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There is always talk about what is happening in the housing market, economy, etc. - especially in Las Vegas... We lead the nation in Foreclosures and unemployment, talk about the housing market heading into a "double dip". The recent buzz is "the housing market will slip another 10 - 20 percent".... I could keep going on and on as many do.... The point of this email is to present to you some statistical economic data so you can formulate the best educated opinion on the current market and the projected coming years.

Median Home Prices For Las Vegas

1990 $93,725
1995 $113,800
2000 $138,025
2001 $149,392
2002 $161,492
2003 $185,417
2004 $270,358
2005 $307,258
2006 $316,575
2007 $291,525
2008 $211,358
2009 $142,475
2010 $140,741 estimated
2011 $143,842 projected
2012 $149,342 projected
2013 $156,825 projected
2014 $166,992 projected
2015 $178,967 projected

Changes in Median Home Prices
Las Vegas-Paradise, NV USA

As shown, the median home prices have fallen 55.5% from their peak in 2006, to a level similar to the median price in 2000. Following a low point reached in 2010, prices will be relatively flat in 2011, and mild appreciation patterns are likely to be gradual during the next few years, but will build momentum as the current under valuation begins to correct. Greater rates of distressed inventory absorption and appreciation will occur as economic expansion returns.

Source: National Association of Realtors; Dataquick; Real Estate Economics

Housing Demand And Supply Patterns For Las Vegas

In general, the patterns of housing over supply and under supply are based on a comparison between a given year's ratio between jobs and housing relative to the long-term trend. As shown, the table presents patterns in housing over-supply and under-supply in the region since 1990, with a forecast extending to 2014.

The model accurately measures significant oversupply (mainly due to job losses) which will reach a maximum level during 2010, followed thereafter by a trend toward equilibrium, which is likely to be achieved during 2015, with the market showing tightness in Year 2014. Under-supply is likely to be manifest thereafter. These patterns are shown graphically in the chart below:

Housing (Over)/Under Supply Patterns For Las Vegas

The following chart presents these patterns in over and under-supply by measuring differences between overall demand and overall supply:

Oversupply (mainly caused by significant job losses during the past few years) contributed to depreciation during the past few years.

It should be noted that patterns in housing oversupply or undersupply do not fully describe the health of the overall housing market. Absorption of housing can still be strong in an atmosphere of housing over supply and under valuation. In order to more fully understand market health, patterns in over and under valuation must be understood.

Las Vegas Housing Valuation Patterns

Declining equilibrium home prices will result from weak income and employment growth and gradually increasing interest rates. Pressures on disposable income may offset increases in household incomes.

The blue curve shown in the chart above represents actual median home prices recorded since 1990, and projections to 2015. The green curve presents our modeled estimate of supportable housing values based on the relationship of mortgage costs (which incorporate mortgage rates) with household incomes relative to the long-term balance between costs and incomes. Periods where the actual median exceeds the supportable median reflect periods where the housing market is over valued. When the actual median falls below the supportable median, under valuation is evident.

These patterns in over and under valuation are shown more clearly below:

The model accurately reflected serious levels of over valuation which occurred from late 2003 through most of 2008. Precipitous drops in prices during 2007-08, and continuing into 2009, have caused current levels of unprecedented under valuation, which have been magnified by historically low fixed mortgage rates. It must be stressed that as rates increase, the unprecedented levels of under valuation will dissipate. Given our forecasts for rising mortgage rates and eventual mild price appreciation, levels of under valuation are likely to recede fairly gradually, with equilibrium forecast to manifest after 2015.

These patterns suggest that the ideal time for housing and residential land purchases in this particular region is during the next 12 to 24 months. Thereafter, strong values will continue, but at diminishing levels. Never before have housing values been so strong in this region - reflective of a severe recession, but even more reflective of the impact of extremely tight and artificially low mortgage rates. For those households who are secure in their jobs and can purchase a home with a fixed rate mortgage, there may never be a better opportunity to purchase an undervalued home in this area.

Over/Under supply measures based on current jobs-to-housing relationship relative to long-term relationship between jobs and housing.
Source: Bureau of Labor Statistics: Census Bureau: National Assoc. of Realtors: Rel Estate Economics.

Summary

Nevada suffered from the triple dilemma of many late cycle loan originations, a large second home market and a reliance on gaming and hospitality based employment. These three factors will continue to delay recovery and draw out the ultimate resolution of the distressed home crisis. At the same time entry level homes are more affordable than ever and many out-of-state mature buyers with accumulated equity will consider Nevada as a retirement living area destination. New entrants to the market will find many appealing opportunities at the same time existing residents are leaving their homes in record numbers.

New home supply has declined dramatically and will be unable to maintain a steady supply over the next few quarters. Many buyers, particularly new prospective residents will prefer to buy a new home versus a home in a neighborhood where the current residents are leaving in droves. Clearly, distressed home inventory has been unable to seamlessly meet demand from most prospective owner-occupant buyers. The few builders able to supply homes in the appropriate price ranges will find few competitors and high capture rates.

Economic calamity in Europe will have the effect of keeping U.S. interest rates low and will postpone any rate hikes by the U.S. Federal Reserve, at least until after the November 2010 elections. This same calamity, coupled with increasing financial regulation will also require banks to focus on their own balance sheets, their European and derivative exposures and will make it unlikely that most institutional lenders would move aggressively to clear their inventories of foreclosed homes. The lenders capacity to clear inventories has improved, the staffs and systems are increasingly up and running; a steady ramp up in short sale volume should be anticipated.

Typically during the later stages of a recession, the Federal, State and local governments gradually add jobs, providing tailwinds to the developing economic recovery. Huge budget deficits at most levels of government and past over expansion will prevent this type of employment support and suggests a prolonged return toward higher employment levels. Private sector hiring remains weak due to pending tax increases and concerns over increasing healthcare costs. Cautious consumer behavior and the need to rebuild confidence in housing should drive builder's product and market selection activities for the next several years.

Demand from international buyers is likely to manifest itself to a greater degree in Las Vegas than many other markets. Housing prices that are very low by international standard and an increasingly wealthy foreign buyer pool will make Las Vegas a bargain destination when compared to foreign gaming centers such as Macau, Lebanon and Southeast Asia.

Posted Agust 6, 2010