Anyone who has ever driven to Las Vegas knows the strangeness of the desert approach. You drive through harsh, unrelenting land where it seems nothing can be alive, and then start to see the lights of a city that seems more mirage than a plausible place. Vegas has always been built on illusions and the housing cycle of the last decade and more seemed to confirm that. However, after an extremely rough patch, it looks like the town built on sand may be building a sustainable housing market.
Rising home prices and a stabilizing middle class may be creating a growth market that isn’t part of a bubble. To understand why, we’ll need to look briefly at the history of Las Vegas housing, why it went bad, and what that means for the future. Right now appears to be an amazing time for investors to get into Las Vegas, if not for new home building, than for buying relatively inexpensive homes and rehabbing/reselling, or, for now, renting them. There are a lot of reasons to think that doing so isn’t merely rolling the dice and trying to get lucky.
Las Vegas Housing: Growth and Decline
As the above paragraphs showed, it is essentially impossible to write anything about Las Vegas without resorting to gambling metaphors, and its explosive growth from a sleepy desert outpost to a glitzy entertainment mecca wouldn’t be believed if you were told it was fiction. Weirdness and glitz aside, though, the Las Vegas housing market followed a fairly normal pattern.
The growth of the casinos led to a few things for the city. A tourist haven needs a population to sustain it, from management to staff. These people need housing, roads, basic services, and everything else. Universities and airports are built, and they need staffing, housing, etc. It makes a city grow. People are attracted to growth and its possibilities, and so they move to Vegas. Retirees see the weather and all the new amenities, so they flock there. The city booms exponentially and the housing market grows alongside it.
According to the US Census, Clark County (where Vegas is located) exploded from less than 50,000 in 1950 to nearly 2,000,000 by the time the market crashed in 2008. Of course, anyone studying the Las Vegas housing market might have known something was coming.
The Las Vegas housing market hit a peak in 2006 but the sub-prime mortgage crisis hit it hard, as the dramatic graph above shows. Indeed, it was the epicenter of the disaster. One question many people had, of course, was why the market got so heated up in the first place – Vegas was growing, but it also had room to grow. Normally, elasticity implies a buyer’s market. However, the natural limitations of building in a desert caused housing prices to soar, and even though people could take out loans to briefly afford them, when the bill came due, the high prices led to an enormous amount of foreclosures.
What This Means for Investors Moving Forward
The chart also shows that prices are slowly climbing up again. Indeed, they’ve gone up nearly 20% in the past year, which leads to some people thinking there is a bubble, or at least another supply/demand inequality. However, you have to expect that such a dramatic collapse will have a dramatic rebound, but as long as it doesn’t reach beyond the norm, there shouldn’t be a bubble. Let’s put it this way: if gas were to have dropped down to 50 cents a gallon and then went back up to $2, we would say there was a dramatic rise in price, but it would still be considerably less than the highs. It would make sense. Despite the rise in prices, Las Vegas is still an undervalued housing market.
As more people are coming back to Vegas, they will be looking to buy or rent. With housing prices still lower than expected and with a lot of property for sale, now is a good time to get in the market. Las Vegas still has the same limitations: there is only so much room to build. So expect demand to catch up to supply. Having an investment of property in Las Vegas seems to be a good bet right now, whether you intend to sell or to rent for the time being.
Questions of Sustainability
The question is whether or not this is sustainable. There are signs that Vegas has learned its lesson. It a town rife with metaphors, we turn away from the casinos and toward something more elemental: water. Las Vegas was famous for wasting water, letting its most precious resource trickle away into the desert heat. But as Charles Fishman explained the The Big Thirst, Las Vegas has over the last decade implemented some of the toughest and most innovative water standards in the world, in an attempt to make itself more sustainable.
If Las Vegas can stay on course, avoid giving in to excess in the housing market, and continue to build a stable middle class, there are great indications that the housing market could be real and a wonderful long-term investment.
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