Las Vegas Investment 2017 Outlook

We recently published our Las Vegas real estate investment outlook for 2017 and it seems to make sense to share it here. Your feedback is appreciated.

Our 2017 outlook is divided into 3 sections. The first is an update on the Las Vegas economy. The second an update on the Las Vegas real estate investment market. The last section is about the impact of probable interest rate increases.

Las Vegas Economy

Growth in 2016 was steady and should continue through 2017 but at a slower pace. Some Las Vegas metro area facts:

• In 2016, Nevada surpassed pre-recession employment with 70,000 fewer construction jobs. Construction jobs are one of the first to be eliminated when there is financial turbulence. So, reaching pre-crash levels with fewer constructions indicates that the economy is more stable than it was in 2008.
• Modest economic growth is predicted in 2017.
• The metro population continues to increase at between 1.6% and 2.2% per year, depending on the source.
• For residential real estate, it is a seller’s market with a 3 month supply where a balanced market is considered to be having a 6 month supply. However, prices are stabilizing.
• Per capita personal income continues to rise.
• Average price of a new home is $322,000. This is well above the current maximum target price of $250,000 so new homes are not diluting the investment pool.
• Current single family home prices are still about 33% below pre-crash prices.

In summary, we expect the Las Vegas economy and housing market to continue to grow steadily but modestly in 2017. This is the best news possible for real estate investors.

Las Vegas Real Estate Investment Market

The broad metrics reported by local and national sources do not necessarily reflect the actual situation in the narrow market upon which we focus. In this section I will discuss what we are seeing and what we expect in our investment focus. First, I will describe our market focus.

The majority of the single family homes and town homes upon which we focus are within the area marked in green below.

The single family homes typically have the following configuration: 3+ bedrooms 2+ bath, 2+ garage, selling between $200,000 and $250,000 and HOA fees less than $70/Mo. On town homes, we focus on a very small set with the following configuration: 1+ garage, 2 to 3 bedrooms with HOA fees less than $130/Mo. All the information below is based only on conforming properties.

Rental rates

Rental rates started climbing in mid 2014 after a long flat period. See the 5 year trend below. We expect this trend to continue through 2017.

Property Prices

Prices have risen slowly over most of 2016 but headed slightly down in the fourth quarter as you will see below:

We expected the sales volume to decline the entire last quarter but, to our surprise, it jumped up in November and then back down in December as you will see below.

Sale Types

Below is a breakdown of the types of sales. As you can see, bank owned (REO) properties constitute a small percentage of total sales where as in 2009 they were the majority of sales.

Actual Returns

We have no attributable data source for the following but we believe it to be true based on talking to existing clients. Our client’s pre-tax actual returns in 2016 ranged between 3% and 6%. We expect returns in 2017 to be similar, despite the anticipated increases in mortgage interest rates.

The Impact of Interest Rate Increases

We’ve been asked about the impact of increasing interest rates on investments.

In the last 2 months, rates for 20% down, 30 year fixed rate investor loans have increased from about 4.5% to about 5%. If we only consider the cost of money, a $200,000, 20% down, 30 year fixed rate mortgage has risen from about $811/Mo. to $859/Mo. However, there are several factors at play including:

• As mortgage rates rise, fewer people will be able to purchase homes. People who will not be able to purchase a home will have no option but to rent, which will increase rental demand.
• Rents are not only increasing (details above), the upper rent range of long term renters is also increasing. 5 years ago, the maximum long term rental rate was ~$1,350. Today it is between $1,700 and $1,800 per month. This means that the rental sweet spot of Las Vegas has enlarged and higher priced homes (250k-300k) can now be good investments.
• Property prices may decrease due to the rising interest rates. However, there are multiple factors combined that make such simple statements questionable. Here is an article from National Association of Realtors that describes the complexity of multiple factors affecting home prices.

Considering the above factors, we expect the impact of the rising interest rate to be offset by increased rents in 2017.

Summary

2016 was a great year for our Las Vegas investors and we expect 2017 to be about the same or slightly better. We see no significant changes occurring in 2017. Lack of develop-able land, increasing per-capita income, increasing rents and the increasing metro population will combine to make 2017 another great year for real estate investment despite foreseeable increasing interest rates.