A subscriber to Real Estate Decoded emailed me the original idea for this post. Thanks, Hal!
What would have happened if we didn’t have real estate bubbles in Las Vegas and Phoenix?
According to many economists, both cities had “contagion” bubbles, bubbles that spread from California.
Las Vegas and Phoenix didn’t really have the economic fundamentals for a real estate bubble but a vast amount of money flowed from California into Las Vegas and Phoenix real estate triggering their bubbles.
Home price increases in LA sort of pulled up home prices, first in Las Vegas and then in Phoenix.
“Hi, I’m Calling From California”
As a real estate agent in Phoenix during the boom, it certainly seemed to me that the boom spread from California.
Many of the calls I got during the boom were from LA first-time, real estate investors who were afraid of missing out on the real estate boom but were looking for inexpensive homes (by LA standards) that weren’t old dumps.
That’s how Las Vegas and Phoenix real estate got sucked in the vortex of LA irrational exuberance. Soon local investor/speculators joined in.
Whether they were from LA, Las Vegas or Phoenix, I think they were caught up in a weird psychological phenomenon.
They all had friends or acquaintances who were
bragging about explaining the big money they were making in real estate and my California callers didn’t want to miss out.
Then if they made some money on their real estate investments, it seemed they doubled down and put the money right back into real estate. They were optimists. They ignored the pessimists. They grew larger and larger until the music stopped.
Afterwards, you could hear some say they would be millionaires today, if they had sold at the top.
But selling wasn’t the mentality that got them into owning multiple investment homes in the first place.
Before their bubbles, real inflation-adjusted home prices in both Las Vegas and Phoenix were increasing at steady rates from the late 1990s to the early 2000s.
- What if Las Vegas and Phoenix didn’t have those real estate bubbles?
- What if real prices kept increasing like they were before the boom?
- What would home prices be like today without the bubbles?
This is a fun game to play and, of course, we don’t know for sure what would have happened but I think real home prices would be higher today in both cities if we never had the Great Real Estate Bubble.
And the bubble hurt and continues to hurt the economies of Las Vegas and Phoenix.
The people who bought homes in 2006, 2007 and 2008 lost money. Their net worth took big hits, especially if they didn’t have much net worth to begin with. Some are still underwater today on homes they bought 10 years ago.
Many have a lot less retirement money than expected, not only because they lost money on their homes but also because of the super low interest rates the Fed was forced to use to shore up the economy. The two cities are poorer today than they would have been without their bubbles.
Phoenix vs. Dallas
Despite very different journeys, real home price appreciation since 2000 is almost the same today for Phoenix and Dallas. They have the same appreciation but Phoenix has more mortgage debt left over from the boom.
Which city is doing better economically?
Phoenix is falling behind Dallas.
There are a ton of differences between the Dallas and Phoenix economies. I think, however, an important difference is the Phoenix real estate bubble and its impact on household debt and net worth.
A lot more people lost a lot more money in real estate in Phoenix than in Dallas and that slowed the Phoenix economy and still does.
- Looking at Texas, it’s clear to me more stable home prices lead to greater household net worth and overall economic growth.
- The Great Real Estate Bubble is still a drag on Phoenix economic growth 10 years after the peak.