RESIDENTIAL ECONOMIC REVIEW
LAS VEGAS-PARADISE, NV MSA EDITION
(CLARK COUNTY)
OCTOBER 2009
REGIONAL HOUSING SUPPLY / DEMAND AND OVER / UNDER VALUATION PATTERNS AND 5-YEAR FORECASTS
Housing Supply and Demand Trends and Forecasts
In general, the patterns of 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 this region since 1990, with a forecast extending to 2014. The model accurately measures significant levels of distressed inventory which are likely to peak during the next 36 months, followed thereafter by a trend toward under-supply, which is likely to first occur in 2015, with the market showing tightness in Year 2014. Under-supply is likely to be significant after 2014.
As shown, demand and supply estimates represent the total number of houses demanded and supplied in this particular region. The current year reflects over-supply which will likely worsen during the next 24 months before improving, then reaching equilibrium in 2014. Thereafter, another cycle of under-supply is likely to form as the economy continues to expand in an atmosphere of relatively low housing supply.
Oversupply (mainly caused by distressed housing and over building during the past several years) will cause continued depreciation into 2010 and level out, before exhibiting mild rate of upward price movement in subsequent years. Intense periods of oversupply should be followed by increasing levels of undersupply as the economy begins to expand in 2012.
It should be noted that patterns in oversupply or undersupply do not fully describe the health of the overall housing market. Absorption of housing can be strong in an atmosphere of over supply and under valuation. In order to more fully understand market health, patterns in over and under valuation must be understood. These patterns are presented in the next section.
Housing Over/Under Valuation Trends and Forecasts.
Historical and forecast median home prices are compared with our modeled estimates of supportable median home prices since 1990. Similar to our over/under supply analysis presented in the previous section, differences between our modeled estimate of supportable median home prices and actual median home prices offer measures of over-valuation or under-valuation since 1990, with forecasts during the next five years.
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 if rates jump, the unprecedented level of under valuation would disappear. 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 in 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 a diminishing rate. 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 credit and artificially low mortgage rates. For those households who are secure in their jobs and can purchase a home with a fixed rate mortgage, this region offers good opportunities.
Overall Market Forecast
Our analysis of both housing supply and demand patterns and housing over/under valuation is merged into a composite index that Real Estate Economics refers to as the Market Opportunity/Risk Index. This index includes jobs-to-housing relationships and mortgage cost-to-income relationships.
It must be stressed that the Opportunity/Risk Index tends to lead market changes by as much as 24 months. For example, as the composite index began to fall significantly below equilibrium in 2004-05, it correctly predicted market troubles which first became apparent by early 2005. The index formed a floor during 2006-07, translating to the worst part of the real estate cycle being felt during 2008. The index reached and surpassed equilibrium in early 2009, but the resultant market stability is not likely to be manifest until early 2011.
Similarly, the high level that the index has currently reached during the 1st half of 2009 will not likely be manifest in the market until about mid-2011. If relationships between this index and actual market manifestation holds true, overall market conditions should improve dramatically during 2011 from current levels. Prices will remain flat in 2010 and 2011 but mild appreciation will become increasingly apparent as more households recognize the severe under valuation of housing in this market area and as the economy resumes expansion.
Summary
With Federal Reserve Chairman Ben Bernanke’s recent announcement that the national recession is likely over, it appears that the Las Vegas-Paradise, NV MSA will be among those regions lagging the recovery by at least a year. Having suffered its biggest downturn in labor and housing, the regions’ economy is among the hardest hit, with severe rising unemployment and decimated home prices. Persistent weakness in the job market recently increased unemployment to 12.4% with forecasts for it to peak during 2010. As a lagging indicator, the rise in unemployment will occur as the economy begins to build from its defined floor and job creation begins to gain momentum.
The region’s housing market has benefited by stimulus measures including federal buyer tax credits and low mortgage interest rates, making housing more affordable. However, severe price swings has brought greater instability to Las Vegas than in most markets. Prices are down 55% from peak levels experienced in 2006. Foreclosure sales volume is up to 42% of the total housing supply from a year ago, so the number of forced sales remains intense. As a result, price support will remain weak throughout 2010.
Notably, a slight decline in housing transactions caused a 4.6% annual drop in volume due to a reduction in owner-to-bank foreclosures and reduced new home supply. Distressed housing buyers have provided most of the sales momentum in the market this year. New home builder market share fell significantly in the past 24 months amid limited housing starts and relatively high new home pricing compared to resale units. Housing starts will continue to fall, which will eventually help to bring supply into balance with demand. As distressed inventory continues to fall, market share will begin to swing back to the new home market if enhanced value is apparent and supply is made available.
Uncertainty exists regarding another potential wave of foreclosures. Despite reports of rising defaults, the next wave of foreclosure activity may likely be much less pronounced than the first wave due to the following:
- Many Adjustable Rate Mortgages (ARMs) are resetting at lower interest rates,
- Many ‘teaser rate’ ARMs have already gone into foreclosure, i.e., the 1st wave was bigger than anticipated,
- Many government and bank programs that are designed to reduce foreclosures are just beginning to be fully implemented,
- Prices are dropping to levels that stimulate a sale, effectively pre-empting foreclosure,
- The economic impact from the stimulus package has not been fully felt, with job creation reducing foreclosures.
The effect of a foreclosure surplus on prices will continue to wane, because values have already dropped to levels that stimulate strong demand for distressed properties. When distressed inventory is finally absorbed, the high level of new housing in the development pipeline will hold down upward pressure on sales volume and price support. Historic under valuation will be followed by price appreciation once economic growth emerges, which will likely occur in the latter part of 2012, setting the stage for significantly improved housing market conditions as the economy begins to expand.
Mark Boud
Real Estate Economics
http://www.RealEstateEconomics.com
