ROULETTE, BLACKJACK, AND TEXAS HOLD ‘em apparently lost their allure to gamblers in Las Vegas. Perhaps the stakes weren't big enough. Maybe the odds were stacked too much in favor of the house. And maybe because, until recently, the favorite game of chance in Sin City seemed to be betting on new homes.

This seemed like a good bet. New home prices in Vegas have been going up, up, up—35 percent in the past year. So the thinking went like this: Why not put down next to nothing on some bricks and mortar, tap into that cheap adjustable rate money, and flip it in a year?

But the gaming ended this fall nearly as quickly as it began, sending shock waves through an industry that had been giddily riding a hot streak. Homes for sale in Las Vegas bloated from 1,400 in February to 16,000 in August as investors headed for the cash window.

The Tables Turn With a glut of homes on the market, foot traffic in new home communities slowed by as much as one-third. Pulte Homes reacted by cutting its prices by 5 percent to 25 percent, and several other builders followed suit. Pulte announced that problems in Las Vegas could affect its third quarter earnings, a very prudent thing to do.

The vultures immediately circled overhead. Barron's, to public builders the equivalent of a muckraker, reported that Doug Kass, a hedge fund manager, had cut his earnings and stock price forecasts for Lennar, Centex, Pulte, and Toll. He said that the rise of the speculation was a big negative in home building, one that would spread rapidly to other markets.

Other builders set out to quell the disturbance. MDC Holdings, which does business as Richmond American Homes, reported that even though third quarter sales in Vegas fell 50 percent, at six homes per community per month, they still stood at a healthy level. And even as sales rates fell, “we generally have maintained the significant home price increases seen in our Las Vegas communities earlier in the year and have continued to increase prices in certain communities, albeit at a much slower rate,” says Paris Reece, MDC's CFO.

Sales incentives in Vegas, Reece says, are no deeper than those in other markets. Cancellation rates in the third quarter were consistent with the year before. “We believe that the market for new homes in Las Vegas in our price points is healthy,” he says, adding that the company has 10 new model complexes set to open soon.

Where Did They Go? Speculation by investors appears to be at the root of softness in some Southern California markets as well. “Twenty percent of our buyers have disappeared in recent months,” says David Jacobsen, senior vice president for sales and marketing a Regis Homes, a large condo developer in Southern California. “The investor buyer has pulled out.”

A sales slowdown in Southern California marred an otherwise great third quarter for Standard Pacific. While net new home orders were up 15 percent in the third quarter, they were down 12 percent in Southern California, primarily due to a sales slowdown in Orange County. Yet analysts report that new home prices from Los Angeles to San Diego have held steady rather than declined.

As reports of price softening proliferated, Greenspan weighed in by telling a convention of community bankers that, while surging home prices are a cause for attention, it was unlikely that a housing bubble could pop. Homeowners who bought more than a year ago enjoy an equity buffer that would help them withstand all but a deep price decline, which he called unlikely.

Learn more about markets featured in this article: Los Angeles, CA, Las Vegas, NV.