Currently, there is some debate as to the sustainability of home prices in Las Vegas and other areas. Strong price increases alone do not indicate overpricing. Instead, we have to look at the market as a composite of events, including rents, potential drivers of employment and importantly, supply.
We took a look at some fundamental measures of values, prices relative to rents and prices relative to incomes. Prices and rents have been rising meaningfully in the last couple of years, however, prices have been outrunning rents and a large portion of this is driven by lower supply against improving demand. This has served to push the ratio back to early 2000’s levels and depicts a scenario very unlike the bubble period. So on a price-rent basis, the Las Vegas market seems appropriately priced.
Incomes on the other hand, have not kept up with price increases and we appear to be above trend. This is a concern, despite a downtrend in unemployment and some rising wages. If we consider front-end ratios that lenders often use, monthly housing expenses as a percent of monthly income, we are slightly higher than the 28%-32% lenders often consider normal, when using median values. We are heading into the mid-30% range when we consider median household incomes and median home prices. But this doesn’t tell the whole story. Due to challenges in finding inventory on the lower-end of the market, some marginal buyers are simply priced out, landing once again in the rental market. We are seeing that some stronger buyers continue to buy homes less than they could theoretically qualify for, so they are essentially the opposite type of buyer.
In general, our concern remains low inventory, and we cannot find compelling reasons to believe levels will amplify anytime soon. Therefore, we may continue to see challenges in the first-time buyer segment. As such, when we make comparisons between medians, they can be useful but we have to be careful to understand that buyers are moving between price ranges and potentially between single family and attached homes, so generically, making broad conclusions about the state of the market is challenging. Further, with low inventory and little respite in sight, prices can become out-of-line with incomes for an extended period. For long-term buyers and investors, it often doesn’t matter a lot unless measured against some alternative sector with high returns, a challenge in today’s investment environment. They would either be relinquishing equity to rents or foregoing positive yields in a reasonably strong rental market.
When prices are moving out of line with incomes, we can't look at one region as if it were in a vacuum. Instead, we have to look at relative values or relative affordability. Despite prices rising faster than incomes, Las Vegas remains much more affordable than most other western markets. The exhibit below illustrates estimates of how many hours one has to work to pay a mortgage. Las Vegas real estate remains far more attainable than the neighboring California market.
To all of the homes in the Las Vegas Valley for sale visit www.lasvegashomes.com
For some academic background on price-rent ratios, see Krainer (2004).