Las Vegas and 9/11 - the 2003 Housing Boom
What caused the housing “BOOM” in Las Vegas? The obvious answer would be, “Not enough supply for the demand.” That is why home prices rise, plain and simple. But, why after so many years did the home prices in this dessert vacation city EXPLODE? What caused there to be such a low inventory of homes after so long of never running into this problem? The amount of people moving into Las Vegas didn’t change and still hasn’t, even in 2006. We suggest that the Las Vegas home values rocketed as a direct result of 9/11 when the Towers came down in New York City.
How can these events be directly related? What does it mean for today’s market? And what about the foreseeable future? I’ll answer these questions to help you better understand the Las Vegas market dynamics. But first, you’ll need a little history.
In the mid ‘90’s there were nearly 200 new homebuilders in the Las Vegas valley. Most were small companies, building and selling between 5 and 100 homes per year. Then, over the next 10 years, with the price of land shooting up, many of these small builders went out of business, moved somewhere else, or were bought out by larger homebuilders. So, by 9/11/01 the total number of builders had dwindled to less than 100, (a decrees of over 45%) leaving behind mostly large companies building larger developments.
Also, the total number of homes sold in Las Vegas has consistently been about a 50/50 split between new homes and resale homes. Most markets in the USA sell a much smaller percentage of new homes, typically 10-30%.
So, this is what happened right after 9/11. Builders became leery of what might happen to the Las Vegas housing market so; they became hesitant to move on any large developments. The small builders pretty much went about business as usual building 5 to 100 homes, not as much money invested as the 1000+ home developments, therefore less risk. However, the big builders had much more to risk. Let’s say they started a tract of, 1000 houses, and the economy tanked… Yeah, a lot of lost time and money! It wasn’t just the builders that were skeptical; I bet many of you were feeling the same way. So, for the 2 or 3 months after 9/11 the applications for building permits plummeted. Then, once everyone realized the economy was OK, the permit applications picked up and returned to its normal rate.
The effect of this short-term drop in permit applications literally traveled through time and wasn’t realized until the end of 2003 when it finally showed up in the Las Vegas real estate market. What do I mean by traveled through time? Just think about how long it takes for a builder to get the permits approved, grade the land, bring in utilities, build the models, and then deliver the finished homes. Yep, it’s just over 2 years. And, because new homes comprise such a large portion of Las Vegas’s housing market, the impact was more dramatic than any other US market. It just slipped right by us.
So, what happens when supply is reduced? Prices go up! But prices went up further and faster than a simple supply-side effect can explain.
So, let’s look at the other side of the equation, demand. The rate at which people were moving to Las Vegas didn’t really change. However, when prices of new homes started their dramatic rise, some homebuyers were able to realize dramatic gains immediately after closing on their new homes.
For example, Joe Buyer contracted with ABC Home Builders for a home at $250,000 in March ’03. By the time ABC Home Builder had the home ready for closing in Dec. ‘03, they had raised the price on Joe’s model to $325,000. This was because they now had a very limited supply of homes available (the ripple effect), and buyers were being turned away. Joe didn’t have to come up with the whole $250,000 until December, and the day after he closed, he had all the buyers the builder could NOT handle ready to pay $325,000 for his house! So, essentially, he could make $75,000 in one day!
For some buyers the temptation to cash in immediately was too strong to resist. So they made a nice profit, and told their friends. Up to this point, the demand for housing was stable. However, when word spread that you could “make $75,000 in one day” the demand side changed. An influx of speculative investors came to Las Vegas, looking to make a “killing.” This just stoked the flames of an already over-heated market, not to mention the historically low interest rates of 4-6% for most of ‘04&’05.
Prices skyrocketed as the new homes inventory dwindled. So, what did the buyers do who were turned away from the tracts? They snatched up all the resale homes! The inventory of resale homes hit a low of about 2100 in early April ’04. Houses were getting multiple offers almost immediately, and the bidding war was on!
As prices were shooting up on resale homes, people started thinking, “If I can get THAT much, I’ll just cash-out now, move to Toadsuck, Arkansas and retire!” The inventory responded, and the inventory rose to over 10,000 by August ’04, and then peaked at 11,400 in October. Then it leveled off for over a year, fluctuating around the 9-10,000 mark until January ’06. The price of homes hit a plateau over a year ago, with prices rising very slowly. There have been a few pockets of price decreases, but we have not seen a market-wide decline.
What’s happened since January? The inventory has grown to 15,717 single-family residences as of 6/19/06 9:32 am. It has been steadily increasing about 200 per week. So, what does the future hold for us? No one knows for sure, however, we do feel that Las Vegas is almost at the full saturation point (with over 20,000 homes) and that house prices will start to level off and become more consistent. Remember, Las Vegas has anywhere form 4,000 to 7,000 people a month moving in and it has been projected that we will run out of land to develop by 2010. The prices will only go up. Las Vegas has a lot unique factors that differentiate us from the other cities in this country that have had large market corrections. You can’t lose by owning property in Las Vegas, NV.
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