My last column (Sunday, June 24th) was about the possibility of a recession near-term. On that same RGJ Business front page, the headline was “Reno Median Home Price Tops $350k” and “May Unit Sales Second Highest Recorded.” The two stories seem incongruent. But they aren’t.
Impact of the Recession
In the financial meltdown of the last recession, the Nevada economy was one of the hardest hit in the nation. It found itself with severely overbuilt housing markets (both north and south; Las Vegas today is still considered a buyers’ market) and northern NV’s unemployment rate rose to 13.7% in Q4/2010. In fact, it was worse than that as many wanting work simply dropped out of the labor force and weren’t even counted. As a comparison, the unemployment rate in Las Vegas at that time was about the same at 13.9%.
The Tesla Effect
Then, in 2014, despite severe criticism of state government for giving tax breaks, Tesla landed in Storey County, just over the Washoe County border. At that time I said: “Other companies will see that Apple is here and Tesla is here and they will want to be here too. This is the best thing for Nevada in a very long time.” (RGJ, 9/5/14). I also indicated that if Tesla came to northern NV, we would likely have a housing shortage, but that problem would be better to have than the problem of a continued sluggish economy. In Q3/2014, the unemployment rate in Washoe County was above 7.0%.
As I indicated in 2014, the brilliance of the effort to bring Tesla to northern NV would not be just the growth of business due to Tesla, itself, but the follow on of other major technology companies (Switch, Google…). And that is exactly what has transpired. As vibrant as the economy of Las Vegas is, its unemployment rate today is 4.8%. As a result of the Tesla deal, northern NV’s is 3.9%!
Home Price Recovery – North vs South
Let’s look at northern NV’s housing issues relative to those of Las Vegas. The latest data show that the market prices in northern NV are now about 88% of their peak back in the crazy days of 2006. By contrast, Las Vegas’ median prices are only 73% of their peak values. Just the comparison of the unemployment rates and home price recoveries between northern and southern Nevada is indicative of the significant economic impact the Tesla deal has had on the region.
The Issue of Housing Supply
Still, the housing issue in northern NV is real, and there does not appear to be a resolution to it anytime soon. Time will tell if, when, and how this condition gets cured. Nevertheless, it is important to understand why it remains an issue.
The answer lies in the response of the federal government to the financial collapse. Dodd-Frank and other rules and regulations have handcuffed lending institutions and devastated the ranks of local developers.
• The government blamed “greedy” Wall Street for the financial collapse (that was easy as it isn’t hard to vilify the industry);
• The truth is that government, itself, played a major role, as it was government policy that required Fannie Mae and Freddie Mac to accept low and no doc loans (aka “liar” loans), perhaps the biggest contributor to the housing bubble;
• Real estate markets are local. Pre-recession, most homes built in America were built by local builders/developers with the national building companies (Pulte, Lennar, Toll Bros., DR Horton, …) controlling only a small portion of each local market;
• In reaction to the financial crisis, federal examiners forced community banks to call the loans of local developers, most of whom did not have the liquidity to pay. Those that did survive are but a skeleton of their former selves. Today, they can produce only a fraction of the number of homes per year that they were able to construct pre-recession both because of their now sullied credit histories and because of regulatory constraints on local lenders;
• The result is newly constructed homes, both locally and nationally, are about half of what they were pre-recession, and, nationally, you have to go back to the ‘60s to find such low levels of activity outside of recessions. In northern NV, new supply is not enough to satisfy the demands of a growing and vibrant economy;
Local Boom and National Recession Can Co-Exist
The original topic of this column was how is it possible that northern NV can continue to grow while I warn of the possibility of a national recession. The answer is that, unlike pre-recession when the regional economy had little technology company presence, with the addition of Tesla and the follow-on tech companies, northern NV is becoming Silicon Valley’s back-office and has a leg up on the rest of that traditional non-tech world. Furthermore, it is quite possible that the legalization of recreational marijuana will insulate the whole state from the next recession.
As for the original deal to bring Tesla to northern NV, we can speculate that the governor could have made a better deal (we’ll never know), but the result of the deal that he did make has surely done wonders for the region’s economy.
Robert Barone, Ph.D.
Robert Barone, Ph.D. is a Georgetown educated economist and a financial advisor at Fieldstone Financial. www.FieldstoneFinancial.com.
He is nationally known for his writings and Robert’s storied career includes his having served as a Professor of Finance, a community bank CEO and a Director and Chairman of the Federal Home Loan Bank of San Francisco. Robert is currently a Director of AAA Mountain West Group, the CSAA Insurance Company, where he chairs the Finance and Investment Committee, and Allied Mineral Products. Robert oversees the investment governance program at Fieldstone Financial and heads Fieldstone Research. www.FieldstoneResearch.com.
Statistics and other information have been compiled from various sources. The facts and information are believed to be accurate and credible, but there is no guarantee as to the complete accuracy of this information