Market analysis and prediction is my game. I enjoy the creative nature of reading economic indicators and translating them into action in the real estate market. I also like the ego boost I get when I'm right (which is quite a bit more often than when I'm wrong). Yeah, I'm a narcissistic nerd that way.
Beginning a few weeks ago, I noticed that just about every major road in the Las Vegas/Henderson area is under construction. Getting across town, or even just to my office from home is now twice the effort as it was a few months ago because of conartuction caused traffic. I was recently at a social gathering of mostly Realtors, where the discussion was about what a pain in the ass the construction traffic is. I was the lone person applauding the gridlock, because it means that we will be very busy around Christmas time.
If you're still reading this article, then you must be asking "WHY", about now. Why do I like the construction traffic? Because all the jobs created by all the work, is a leading indicator of what's going to happen to the local real estate market in 6 months.
LOGIC OR JUST PLAIN CRAZY?
A "leading indicator" is some event or chain of events which can be measured, that has an effect on a market in some point in the future. For example, an extended cold snap in central Florida in January is a leading indicator that prices for orange juice will go up in the Summer. The orange juice you had this morning for breakfast was grown and picked last year. This year's cold snap had no effect on the price of today's orange juice, but it did damage today's crop. Today's crop is tomorrow's glass of juice at breakfast, hence the condition of Florida's orange groves today is a "leading indicator" for tomorrow's orange juice prices. The trick to predicting more complicated markets like the Las Vegas real estate market, is finding and knowing the appropriate "leading indicators" which drive supply and/or demand.
Most of what I read lately, focuses on housing statistics and the predictions of pundits who simply extrapolate the current numbers to predict the future. That's why they are so often wrong! Market analysis isn't really science, it's more art. It's NOT just statistics, it's knowing what the statistics mean. Statistics can be spun to tell any story we want, the real talent comes in knowing which statistics tell the real story and which will lead you in the wrong direction. For example, my last article broke down the appreciation rates into a disturbing story of a return to the excess which lead to the crisis of 2007-8 (etc). While the other pundits, looking at the overall appreciation rates tell a story of a sustainable rise in value, by breaking down the rates by economic class, I saw a very different story. Based on the data I had at hand, I saw appreciation in Vegas' working and middle class neighborhoods getting too high to be sustainable and warned to be ready for a correction. That, however was based on the common assumption that Las Vegas today is at the same place as it was in 2004-5. I've now seen data that indicates we aren't in the same place, despite the numbers that say we are. In fact, we've grown in very different ways to achieve the same numbers and that alternate direction is important to predicting the future of Las Vegas real estate.
Supply and demand (desire & inventory) react together to set the market price. But both of these factors are in constant flux and sometimes even get out of control when emotions run high. Fear and complacency can pervert the preception of reality away from the reality itself and when the emotions subside, the market "corrects". In a good/stable market, these interactions and corrections graph out to be a gentle, rolling wave. The market is fine with rolling waves, but when those waves grow bigger and become spikes, or even cliffs, the word for the day becomes "disaster".
As I mentioned last week, the most important demographic market here in Las Vegas is growing at ridiculous rate, which on it's face is completely unsustainable. Before that, I was predicting a steady and comfortable market (slow rolling waves). Which prediction is true? My answer is both.
The Las Vegas metro economy was hit very hard and sunk very low as a result of the mortgage melt-down. We have a very big hole to climb out of, and for the past few years that's exactly what's been happening. We've seen property values in the mid-lower end of the housing spectrum double in the past few years. We're now at the point where we were, before the run-up to the disaster of 2007-8. I expected, and saw the market cool off last year to a nice, solid, sustainable growth rate, but then the general economy started to blossom like Washington's Cherry Trees and as a result, we have construction gridlock and a new spike in demand. The question I find myself pondering is, what will be the new norm? How high can we go without risking a catastrophic fall? What is the value the Las Vegas economy can sustain?
So we're back to where we were before the run-up to the crash (2004-ish). What has changed about Las Vegas in those ten years and how will it effect the real estate market? Believe it or not, even with the years of exedous, we've grown by over 300,000 people. The Strip has new and more entertainment capacity. The people coming here gamble less, eat more and see more and bigger shows. We have arenas and more convention space being built and high tech/aerospace industry recognizing the value of our location, population and environment. Tax revenue is up, providing money for long deferred public projects and though still pretty crappy, our schools are improving and finally a focus of the population.
Vegas is on the move and growing, so is the local real estate market. That's like moving the goalposts in a soccer/footbal game! Based on the current numbers, indicating thet we're where we were in 2004, we should be scared and feeling like Chicken Little, that the sky is falling. But I don't feel that way anymore. We've still got room to grow our real estate market before we outpace the growth and diversification which is defining our future.
The recent omnipresence of construction in this town and the jobs it represents is a leading indicator of the real estate market to come. Here's how: Charlie, the construction worker was out of work or under employed for most of the past four years, but now is getting overtime. Like the city he lives in, he's got to dig himself out of a pretty deep hole, but now that he's working full time (plus), he's climbing out of the hole pretty quickly. In a few months, he'll be on the plus side and since he's tightened his belt and economized for so long, it won't be long until he's saved quite a little chunk of cash. Even if he doesn't buy or rent a bigger/nicer home, relaxing his belt and spending some of his newly earned cash will boost the whole community and help others achieve a higher real estate goal. With Charlie's spending, demand for real estate increases, pushing prices for both sales and rentals higher.
At some point though, the rash of construction will slow down. Charlie will lose his overtime and may even work less than 40 hours some weeks. His free spending will subside a bit and as a result, the economy in general will cool. Real estate prices will level off and hopefully settle into reasonable and sustainable appreciation. I cannot accurately predict when this levelling off will occur, but I am confident that we will be riding the up-side of the wave until at least after Christmas 2015.
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