Statistics provided by the Greater Las Vegas Association of Realtors reported that in June of 2013 the median home price in the Las Vegas area was $183,569. That is a nearly 38% increase over the median price of a single-family home in July 2012 and up 55% since the bottom in Jan 2012. The $183,569 median is also akin to the same median of late 2003/early 2004.
On the surface it is easy to come to the conclusion that prices are simply rising to the pre-bubble prices prior to 2005. Real estate markets though offer other clues to determine the motivation of buyers and seller and indications of what may be to come.
Some of the most savvy real estate professionals and investors who have been dialed in to the post-crash market are wary of the rapid price appreciation. In my own business, I was advising buyers to quickly purchase in late 2011 and early 2012 when foreclosures halted in anticipation of an inventory shortage. I wanted to get them a home, before a price spike hit. I was worried the buyers might become afraid of the market change, or even worse, no longer qualify! Luckily, most were able to purchase during this time period and they are sitting in a great position today.
If you want my conclusions, skip to the bottom. If you want to know “the why”, keep reading!
Some of the troubling aspects of our Las Vegas real estate market are as follows:
- Until about 2 months ago we had been in a low inventory environment since the 2nd quarter of 2012 after the implementation of NV 284 (the anti-robo-signing legislation which virtually halted foreclosures for over a year). Over the last 6 months however inventory has increased 60%! Sales have been flat at around 3800 units per month since March of this year.
- There is a conversion occurring from a seller’s market into a buyer’s market. The reason any buyer wouldn’t think this to be the case is based on their experiences they have witnessed themselves or have hear stories of multiple offers situations, buyers being forced to pay for short sale negotiation and assorted extra fees. Due to the large amount of cash buyers, getting closing costs paid has been quite rare, even on financed offers. How can this be if inventory is increasing? The reason is simple. Distressed real estate makes up only 16% if the available inventory and that is where the cheap prices have resided. With that comes the highest demand. Many buyers are now becoming more patient as their choices on the amount of homes is increasing quickly for the first time in years paired with their reluctance to pay high prices. This is less the case in the under $125,000 market but more prevalent in higher ranges.
- Too many investors purchasing homes in Las Vegas. This is not healthy. This is institutional money being invested in our market and it is short term. These investors will leave. They are not like traditional owner-occupants who are here for the long haul. The danger is when they do leave they could do so quickly in order to try and protect their gains. Doing so could place large numbers on the already flat sales market. Once buyers sense a potential glut, the slow-down often becomes self-fulfilling, pulling sales and prices down.
- Some of the large hedge funds are slowing down their purchases or stopping as their projected rents are no longer attractive when compared to purchase prices.
- New Homes: the average price is around $265,000, almost a whopping $100,000 above the median resale home. These homes are grossly over-priced and quickly lose value in a year or two when as resale homes they must go the market and compete as like properties with other resales.
- More notes about new construction homes: the parallels to 2005 are eerie. I can still remember one of the first salvos of the market correction when Pulte Homes lowered in many of communities by a straight $100,000 across the board in July of 2005. Imagine you were a home homeowner who saw that report on the news a month after you closed escrow. New homes are over-priced! I cannot stress that enough. They have plenty of room to roll back prices and that is dangerous. They can trap their homeowners in underwater positions when they significantly reduce prices. Realtors are also once again seeing very high commissions in some new home communities. When commissions go up it another sign that things are not well. We have also seen some lotteries at new homes sites. Imagine that, a metropolitan market such as Las Vegas with 44,000 vacant homes and over 80,000 mortgages not being paid is having home lotteries!
- The price of money and interest rates: we have become so used to these low interest rates that the average person gives no thought anymore to their meaning. The government has been printing money to stimulate our economy for four years now. Essentially, they are giving it away for nearly free. It is not however being given to you and I. It is being given to large financial institutions and they can’t buy stuff fast enough. These guys are simply looking as Las Vegas as an investment pool. You can’t fault them for it. It is their job to make money. Do not however look at their purchases as any sign of a true recovery. Few things have more impact on a real estate market than interest rates and we all know we have benefited from artificially low rates due to Feds monetary policy of Quantitative Easing, pumping money into the economy to stimulate it. Interest rates are in the opinion of most in the Industry are set to go up over the next year. The higher they go, the more they erode the purchasing power of the buyers.
- Las Vegas home prices trends over the past 8 years versus the previous 20 years have been composed of wild swings, not the slow line appreciation or depreciation. 2004-2006 saw the bubble, then the cascading crashes of 2007-2008. We saw an REO (foreclosure listing) bubble in 2009 as buyers wanted to take advantage of the $8000 tax credit. 2010 saw more falling prices when the “tax credit bubble” ended. In early 2012 prices started up and are now up 48% since that time. Some of the hotter neighborhoods such as Summerlin are up even more than that. In 2010-2011 you could pick up two bedroom condos for $50,000 all over MLS and now most of those are $80,000 and above.
- The basic problem of the real estate/foreclosure crisis has still not been fixed. The fundamentals are still wrong, 80,000 homeowners not paying their mortgages and tens of thousands of vacant homes still loom over the market. Our inventory is very likely to continue experiencing inventory expansion when you factor that the “shadow inventory” which will eventually be brought to market and the high number of investor-owners in Las Vegas that may choose to cull their profits and sell; especially if the public perception becomes one of a buyer’s market. An increasing Las Vegas real estate inventory will make it likely corrections will occur as sellers will have to compete to get their homes sold.
- Public perception lags several months behind hard data. Do not under-estimate psychology in the market place. Do you know how many buyers told me in 2012 they were waiting to buy because they thought the market was going to drop another 5 points? The market was down 55% and they wanted to squeeze another 5% off the adjusted basis price. Prices quickly went up in a month or two and many missed the opportunity to buy all together. Some bought later paying 20-30% more fearing prices would only escalate.
Conclusions
I want to be clear; I am not calling for a price crash. I am however projecting that it is very likely we will see corrections in the market based on the previous reasons listed. The old adage still applies, buy when most want to sell, and sell when most want to buy. The trough of low inventory has already passed and the amount of sellers is on the rise. Once public perceptions take hold and the media also begins to report the change, the momentum will likely increase.
When the affordability index starts to favor renting as opposed to buying, it’s time to sell. Let’s be honest, most of you never expected to see gains like you have in the past 12 months. This time around, don’t get caught, turn your paper equity in to what really matters, cash.
Paul Rowe is a short sale specialist and listing agent with Shelter Realty. He is also a real estate investor.
Call Shelter Realty at 702-376-7379 and ask to speak to Paul. He will provide free analysis of your home value and how it relates to your needs as seller. You may also fill out a contact form on this website or email info @shelterrealty.com
Paul Rowe is a real estate investor and REALTOR® with Shelter Realty Inc. He can be reached at (702) 376-7379. With hundreds of short sales negotiated successfully over the past 12 years, Paul works exclusively with distressed property owners and potential foreclosure and short sale victims in Southern Nevada who owe more on their mortgage than their property will appraise for.
