The last time Las Vegas had a major housing bubble, things didn’t end well. Hoping it ends differently this time.
It’s not fun to think about, but there are plenty of signs that current Las Vegas housing prices aren’t sustainable. Last year, prices jumped 26%. The median cost of a single-family home rose from $345,000 in January 2021 to $435,000 last month. Before the bubble burst in the mid-2000s, housing prices in Las Vegas peaked at $315,000. After adjusting for inflation, this amount is approximately $436,000. Oh oh.
It would be one thing if this 26% spike occurred when prices were near record highs. In January 2013, prices jumped 27% from the previous year, rising from $118,000 to $150,000. But that followed six years of falling prices. It was a market rally.
It’s a red flag when prices climb 26% in a year, approaching the inflation-adjusted figure that preceded a massive downward spiral 16 years ago.
If the Las Vegas economy were particularly robust, this price increase would be less of a concern. But the Las Vegas area has the highest unemployment rate of any major metropolitan area in the country. The coronavirus and Governor Steve Sisolak’s subsequent restrictions have hit tourism-dependent Clark County particularly hard. The number of people employed here is nearly 90,000 fewer than in February 2020. This is not normally a recipe for soaring house prices.
To understand what happened, look at Washington. Under President Donald Trump and President Joe Biden, Congress has approved massive coronavirus relief bills. “Free” money is not good for inflation, but it has given people more to spend. Politicians also passed improved unemployment benefits.
Then there is the Federal Reserve, which has a significant influence on mortgage interest rates. He now holds more than $2.6 trillion in mortgage-backed securities. Yes, it’s a trillion. That’s almost double what he had at the start of the pandemic. This has helped keep mortgage rates low, increasing what buyers can afford without increasing their monthly payment.
Freddie Mac reported that the average rate for a 30-year mortgage hit 4.94% in November 2018. If you took out a $250,000 loan at that interest rate, your monthly payment would be $1,333.
During the pandemic, the interest rate on a 30-year mortgage fell to 2.65% in January 2021. With this interest rate, you would have a lower monthly payment on a $330,000 loan. At the end of last year, the rate was 3.11%.
The Fed has signaled that it is preparing to reduce its holdings of mortgage-backed securities and raise interest rates. Expect mortgage rates to rise accordingly, limiting what people can borrow.
Brandon Roberts, the current president of Las Vegas Realtors, said mortgage companies could roll out different products as interest rates rise. “I heard rumors of a 40-year mortgage,” he said. This would prolong the bubble, not repair it.
The federal government can – and does – create asset bubbles. Eliminating them without destroying the economy is a much more difficult task. Rising interest rates slow economic growth, increasing the likelihood of rising unemployment.
When people are unemployed, they find it harder to pay their mortgages. Presumably, the federal government will eventually demand repayment of student loans. This will add another financial stressor. Economic downturns are amplified in Nevada because the economy remains heavily dependent on dollars from discretionary tourism.
If people can’t find jobs in Las Vegas, they will likely sell their homes and move elsewhere. This is how inventory goes from scarce to plentiful. If this happens, prices will fall.
Timing the market is a wild ride. Prices could continue to rise for years. But one day we will look back and wonder why no one warned of the housing bubble that was waiting for us.