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Investors
LAS VEGAS: IS IT THE PERFECT REAL ESTATE MARKET? We are confident that the only bubble that will be seen in the near and foreseeable future in the Las Vegas real estate market will be in the champagne glasses of the home buyers and investors who continue to buy real estate in the valley through 2008. We are also convinced that there is a bubble, but it is not the one that you think. HERE'S WHY: Las Vegas has doubled its population every decade since World War II; in the decade of the 1990s, Las Vegas added nine new residents every hour; and, in 2004, the region bettered that astonishing pace by adding 11 new residents every hour (that's one about every 5 minutes and 30 seconds.) Federal government figures released recently reveal that, nationally, U.S. housing prices jumped by 13.4 percent for the 12-month period ending June 30 '05, the largest increase in more than 25 years. Locally, Nevada led the nation at 28.1 %. And, government officials see no end in sight. The report, released in June '05 quoted Office of Federal Housing Enterprise Oversight (OFHEO) chief economist Patrick Lawler saying, "there is no evidence of prices topping out. On the contrary, house price inflation continues to accelerate." In addition to Las Vegas being the fastest growing city in the United States for the past ten years, Nevada will be the nation's fastest growing state for the next two and half decades, and by 2030 will have more than 4 million residents -- more than twice as many as in 2000, according to a U.S. Census Bureau population growth released this April. LAS VEGAS: IS BOOM OVEREXTENDED? The headline on the June 20, 1955, issue of Life Magazine. Fifty years and 130,000 hotel rooms later, another boom is echoing across Las Vegas Valley as the market adjusts to demand for affordable housing. Las Vegas consistently pulls families, second-home, and retirement refugees from California who look for a better value and a way to bank some of their home equity. A recent report from the Public Policy Institute of California found that high rents and rising home prices have one in four Californians thinking about moving out of state or to another town. Of California's 36 million population, about 7 million are 55 years of age or older, and more than a million will hit that age in the next five years, Sullivan said. All of them pay state income tax. Moving to Las Vegas would save them about 10% of their annual income. At a salary of $100,000 that means $833 per month in additional gross income, enough to support an additional $150,000 mortgage. California is just one part of what is predicted will be the largest population migration in the history of the United States. As the baby boomer generation ages they will inherit vast wealth from their parents and leave the cold weather of the Northeast for the sunnier climates of the South and Southwest. Nevada, Arizona, and Florida are expected to receive the brunt of the population shift. Casinos backed by Wall Street are spending billions of dollars expanding. From downtown, where hundreds of millions of dollars are being spent renovating such downtown icons as the Golden Nugget and the Lady Luck, past MGM's $5 Billion City Center and Boyd's $750 million South Coast Casino, ending at the twin $2 billion casinos being built at the Strip and St. Rose Parkway, hotel and casino development planned to be completed by 2009 approaches $16 billion. There were more small businesses started in Las Vegas in 2005 than anywhere in the country. Apartment complexes are being snapped up by investors and converted to condos at a faster rate than new units are being built, which is putting upward pressure on rental rates. The apartment market reached a 95.1 percent valley-wide occupancy rate in the second quarter, despite a 6.3 percent increase in monthly rents during the last 12 months. Analysts estimate that apartment rent growth will range from 8 to 10 percent by the close of 2005. On November 22, 2005, the Las Vegas review journal reported that in the past year, Las Vegas businesses have added 61,000 jobs. 61,000 Jobs! How many families does that represent? What impact did the creation of these new jobs, many of which went to new residents of the Las Vegas metro area, have on the demand for housing in the valley? What impacts will the creation of the 70,000 plus jobs predicted for 2006 have? This level of job growth is four times the national average. No other state even came close to Las Vegas' job growth performance. Gaming and hospitality added the most jobs with 16.500, which was to be expected. Additionally, professional and business services companies added 13.600 jobs, a strong second place showing. This is extremely significant in that it provides empirical evidence that the diversification of Las Vegas' economy, which can only strengthen the real estate market is rapidly proceeding. While it may once have been true, Las Vegas is no longer a company town inhabited solely by low income hospitality workers. If there is a bubble in the Las Vegas real estate market, it is a protective bubble derived from the valley's unique demographics and geography, a bubble of stability, and not one of irrational speculation. As noted above, the U.S. Census Bureau is predicting that Las Vegas' booming population growth, with its commensurate economic growth, is going to continue for another twenty-five years. Well, that's a long time, and it's difficult to project anything for that long a period of time. So, let's discount their projection and assume they can only accurately predict population growth for the next five or seven years. If the U.S. Census Bureau is right, and this unprecedented population growth continues through 2012, what impact will this growth have on the value of real estate in the Las Vegas Valley in that time period? By the way, the Federal Bureau of Land Management (FBLM) owns 90% of the land in Clark County where Las Vegas resides. A vast percentage of this land is designated as national conservation areas and will never be sold. By the year 2010, the FBLM will have sold all of the land it ever intends to sell. And, if the Census Bureau's prediction is accurate through 2030, what will happen when the land auctioned through 2010 is built out? Where will all the new people live? How much will they pay to live there? Despite these facts, we are further convinced that investor's expectations must be adjusted. It is almost a certainty that the record year-to-year 52% median home price increase that homeowners and investors alike experienced from Q2 2003 to Q2 2004 is unlikely to be repeated. Ever. Investors are advised to scale back their expectations and dreams of get-rich-quick returns. It is likely that the meteoric gains of the past two years will be replaced with merely stratospheric returns. So investors would be well advised to forget about getting rich quick and settle for getting rich fast. Real Estate buyers have become spoiled, with the leverage of mortgages those 52% gains yielded some buyers cash on returns of several hundred percent in one year. What could be bad with a few hundred percent returns in two years? Or three, for that matter? No investment ever goes up in a straight line and it seems that prices may have gotten ahead of themselves a bit and are taking a breather, explaining the recent, moderate decrease in median home prices. But Las Vegas' population and economic growth is marching on inexorably, and can only lead to one result; continued real estate price appreciation. Anyone buying real estate in Las Vegas is advised to quit whining about bubbles and negative cash flow (which is really just a deferred down payment, anyway), take a deep breath along with a reality check and reset their expectations. It is likely a property will have to be held longer than thirteen months to see the considerable gains that buyers have become accustomed to. Thirteen months, twenty three months or thirty three months, a strong case can be made that Las Vegas real estate, with its terrific likelihood of appreciation and the not-to-be-found-elsewhere safety net of its restricted geography and compelling demographics represent one of the surest, safest bets to be made anywhere. One of the surest, safest bets anywhere? Found in Las Vegas? A little ironic, isn't it? |