This topic has been at the forefront of the mind of the Vegas Real Estate Guy for quite some time. What we are seeing in today’s real estate market, even more so here in Las Vegas, is an acute correction to the expansion and explosion of the suburbs. The great housing expansion of 2001-2006 saw tremendous growth in metropolitans all over our great country. This growth was concentrated where in places where there was little concentration – on the outskirts. The saying was “drive till you qualify” amongst the homebuilders and it was as true as the sky is blue (like every day is here in Las Vegas).

The Perfect Storm

Well, presently in 2008 we are in the midst of the one of the largest housing downturns in the history of mankind. But we must remember the massive surge in housing values that facilitated the possibility of such a fall. A surge that is often compared to a perfect storm that pushed housing prices from affordable to barely attainable to ridiculously beyond one’s means.

· In 2001, the planes crashing into the Twin Towers on 9/11 sent shockwaves across the world with much more repercussions than just real estate. It changed everything and as soon as it happened, I said “flying from place to place has changed forever.” And it has. But what happened to the real estate market? In the Las Vegas real estate market, the municipalities had no idea what was going to happen. Neither did the private sector. This led to record low pulling of housing permits in the Las Vegas Valley. Since no homes were being built and people were still moving here to the tune of 6,000 per month, the houses on the LV MLS were being bought up rather quickly. Also, what happened here was that the thought of a recession made everyone feel really bad. Greenspan lowered interest rates as quickly as he could and was destined to keep them there for quite some time.

· In 2002/2003, Las Vegas and all of the West are in the midst of one of the worst droughts on record. Pat Mulroy at the Southern Nevada Water Authority does the unthinkable until she can figure out how to solve the future growth needs of the Vegas valley. She issues an edict that no more building permits can be issued (since she will not issue any more water will-serves) until they understand the future water supply for new growth. At the time, this seemed reasonable, but of course, people kept moving here and the MLS listings for houses went from 14,000 down all the way to about 400 listings valley wide. No new homes were being built and speculators were starting to run rampant over the idea that there weren’t going to be any houses available for quite some time.

· In 2004/2005, the price for houses in Las Vegas were growing over 50% per year. The number of new homes being built was a staggering 35,000 units in 2005. There were lotteries for house releases and homebuilders had folks camping out overnight, that’s right, freaking camping out overnight, to get their hands on any available houses in releases. Homebuilders were releasing homes in sets of 4 per week (normally releases are between 8-12 units per month) and every release they were raising pricing by $10,000. It was absolutely insane and a lot of it was simply speculation on the real fact that people could not find houses and building permits were stagnate for so long before this run-up.

· Interest rates – all along this massive climb in pricing were the extremely low interest rates created by Alan Greenspan and the FED. These interest rates were low and were kept low for a long time to help avoid a recession. At the time, we all loved it. Money was cheap, things were growing, and people were making money. Sometimes insane amounts, but still…

· Subprime loans – this is a topic for a whole different article, but suffice to say people were getting stated income loans earning $2k/month with FICO scores in the 500’s. And they weren’t just getting $100k in loans. Many times, people were committing fraud by stating their income WAY higher than what was real, since the obvious exit strategy was to simply flip out of the home at some point and not have to make high payments after their ARM’s adjusted.

Builders were gobbling up land in Las Vegas as quick as they could find it available. Not that it met the right criteria for location or density or price. That simply did not matter; they were buying if anyone was willing to sell. That drove prices for houses even further along.

“Drive Till You Qualify”

Since pricing was insane and appreciation was clipping along at 50% per year, people were having a very difficult time qualifying for loans, right? Not so fast. There is plenty of land on the outskirts that can be had much cheaper than the stuff closer in and people can “drive until they qualify.” This saying is obvious, but I will explain anyhow. It means if you can’t afford a house close into town because pricing was so high, you can always find cheaper housing further out. If you drive further out and you still do not qualify, then keep driving until you find a subdivision that you do qualify.

Here in Las Vegas, the homebuilders were justifying very large land purchases for future development by simply using case studies found in California and other large metropolitans. They were say, “people drive 45 minutes one-way to work all the time in California and they will do it here as well.” This made perfect sense when things were going well. In today’s market, this theory may not hold much water.

Then add the “x” factor to everything we talk about here – gas prices. Everything has changed with the massive increase in gas prices across the country and the world. No longer does it make sense to drive all that way. Matter of fact, people are getting rid of their SUV’s and pickups in droves for smaller more fuel efficient cars, just to stay on par with what they had before in cost savings from being further out. Since I sincerely do not believe gas prices are coming down anytime soon, this moniker of simply driving until you qualify is all but dead.

The Suburb’s Future

The good folks over at CEO’s for Cities developed this amazing white paper on the subject. It is called “Driven To The Brink”. It takes a long look using good solid data that shows the coming trend that just might lead to the Death of the Suburb’s. There are several factors that lead to this concept and here are just a few:

1. The “greening” of society is making it not only mandatory to drive less, but it is now becoming “cool”

2. The massive trend towards de-cluttering one’s life and living within one’s means

3. Massive appreciation in the price of gasoline and the price of oil

4. Fresh wounds from home-buyers looking for more established neighborhoods closer into the city. People are less willing to take chances on unproven commodities

5. The push for sustainable living through mixed-use development that puts the center of housing development around the live-work-play initiative and away from the car-centric theme

In this white paper, there are some great points made about where they believe suburban living is headed and why. I strongly suggest anyone either in the real estate business as a broker, agent, mortgage person, appraiser, investor – whatever, as long as you are in real estate in one form or another – to read this white paper and see how it affects you and your market.

In conclusion, I feel strongly that the future of housing does not rest in growing our suburban footprint. Suburbs were a phase of the housing life curve that is now upon us and has played itself out. Gas prices, among other key items, will play an ever-increasing role in keeping us from spreading out further for our every day lives. I do believe, however, that the present footprint of our suburbs will not shrink. It will change over time as these now sprawling cities will become more fractioned and you will see several sub-metropolitans created over time. Each smaller city will have a city-core and have all the facets of it being a sustainable place to live. But it will not be car-centric and it will not be a suburb.

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