Las Vegas housing prices are in the toilet. The latest numbers show prices there have fallen -37.3% in the past year and -51.1% since 2006. The state of Nevada leads the nation in foreclosures — 10,000 in March alone — and seven out of ten Las Vegas mortgages are underwater meaning the homeowner owes more money than the home is actually worth

But the best deal in Vegas isn’t real estate. It’s MGM Mirage (NYSE: MGM).

The embattled casino company, controlled by billionaire Kirk Kerkorian, owns Mandalay Bay, the MGM Grand, New York-New York and The Bellagio, Vegas’ crown jewel. Not content with that impressive portfolio of premier properties, MGM is developing a massive $8.4 billion project known as CityCenter. (According to their web site, this is the correct name.)

In the long run, CityCenter should be great for MGM. In the near-term, it’s an unmitigated disaster. That’s because the project has diverted investor’s attention from gaming — which MGM knows how to do best — to how the company will finance this ambitious new project.

Let’s face it: Debt’s gone out of style since the downturn started, and CityCenter’s massive price tag has scared investors silly. Why? Because investors fear people won’t gamble in a downturn and the prospect of building even more places to gamble — and on such a grand scale — seems like a losing bet. That’s why MGM’s stock has cratered -60% this year — on top of a -83% decline in 2008.
That’s nuts. The shares are a steal. Here’s three reasons why:

1. Downturns may not encourage profligate spending, but they’re no reason to think Vegas is going to turn the lights off. Business is actually pretty decent. In fact, in the first half of 2009 MGM’s stock has lost -71%, while its gaming revenue has decreased only -8.9%. Sales overall — boosted by discounted room rates and other attractions — have only slipped -5.9%.

2. MGM is a market leader, not just in terms of gaming, but in terms of the overall stock market. To wit: During the five years ended Dec. 31, 2008, the S&P 500 Index — the market’s benchmark — notched an average compound annual loss of -7.9%. During that time, though, MGM’s net asset value — “shareholders’ equity” if you like — grew by +7.5% a year, beating the S&P by more than 15 percentage points.

(If that measure seems familiar, then you’re probably a fan of superinvestor Warren Buffett. That’s how he calculates his performance. Berkshire Hathaway’s average annual growth in equity during the same period, incidentally, was +7.3%)

3. Though none of the casinos look great right now from a net earnings perspective, we can make some comparisons based on the balance sheet. Right now, the S&P is trading at an aggregate 1.97 times book value, (book value is the part of company shareholders own divided by the number of shares outstanding). MGM’s cross-town rivals Sands and Wynn are both trading pretty close to the average, at 1.11 and 2.08, respectively. MGM, for its part, is trading at a mere 0.40 times its book value, which means it’s trading for less than the sum of its parts. What’s more likely: The entire S&P losing three-quarters of its value, or MGM rising to meet the index’s average? I’ll take Door No. 2, Monty.

Now, CityCenter isn’t some dinky little room addition on the back of a Hilton. It’s the largest development in Vegas’ glittering history, and it’s going to cost a fortune. Investors were scared that financing would fall through during the credit crunch, and that’s what pushed the stock down. But after MGM got the financing in May, its shares quickly rose from their early-March nadir just north of a buck to an almost-respectable $13.50.

Then, as is prone to happen in Vegas, they crapped out. The company said it would issue more equity to raise dearly needed cash, and investors again backed away from the shares, fearing their value would be diluted.

MGM is now trading at about $5.50. The shares have far more potential than even the best condo deal on the Strip.