2016 is drawing to a close and it is time once again for our annual market update. Before I get into the update, Cleo and I thank you for your trust and your business and we wish you and your families a wonderful Holiday season!
Our 2017 outlook is divided into 4 sections. The first is an update on the Las Vegas economy. The second an update on the Las Vegas real estate investment market. The third section is about the impact of probable interest rate increases. Lastly, we would like to share some lessons we've learned about buying investment properties in the highly competitive Las Vegas market.
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. (The economy and population of the Las Vegas metro area is about 80% of the total state.)
- 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. First, our market focus.
The majority of the single family homes and town homes we focus on 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. 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 started climbing in mid 2014 after a long flat period. See the 5 year trend below. We expect this trend to continue through 2017.
Prices have risen slowly over most of 2016 but headed slightly down in the fourth quarter as you can 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 can see below.
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.
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. The 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.
In summary, we expect that the impact of the rising interest rate to be offset by increased rents in 2017.
Las Vegas Investment Property Acquisition Characteristics
At any given time, only about 0.05% of the 14,000+ available properties are likely to be good investments. We are only able to find these proverbial "needles in haystacks" using our software, process and investment team. However, our identifying good investment properties achieves only part of the goal of acquisition. The following is necessary to get properties under contract in the current Las Vegas seller's market:
- Move fast: Market priced good properties only stay on the market for a few days. We must make offers quickly.
- Offer close to market value: Properties sell for approximately market value, taking into account the condition of the property vs. recent comparable sales. Unless offers are very close to market value, they will not be considered. In the current market, there is no "bid low and negotiate". Good properties receive multiple offers and only the best offer is considered.
- Since we make offers based on return, we are frequently outbid. Thus, we frequently make multiple offers at the same time.
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 or in the foreseeable future. Lack of develop-able land, increasing per-capita income, increasing rents and the increasing metro population will combine to make 2017 another great year of real estate investment.
Once again, we thank you for your trust and your business in 2016. Cleo and I wish you and your family a safe and a joyous 2017!
Sign up for our free bi-weekly investor newsletter and you will be notified of new articles, software and high return Las Vegas investment properties.comments powered by Disqus