Dealing with the housing bubble in Southern Nevada

March 19, 2003 - For months now, Las Vegas Valley residents and the Southern Nevada business sector have anticipated a crash in the burgeoning housing market. In fact, cities around the country have waited anxiously for the housing "bubble" to burst. Many feel home prices have climbed to unsustainably high levels and are due to plummet.

In the simplest terms, a "housing bubble" describes a condition in which the housing prices rise above a level that market conditions can support. Because the housing market has experienced this expanding bubble for nearly a year, many fear the bubble will suddenly burst, causing demand for homes to drop sharply and trigger a crash in home prices.

Many analysts have based the bubble theory on a comparison of the housing market to the stock market collapse of the late 1990s. While the notion that "what goes up, must come down" certainly did hold true for Wall Street, the housing market scenario is very different. Unlike housing, stocks are liquid commodities that are easily sold and traded. A significant personal investment, a home takes considerable time and effort to buy or sell.

While the conditions of Southern Nevada's housing industry could most certainly be described as a "bubble," the likelihood of a burst is yet to be seen. As interest rates return to normal and population growth slows, housing prices will certainly drop, but this phenomenon will most likely occur over a period of time. Because mortgage interest rates have held at incredibly low rates for months, the market has absorbed future demand for housing. Much like the auto industry's appealing zero- percent financing throughout 2002, low mortgage interest rates for the past year have stolen some of this year's demand for housing.

Many of the Las Vegas Valley's residents, as well as the residential construction and real estate industries, are cautiously waiting to see what will become of Southern Nevada's housing market in 2003. With a military conflict in Iraq looming, economic predictions are difficult to make, but data indicates housing prices should remain equal to or increase slightly above the 2002 levels. Low interest rates, appreciation in home values and a slowly improving economy indicate that the housing market is solid. After 2003, we will most likely see a decline in both demand and building of homes in the valley.

To complicate matters, the pending war will almost certainly affect home prices. A large-scale military conflict usually causes consumers to put off purchasing decisions. Relying on past experience, consumer confidence will continue to decline leading up to the military conflict. However, the economy tends to grow after war commences, assuming of course the outcome appears positive. If the war with Iraq is resolved quickly, the Federal Reserve Board will most likely increase interest rates by the fourth quarter of 2003 or early in 2004. If military resolution is prolonged however, economic growth will suffer and more time will pass before interest rates will increase.

One of the biggest factors in the future of the housing market in Southern Nevada is the rate of population growth. The overwhelming influx of new residents into the Las Vegas Valley is slowing.

In fact, the state demographer reports that, by 2008, Nevada's population growth will slow to the 2-3 percent range, rather than the 5-6 percent range we have seen recently. While we should continue to lead the nation in population growth, slower growth will mean less demand for housing in the coming years. This slowing in population growth, however, will require big adjustments across a number of industries within the state, not just the housing market.

Land prices play a leading role in the valley's housing market, and will continue to affect the price of homes in Southern Nevada in the coming years. The trend of escalating land prices will continue, as land is becoming increasingly scarce in the valley and there are fewer properties that will accommodate housing developments. Dwindling land availability has helped the market sustain high home prices over the past year, but will plague developers and homebuilders as home prices fall.

While demand for housing is not a source for concern right now, a real lack of affordable housing is. Several issues, such as high land prices and increased construction defect litigation, explain the reasons for higher home prices, but few have stepped forward to tackle the issue of affordable housing. This topic will grow exponentially even after housing prices begin to lower, because interest rates will increase. The number of Nevada families that will be able to purchase a home will decline significantly as interest rates rise in the coming years.

For anyone considering purchasing a home, now is a great time to buy. Interest rates are at 40-year lows, and housing prices will probably not decrease before the end of the year. Although the valley's market sits atop a "bubble," don't anticipate a burst that will devastate the housing market. When home prices in Southern Nevada do begin to decline, they should do so slowly. Market correction will most likely occur over a period of time. If home prices do begin to drop in late 2003 or early 2004, the market should be corrected by 2005.

Jeremy Aguero is a principal at Applied Analysis, a Nevada-based advisory services company. The firm can be reached at 702.967.3333.

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Article Copyright ©: J. Aguero, Special to Business Press