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Las Vegas Housing Market Conditions

Still, a Ways to Go

The oversupply of single-family units that was created in the speculative-housing euphoria of the past few years has left more than 27,000 vacant units in the Las Vegas metro area. See the table below. Large numbers of vacant single-family units set in motion market forces that affect the vacancy rates of other housing types.

The assumptions identified above yield an estimate of 27,455 vacant housing units. This estimate, however, may overstate our current problem because there are always vacant units needed as inventory for prospective buyers and renters. To be sure, vacant units and the normal supply of vacant units are subject to change with the forces of supply and demand. Still, we need an estimate of the excess housing supply to get a picture of how we might get back in balance.

Using assumed normal vacancy rates, shown in the table above, we see an estimate of the normal vacancies of about 19,000 units across all housing types and an excess of 8,521 units that will need to be occupied before market forces come back into balance. Moreover, the movement of households into single-family detached as renters is reason to believe that the mix of units to get back into balance will differ from what we show above. New construction in 2008 will also add to the current excess supply. New construction is down significantly from past levels and it likely to be so for 2008, a reflection of the tough market environment, still market opportunities will arise. The long-run outlook for economic and population growth remains favorable.

A large inventory of empty nonowner-occupied units has increased rental activity. These owners find it better to rent and make a contribution to their mortgage payments than leave units vacant. Some households have moved into single-family units and out of apartments. As a result, apartment vacancies rose in 2007, ending the year with 7.7 percent vacancy rate.

Clark County's 2008 population growing at 2.5 percent and new construction at 12,000 units would result in increased demand for housing units of about 20,000 units for 2008. With an excess supply of 8,521 and new construction of 12,000 units one would find a markedly different environment than we see. Under this scenario we go from imbalance to balance. On the other hand, construction of more than 12,000 units in 2008 would push back the date of balance into 2009. Of course, uncertainties hinder specifying the path back to balance as there are many decisions made about future residential construction.

Average rental rates for apartments have inched forward to $876, up from $868 for the third quarter 2007. All in all, the rental apartment market has been affected by the excess supply of single-family units from those unable to sell units at desired prices. Once the excess of single-family units goes away and residential housing comes into balance, apartment vacancy rates will recede.

Residential permitting increased at a torrid pace of 6,196 for the fourth-quarter 2007, an annual rate of 24,784. With an estimate of 27,455 vacant units, one searches for an answer to a seeming loss of economic understanding. There is, however, a simple explanation soon to be implemented increased hookup fees sent a wave of developers to get permits before the rates went up. This explains the sharp increase in permitting at a time of substantial excess supply. Having built up the stockpile of permits, one might expect some slowing in permitting activity forward. As such, one might expect to see more time between permitting and building in the current, more restrictive financing standards. In the future, however, market opportunities will open up as the excess supply dwindles with population growth.

Housing sales prices continue to decline. Our estimate of the median price for homes sold declined from $320,000 in the 4th quarter of 2006 to $272,000 in the 4th quarter of 2007. To be sure, these averages show different mixes of properties, still one clearly sees that prices are dropping as a reflection of the excess supply. This 14.7 decline in one year goes some way in retreating from a near 50 percent increase in one year in 2004-2005. For those who bought at a high price a year ago and now want to sell, the outlook is bleak. Owner-occupied units for which no market transaction is desired remain removed from such adverse conditions, however.

Using median mortgage values divided by median sales price we find that credit standards increased. The loan-to-value ratio dropped from 88.7 percent in the 4th quarter of 2006 to 84.3 percent in the 4th quarter of 2007.

Housing prices have declined for Las Vegas and four western regions. Prices have declined in Las Vegas and Phoenix throughout the year, but prices in Salt Lake City grew until the 4th quarter of 2007.

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