceeds to be split between certain federal, state and local government entities.
Doug French wrote a prescient commentary for NPRI in August 2002 asserting that the BLM’s system of rationing land through auction was artificially driving up the price of land and, by extension, homes.
In the late 1990s residential land sold for $40,000 to $50,000 per acre. That same land is now selling for $200,000 per acre, and the price of higher-density residential land for affordable, “cluster” homes is fetching $250,000 per acre and up.
On July 30,  after a delay of months caused by an environmentalist lawsuit, the BLM completed an auction of over 201 acres. For the first time the BLM received bids on all 39 parcels auctioned. It also netted $30,929,000—or 41 percent over appraised value. The average price per acre was $150,733. That’s a 30 percent increase over the previous auction’s average price of $116,004 per acre.
[Note: French’s price per acre calculations differ slightly from our own but the difference is insignificant for these purposes.]
Unfortunately, French was right. Even worse, the market distortions caused by the auctions were only just beginning.
The BLM auctions provided for by the SNPLMA began in 1999. Using data available from the Southern Nevada Homebuilders Association (SNHBA) website, we calculated that, from 1990-1999, the median new home price in Las Vegas rose an average of just 2.63% per year.
In the three years after the implementation of the auction system, from 1999-2002, there was an average annual increase of 8.1%. It can take three years from the purchase of raw land until the first home sales occur. So, while perception of value would have some immediate impact on prices, the full impact of the auctions on home prices wouldn’t be felt for about that length of time.
From 2002-2005, the median home price increased a staggering 18.4% per year and rose another 15.4% from 2005 to 2006. The median new home price in 2006 was an unbelievable 77% higher than just four years earlier.
A year before French’s piece, the BLM sold the approximately 1,900 acres that is now Aliante in North Las Vegas for just under $25,000 per acre. In the last auction featuring large parcels in November 2005, the Olympic Group paid nearly ten times as much, more than $240,000 per acre, for a little over 2,650 acres straddling Aliante.
These two transactions bookended a half-decade in which the price of raw land skyrocketed. The BLM auctions were designed to maximize revenue for the federal, state and local governmental entities that received the proceeds. They certainly accomplished this but at the cost of helping to inflate the housing bubble.
About half of the auctions contained a handful of small parcels (usually each was 10 acres or less). The remaining auctions, normally one per year, offered dozens of small pieces in addition to one large parcel (up to 2,000 acres) or a few mid-sized (100-500 acres) that were generally adjacent or near each other and which typically were purchased by a large land developer (and/or consortium of homebuilders) and slated to be developed as a master-planned community.
This created a situation in which the auctions were virtually all-or-nothing exercises for major homebuilders. Either participate in the winning consortium or come away empty-handed and have to scramble to find land on which to build. The effect was an acceleration in land prices and home prices.
Scarcity of land drove up prices, which pushed the price of new homes higher. Speculators and investors, driven by easy money and outsized returns rushed into the housing market, creating artificial demand, which further accelerated home prices. This made builders hungrier for even more land, spurring a spiral that fed upon itself. Until it all came crashing down.
Three months after French’s warning, the BLM held an auction that included 3 parcels totaling just under 1,000 acres that eventually became part of what is now the Mountain’s Edge master-planned community in the southwest area of the valley. The Mountain’s Edge parcels sold for approximately $160,000 per acre, slightly more than the average price per acre for all plots in the auction.
A June 2003 auction of a little less than 1,000 acres garnered an average of $233,739. 485 acres of this was in what became the Providence master plan in northwest Las Vegas, which sold for over $234,000 per acre. This auction also included two larger pieces in the south central part of the valley totaling more than 300 acres that went for in excess of $235,000 per acre.
The next large parcel auction saw a drop in the average price per acre to $179,257. But this sale was an anomaly. Pulte Homes paid just $138,542 per acre for 480 of the 773.75 acres sold. This land was adjacent to Pulte’s Anthem community and, at the time, was infeasible for any other company to develop. Aside from the Pulte purchase, the price per acre of the remainder was nearly $240,000. Ironically, the future Inspirada received no bids in this auction. Some blamed this on the affordable housing requirements imposed by the City of Henderson.
When the 1,940 acres that became Inspirada sold for more than $280,000 per acre in June 2004, even some of the most optimistic began to question whether prices had become unrealistic. After the Focus Group paid nearly $300,000 per acre for the 1,700+ at Kyle Canyon Gateway, many openly discussed the existence of a real estate bubble. The lender eventually foreclosed on Kyle Canyon Gateway with scarcely a rock having been disturbed.
This land at Kyle Canyon Gateway could have been had for just $300k per acre a few years ago.
In less than three years after French’s warning, the cost of raw land at BLM auctions almost doubled. The median new home price increased by 66% during that time and was still headed up.
A contemporary R-J report on the auction in which Olympia Group purchased the land adjacent to Aliante referenced warnings about a real estate bubble. But the combined sales netted over $783 million for less than 2,900 acres, prompting the reporter to state, “land prices in the Las Vegas area show no signs of dropping.” It even quoted an attendee asking, “Bubble? What bubble?” Reading the report today one can almost hear a popping sound.