When will Prices get back to
cover what I owe?
This is a common question that I’m asked when consulting Las Vegas home owners that are on the fence about doing a short sale. Something has happened to them that has created a cut in their income and/or the financial burden has become too much for them to continue paying for a mortgage based on 2006 prices… yet they don’t want to hurt their credit. Temporary solutions to “ride out the bad economy” until Las Vegas home values rebound that I’ve come across have been from renting their homes out, renting rooms, cashing out retirement savings and even borrowing money from friends or family.
Unfortunately.. you need to understand what created the high home values to begin with to have an understanding of what went wrong. NPR had a fantastic presentation some time ago that went over what created the problem to begin with that is simple and easy to understand. From all of my research and studies, I think this is the simplest thing to follow and I suggest everybody take the time to learn what was a major contribution to out of control home values that took place in highly speculated real estate markets such as Las Vegas. Here is the great and simple presentation –> HERE.
New Predictions by Moody’s
on Real Estate Values
Once you understand The Giant Pool of Money and how it was used, it should be no surprise When something comes out such as the latest report from Moody’s that you can read by clicking on This Report from MarketWatch.
Before I continue.. I need to make a correction to the article concerning this statement:
The housing market is in the third year of the current downturn, one of the worst corrections in U.S. history as a result of the economic recession and the mortgage industry nearly grinding to a halt during the credit crunch.
If you took the time to listen to the NPR broadcast concerning the Giant Pool of Money, it’s pretty easy to tie the robust economy to real estate. In other words… real estate values did not plummet because of the “economic recession” or the credit crunch. In fact… it’s just the opposite. When home values reached an unsustainable peak, Americans Got Debted to death and the money spickets were turned off… money stopped flowing into the economy.
Nevada Home Values won’t recover
from the peak until after 2023
According to Moody’s. To me… this is no surprise and I’ll go over why with some simple calculations using some home values. Keep in mind the massive increase in inventory in the form of new homes built during the real estate boom that people don’t factor in or conveniently forget. In other words, there really is no shortage of homes available that would suggest appreciation rates rising faster than normal.
A Great Example using a Henderson, NV Home
I have one particular Las Vegas Home for sale where the owner paid $375,000 for it during the peak in 2006. The current value is around $150,000. Historical appreciation rates for the entire United States range in the 3% to 5% range. (Pre 2002… Las Vegas only had an average appreciation rate of 3%.) Taking the current value of around $150,000 and using an average annualized appreciation rate of 3%… we would be looking at around 31 years for this home to be worth $375,000 again. Or… the year 2,040 before it will be worth $375,000 using a 3% appreciation rate.
That is if Las Vegas Home Values do not fall even further. Keep in mind there are some MAJOR factors in place right now tampering with the real estate market. The $8,000 first time homebuyers credit, Loan Modification programs and the foreclosure moratorium that has delayed foreclosures from being on the market. The current Las Vegas Unemployment rate is over 13% and that does not even count all of the real estate related industries where professionals have taken significant cuts in pay. Let’s not even get into all of the Option Arms that are set to be recalculated in the next several years.
Let’s get generous and use a 5% annualized appreciation rate for the current value. It would take 19 years for this $150,000 home to reach $375,000 again or the year 2,028.
Sure… there will be years when the appreciation rate is higher.. but historically, real estate appreciation rates are in the 3% to 5% range. In the past, I’ve posted articles that discuss why using the median Las Vegas home price “appreciation” maps for making investment decisions is not a very wise way of investing in real estate.
The calculations I use are some of the simplest involved when it comes to working with my real estate investors. We don’t buy on “what if” appreciation rates… we use solid and true numbers tested by time.
As mentioned… there are several other factors in play concerning today’s Las Vegas Real Estate values. One comment from reading all of the other comments in the article mentioned that really stood out for me is the one to the right.
I would have to say that almost 50% of all the offers coming in on my Las Vegas short sales are FHA loans. The banks selling their REO properties are going for the Cash Buyers. (See my Last Post on this –> Las Vegas Real Estate Demand rises as Cash Investors become kings with Banks.) This has resulted in buyers tired of losing out on their Bids for REO homes taking a shot at Las Vegas Short Sales and even bidding up on homes for more than list price.
There are some current issues going on with FHA loans right now and I don’t think it will be too long before we have another bailout. Throw this in along with the $8,000 tax credit for first time homebuyers set to expire on 11/30/2009 and we may have a further decline in home values. Even if the $8,000 tax credit is extended / expanded.. it is an incentive that is non-sustainable. Home values and the economy need something significant such as the internet / tech revolution seen in the 1990′s. In other words, the economy needs to be based on producing something then consuming before it gets back to the roaring economy recently witnessed.
Perhaps Alternative Energy / Solar Energy development in Southern Nevada will create a truly sustainable economic boom but don’t hold your breath for this to happen.
Sure.. City Center will be done / open soon but this is only going to be raiding business from less competitive Casinos already struggling to keep their doors open. There is absolutely no shortage of hotel rooms in Las Vegas right now as it is and there will certainly be some cannibalizing going on here. The planning for this project started in 2004 and there is absolutely no way this project would have been planned / developed using post 2007 numbers. Don’t be disappointed if home values in Las Vegas don’t magically jump in value after City Center opens up as many sales minded people are predicting/pushing.
There is no quick solution that is truly sustainable except for time. Time can be your friend or your worst enemy depending on how you understand / use it.
If you are looking to get out of a Bad Investment or an Investor looking to invest in Las Vegas real estate the right way.. you can use the information below to contact me.
Paul Francis, CRS
Prudential Americana Group – Realtors®
Las Vegas Real Estate