How Low Will Las Vegas Real Estate Prices Go?

I saw this article “How Low Can They Go“? in CNN Money by Shawn Tully of Fortune Magazine over a week ago and it’s brought up many questions. These questions have been tucked away in the back of my subconscious mind and they keep coming up when I have time to think. (Generally when I am stuck in Traffic waiting to get to my next appointment.) Most real estate articles in these types of magazines write about and predict what has already happened but this one had quite a bit of interesting research performed to make a convincing argument to the average reader.

In this analysis of future real estate prices, research was done and future prices predicted using an analysis of the ratio of rents to home prices for the past 15 years. (My opinion, but 15 years is hardly a long enough historical analysis to gauge the future of pretty much Anything.) Take note that the research was taken from home value statistics back in June and the article was just published on November 7th. Trust me, unless you’ve had your head buried in the sand in the middle of the Mohave desert since June, you know Las Vegas real estate prices have already gone down since that time.

Now, you can read the report above and make your own judgement but I do have some serious questions to ask. In the article I find this statement that is the entire basis of this very report very interesting. “Many factors determine the value of a house. A family would consider the quality of local schools, the number of bedrooms, the size of the yard. Economists assessing a region look at interest rates, employment, and population growth. But over time the most reliable guide to home values is rents. In most markets people won’t lay out much more in monthly costs to own a house or condo than they would to rent a similar property unless they expect a huge profit when they sell.”

That last statement would certainly be true if you completely forget that the interest and property taxes in your mortgage are tax deductible if you own the home and it’s your primary residence. If you purchase a single family home for the use of a rental property, there is something called depreciation. (Without getting too deep here with variables, calculations and scenarios, I’m going to keep it simple.)

People won’t buy a home unless they expect a Huge Profit when they sell? Really? I have not been in the real estate business for 15 years but I do know for a fact that I was helping people buy homes and investors purchase single family real estate as late as 2002 when a 3% appreciation rate was a sound historical number to use in our calculations. Other calculations are certainly used that must be considered. You know, things like a renter paying off the mortgage for you and the value of leveraging? Variables and needs are different for every single true real estate investor I’ve come across and what might be your taxable income may certainly be different then somebody else’s. What might make sense for you certainly makes no sense for somebody else and predicting future prices based on rents vs. home prices is interesting to say the least.

Once again, there is some truth to the statement “People won’t buy a home unless they expect a Huge Profit when they sell” but I would not use the general “People” term, I would use the term “Speculators” because they were the ones buying up real estate across the country chasing the next “Hot” real estate market.The true real estate investors that understand this backed off of investing in single family homes in Las Vegas back in late 2003 when late night infomercial and convention expo real estate gurus attracted the speculators to the Las Vegas real estate market like nails to a high powered magnet. These same speculators moved on to other real estate markets across the United States and I pulled up this article from Fortune that I remembered way back from 2005. Riding the Boom.

There are certainly some very valuable lessons to learn from that article and I would love to see a follow up article.

Now, according to that statement concerning the most reliable guide to future real estate values is home values vs. rents they came up with the “The Top 25 Real Estate Markets Poised to Fall”. (Las Vegas was ranked #8 out of 25.) You can certainly make your own judgements about this report and I certainly have my opinions. I don’t have a huge batch of Kool-Aid brewing up so I don’t need to convince you to drink it and you’ll read why below. I’ll agree that there is a relationship of rents to home prices but certainly not in the same light as this article and research suggests. It’s much more complicated then that and that is where the “Economists assessing a region look at interest rates, employment, and population growth” comes in. Now, using Fortune’s “Exclusive calculations” they came up with an interesting table showing where real estate markets “Need to Head” for home values in relationship to rents. Keep in mind that this is only on available data for the past 15 years. I don’t know about you, but I certainly remember what Las Vegas was all about 15 years ago when I attended UNLV and It’s much different today in terms of jobs, amenities and lifestyle.

Instead of making the statement “Where Housing Is Headed” I think it would be much more responsible to think of the calculations as a basis for knowing when real estate prices have reached the bottom for a particular market. Why? Because true real estate investors understand the other variables in play when it comes to the relationships between rents and home prices. However, I would not solely rely on this relationship alone because there are other factors in play such as “Economists assessing a region look at interest rates, employment, and population growth.” According to the methodology disclosed on the right hand side of the “Where Housing is Headed” table, “In a handful of cities, our formula suggests that prices will actually rise. Home values should increase slightly in Dallas, Indianapolis, Cleveland, and a few other locales the bubble missed. In Detroit houses are so cheap – the median is around $100,000 – that even a shift in the economy from disastrous to mediocre is all that’s needed to lift both rents and prices.”

So, according to the “Exclusive Calculations” provided by Fortune Magazine, call up the first real estate broker you can find in Cleveland or Detroit (or Both!) and start investing in Detroit and Cleveland real estate. Unless of course you took the time to read this –> Foreclosure Focus. As you’ll see once again, there are several more variables in play then just rent prices in relationship to home prices. And let’s not forget property taxes. There is a huge difference in the property taxes for a $400,000 home in Las Vegas then there is for a $400,000 home in Chicago. Property taxes certainly play into our real estate valuations, but rents are based on demand. (In other words, if property taxes increase you just can’t raise the rents because you want to unless you have a line of renters waiting to move in and you also need to be able to rent the real estate out. If there is no demand for rental homes, it certainly is going to have an effect on what you can rent it for.)

Which moves us to the next topic to throw into the mix: The 76 Million baby boomers that will be eventually retiring and are going to be very sensitive to paying property taxes that eat up a good portion of their retirement incomes – especially to fund bloated governments more interested in finding ways to raise taxes then cut spending. In other words, migration. These property taxes are certainly nothing to sneeze about.

Do I need to add more variables to the mix for more confusion? I hope not, but I certainly can and wish it was as easy as just coming up with some “Exclusive Calculations” to help predict future values for the next five years. I don’t think it is so much the tables that were created (because there certainly is SOME value to them) but more the headlines that were created to explain them. “Our exclusive calculations can help you figure out what your house will be worth in coming years” and “Where Housing Is Headed” makes me wonder what Shawn Tully is trying to accomplish. I don’t know but I certainly can tell you that Mr. Tully has been warning about real estate prices since 2002.

Real estate is certainly much more complicated then just creating some rental tables so take the information with a grain of salt. If it really had any value, this particular method of analyzing real estate would have been developed long, long ago. If you are looking for a reason to buy Las Vegas real estate, I’m certainly not going to be the one to provide you with a generic statement such as “Now Is The Time To Buy”. Keep this in mind as you search for a reason to buy Las Vegas Real Estate (which tells me that you want to buy Las Vegas real estate) —>

“I’ve found that when the market’s going down and you buy funds wisely, at some point in the future you will be happy. You won’t get there by reading ‘Now is the time to buy.’ ~ Peter Lynch

Paul Francis, ABR,CRS
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