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Las Vegas Housing Market Conditions

Resuscitating a Moribund Market

Pundits abound. Facts, lies, forecasts, and statistics cascade across the media landscape in an ever increasing information blitz. The media competition does not seem to result in improved efficiency, however. One has said that we have many forecasters not because they know, but because they are asked. Two groups result, those who know they don't know and those who don't know they don't know. Forecast we must, but assurances of accuracy come in the retrospective, leaving us to recall JP Morgan’s observation when asked what he thought the market would do next, "It will fluctuate." So, borrowing from others we might forecast that we are not at the end of our difficulties. Moreover, we are not even at the beginning of the end, but it is, perhaps, the end of the beginning.

We have too many houses, and not enough people—hard to believe after years of growth that supply has gotten out in front of demand. Nonresidents own some of the Las Vegas-area units, to be sure, even if they only use them occasionally. So, not all the empty units we see need involve local economic factors. With the rush to buy property for some with the expectation of reaping large capital gains, people from outside Las Vegas came to own property in Nevada. As prices have plummeted of late, we continue to see people buying second homes in Las Vegas. But, unquestionably, we have a glut of housing. Just finish a window survey as you move about town—there are many units for sale. We find 34,124 units are vacant, about 4.9 percent of housing units. Once you explain the normal inventory level we get an estimated excess supply of 15,200 housing units of, a rise of 2,895 from the third quarter. See the following table.

The rising excess inventory of units is an indicator of the continued weakness of the local housing market. Moreover, anecdotal evidence points to lags in moving property from foreclosure to sale of distressed housing. As such, our estimates of the excess may be an undercount.

The U.S. Bureau of the Census reported higher 4th-quarter vacancy rates than we report here. Indeed, they reported that Las Vegas was the emptiest city among the 75 metropolitan areas they cover. Their work is based on survey methods, and local estimates come from a mix of survey information and enumeration. They reported that the rental vacancy rate for rentals of all types was at 16 percent and that the vacancy rate for single-family stood at 5.8 percent. CBER’s apartment survey vacancy rate is at 9.8 percent; and, we use 4 percent for single-family housing vacancy. Differing methods surely account for different numbers. Indeed, the reader is cautioned that the Census- and CBER-based estimates of data are subject to many sources of possible error, particularly during a chaotic period.

The reported 16 percent rate from the Census seems high to us, nonetheless, we believe that the picture of economic weakness it portrays is correct. Further research and information will perhaps yield a better assessment of the data—a goal we all work toward.

What a fine mess we have ourselves in, unable to handle housing deflation and foreclosure and bring the housing tailspin to a halt. The world has changed from a simple market where people took out a mortgage from their local banker; now mortgages become securitized, collateralized, and sold off many times. Caught on the horns of a dilemma, we too often do not know who owns the mortgage and how to stop the cascading downturn.

Markets are interrelated. Housing markets depend on other markets. Credit markets seized up in 2008 and have reeled about. Las Vegas has not been immune from these events; indeed, as a rapid growing area, Southern Nevada benefitted from the wide availability of capital over the past few years. Of late however, things have stalled for the lack of functioning credit markets. A return to credit availability is another problem that needs addressing before one can be comfortable that economic prosperity will return to a sustainable path.

The Southern Nevada unemployment rate continues on an upward path, having pushed through the 9 percent ceiling with ease and every sign of higher future rates. Rising unemployment and weak job prospects cast a cloud on the Southern Nevada housing market. Future job prospects will depend on reviving the national economy. A large national stimulus package will help, to be sure, but it remains to be seen by how much. Concocting spending and tax cuts will not quickly revive Nevada’s economy as it takes time for these actions to have an effect. Once stimulus spending is underway, one gets closer to the date of recovery, but the best we can hope for is the end of 2009. The probability of recovery slipping into 2010, however, has increased with the sharpness of the recent job layoffs.

Housing prices continue to decline—a bad news, good news story. The decline is bad news for those who own homes and find themselves owning more on the mortgage than the house is worth; on the other hand, one finds good news in falling housing prices, making homes more affordable. During the bubble period, housing affordability suffered as prices rose precipitously. The rise and fall of housing prices is shown in the accompanying figure. As of November, the price index (about 138) is now close to the trend value (125). The difference is small enough that one can see that housing affordability has returned to Las Vegas. But even this may not restart the housing market because of rising job losses and concern for stability and the uncertainty of whether the index may continue its downfall. Though many unknowns remain, we have recently seen many investors return to buy housing properties in Las Vegas, suggesting that they find housing affordable with enough prospects for future returns. Still, job improvement and population growth will be needed to bring the housing market out of the doldrums, and then we will most likely return to the pre-bubble trend.

Vacancy rates, now standing at 9.8 percent, drifted upward during the 4th quarter from 8.1 percent, as demand continues to fall relative to supply. More job losses in Southern Nevada came with fewer apartment dwellers. Moreover, economic conditions deteriorated rapidly following a series of economic problems in September. The rental rate also increased over this period, but the rental rate does not include adjustments for move-in specials, which become more prevalent with higher vacancies. The average rental rate is at $874 a month for the 4th quarter, up from $848 in the 3rd quarter. Rates increased for larger units and declined for smaller units.

The foreclosure environment remains unsettled. No doubt efforts will be made to help some of those pushed to foreclosure as a result of mortgage resets. Though most of the subprime resets have occurred, more resets remain, particularly the Alt-A’s in 2010 and 2011. So, further difficulties with housing finance and the associated secondary effects are still to come.

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