No one can predict the future.  And beware of anyone who guarantees returns!  However, sometimes economic indicators appear to be very clear.

 

Feel free to review the following article I wrote in 2011 when everyone you met was focused on Doom & Gloom and the most common conversation at backyard BBQ's was that 'the market will never recover and when it does, it won't be in my lifetime."

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Personally, I went on a buying spree then and am very glad I did today!

 

It is hard to imagine a literate adult anywhere in the western world who is not aware of the US property boom in the early to mid 2000’s and the subsequent crash in the final years of the decade. It is also widely known that the property market is recovering strongly.

What is not well understood is that there really is no such thing as “The US Property Market”. Rather there are multiple markets within each state, city, and local areas and within property types and price levels. The market in San Antonio is quite different from that in Las Vegas. The San Antonio median home price increased 7% in 2010 [Texas A&M University Real Estate Center, “2011 Market Report” p. 61], while the Las Vegas median price continued to decline. Within the Greater Las Vegas area the market for starter homes is at a different stage of the property cycle to that of “McMansions”.

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There is no doubt the GFC hit Las Vegas early and hard with employment, income, visitor numbers and gaming income all suffering significant drops in 2008 and 2009 from their 2007 peaks [University of Nevada Las Vegas Centre for Business and Economic Research “Historical Economic Data for Metropolitan Las Vegas]. The city was amongst the leaders on the lists of foreclosure and negative equity percentages throughout the period.

However, there is some anecdotal and statistical evidence to indicate that economic conditions in Las Vegas are improving.

• Walk down The Strip any evening with the throng of tourists

• Visit the hip new Cosmo casino catering for upmarket visitors and locals

• Wait in the taxi line at the airport on a Friday

 

There is a marked change in the feel of the city from two years ago and a common question heard from visitors is, “Recession? What Recession?” These observations are born out in some recent economic indicators, particularly visitor numbers (+2.7% in 2010 and 4.3% in 2011) [Ibid].

Does this mean the Vegas housing market has bottomed out?

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That depends on which market segment you are looking at.  I believe the lower end has already over-corrected. Bargains available on well-located good quality starter homes, town homes and condos in 2010 and 2011 (less than $65,000) have become very scarce and difficult to secure; while at the top end of the market, very large homes have further to fall. What’s my rationale for this prediction?

• Owners of cheaper properties were among the first to lose their jobs in the recession, default on their loans and have their properties work through the foreclosure and short sale processes.

• Concerns about high “shadow inventories” leading to a “double dip” collapse are much less applicable to this segment, as a high proportion of these mortgagees with negative equity have already defaulted.

• Buyers of foreclosed and bank-owned (REO) properties know they are making a long term purchase, so few of these will be put back into the market in the next few years.

• There is great competition from cash or privately financed buyers for good quality, lower priced properties as soon as they are listed.

• Owners of higher end properties often have other income sources or have retained their jobs and have been able to meet their mortgage payments.  Despite their negative equity they have held onto their properties for longer, while looking for alternative solutions and hoping the market will recover.  Because they have more options they have been slower to choose to default on their loans and walk away from their properties.

 

The best evidence I can provide for my prediction that prices have overcorrected on good quality, lower end properties is a summary of historical and current prices for a representative sample of those I have closed during 2011. The properties are characterised as Cash Flow (CF); Balanced Return (BR) or Capital Gain (CG) and are a mix of condos, town homes, starter homes, move-ups and large homes.

 

The graph below compares their Spring 2002 pre-boom estimated price, their actual or estimated price during the 2005 to 2007 boom and their post boom 2011 settled price.

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From the graph it is easy to see that for lower end cash flow focused properties, 2011 prices are half to three quarters of their pre-boom 2002 price, and less than a quarter of their boom price. Large, higher end properties that will provide more capital gain returns over time haven’t yet dropped by the same level.

Table 1 details the full sales history of these properties and their estimated value in Spring 2002 and Summer 2006. It also provides the current or estimated rent and calculates the gross rental return for each property.

 

I am currently recommending to my clients, that now is the time to buy cash flow focused properties, if they can be secured. We are also making aggressive offers on balanced return type properties, but are holding off on the high end capital gain focused investments until winter 2012.