Are Las Vegas home prices really overvalued by 21.3%?
The Las Vegas real estate market is overheated and according to a highly cited study by Fitch Ratings, home prices in the area are 21.30% above fair market value. Wow!
And then an avalanche of articles about a housing bubble ensued along with e-mails from potential buyers asking us about when the expected market correction will occur.
In this video, we will briefly discuss Las Vegas housing market statistics before we talk about why the Fitch Rating report is fatally flawed and thus worthless.
In this video, we will discuss the great price gains in the Las Vegas real estate market in the first 5 months of 2018 and then point out the fatal error in Fitch Rating report which claims that home prices are overvalued by 21.3% here.
Las Vegas real estate market for single family homes
This graph shows the active listing inventory of single-family homes from May 2016 to May 2018. Up to October 2016, the active listing inventory hovered around 9500 listings. Then within 4 months, it dropped to less than 8,000. By January 2018 it further dropped to about 5500 listing before a nominal increase to 5700 listings in the last 2 months.
While the listing inventory of single-family houses dropped by 41% in the last 2 years, demand has increased and sales have been increasing in the last 4 years and in 2017, 34,317 homes sold in Las Vegas.
The best way to work in both active listing inventories and unit sales is months of listing inventory. While the months of listing inventory hovered around 3-4 months prior to last year, it dropped to two months and has been dropping to less than 2 months since March 2018.
The laws of supply and demand always rule supreme, 3 months’ worth of listing inventory results in a seller’s market and two months of listing inventory results in a strong seller’s market and this trend is not reversed until we reach 5-6 months of listing inventory. And there are no signs of that happening at the present time.
Significant increase in the median price of single family houses
As we stated, the median price of Las Vegas homes is at $295,000 in May 2018. This is 18% higher than the same 18 months ago and 10.1% higher than January 2018.
Las Vegas real estate market for townhomes
The months of listing inventory for townhomes has dropped to less than 2 months and in the last 3 months, it has hovered around 1.5 months.
Las Vegas real estate market for condos
The months of listing inventory for condos have been hovering around 2 months which results in higher pricing.
At the end of May 2018, the median price of Las Vegas condos is at $138,000, which is 22.7% higher than the beginning of 2017 and 6.2% higher than January 2018. The median price of high-rise condos is up by 8.5% since the start of the year as well.
As you can see the median price gains for residential real estate are significant. However, we have finished every Las Vegas housing market report by saying that these price appreciations are due to severely low listing inventories and not organic. Additionally, price hikes will continue until we get far more active listing than we do now.
Fatal error in Fitch Ratings article
The way Fitch Ratings do their calculations is they look at the economic improvements in the local market and then compare it to the home price gains in the same period of time. For example, they wrote that nominal income, population, and rental rate growth have been in 2.06%-2.46% range but home prices have gone up at 11%.
The deal with mathematical equations is that your initial assumptions affect the outcome and bad assumptions lead to totally wrong results, even if the math is sound.
The fatal error in this report is that they have not taken into account where we came from after the great recession when home prices were far below their true market value.
In May 2002, before the great run up of home prices, the median price of single homes was $163,500 while the same in 2011 stood at $118,000. But forget all of the fluctuations and take the $163,500 median price in 2002 and 3.5%-4.5% appreciation rates which are considered normal for the next 16 years.
If we had a 3.5% median price appreciation rate for single-family houses, the current median price would be at $283,500, at 4% it would be $306,200 and at 4.5% it would have been at $330,650. The median price of single-family houses in May 2018 stands at $295,000 which is less than 4% annual appreciation per year. And yet they say Las Vegas housing market is in a bubble, no it is not. This is the reason that newspaper reporters should avoid writing articles that involve math.
Now, say that this Fitch Rating report was totally right, then there should be a mechanism for prices to come down, and the only way would be either increasing supply or less demand and there is no signs of either one.
Lastly, in January 2011 the median price of single-family houses stood at $118,000, the same in January 2013 was $150,000, for 27% home price appreciation, while the local economy didn’t improve by double-digit rates. So, per Fitch Ratings we were highly overpriced back then, and see what happened, the current median price is about double of what it was back then, do we need to say more?
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On behalf of Saber Team, this is Karen Saberzadeh of Realty One Group and www.lasvegas4us.com wishing you a great day.