Over the last decade I’ve had a front row seat to one of the most interesting real estate markets in history. I made my first foray into the Las Vegas real estate market twenty years ago as a long-distance investor and landlord. I saw the growth taking place and believed that appreciation was sure to follow. I was way ahead of my time. There was so much building going on that prices remained flat. Buyers wouldn’t buy used when they could easily afford new. That didn’t change for more than a decade.
When the national real estate market heated up, the Las Vegas market kicked in the afterburners and absolutely skyrocketed. Common sense was thrown out the window as amateurs bid prices to the stratosphere. It was what Alan Greenspan termed “irrational exuberance.” The supply of available homes was measured in weeks and days rather than months. It seemed there were bidding wars on the front lawns as the “for sale” was being hammered into the ground. We know what happened next.
Home Builders Disappear
When the market crashed and foreclosures piled up new home builders slashed prices to liquidate standing inventory. They took advantage of the now expired home buyer tax credit to unload as much as possible and either drastically cut back building or, in many cases, left town altogether. Home prices soon began to plummet even faster than they rose. Supply expanded to the point that it appeared the market would never recover. Then a funny thing happened, seemingly while no one was looking. That supply of homes that appeared to be never-ending is gone – poof!
I recently wrote about how foreclosures have dried up in Las Vegas (article). A new law has created a great incentive for banks to favor short-sales rather than taking back homes. At the same time the low prices have attracted many buyers from out-of-state. What REOs were available were being purchased for cash and turned into rentals. The rental demand is strong since many people either can’t qualify for a mortgage anymore or they no longer have an appetite for home ownership after being burned by the market.
The available supply of homes in the lower end of the market is once again measured in days rather than months. When houses come on the market they are seeing bidding wars with buyers being told to submit their “highest and best” offer. That offer better be cash in you want a chance of having it accepted. The difference so far is that prices are creeping up rather than exploding. The primary reason is that amateurs are not the ones fueling it, professional investors are. They are, for the most part, savvy and numbers driven rather than being caught up in the emotion of gotta-do-a-deal-itis. If the numbers don’t work the investors move on and look for a deal that pencils out to their satisfaction.
The amateurs and newbies are still out there, but they’re too busy talking about the “shadow inventory” that the banks are going to dump on the market any day now. They give the banks way too much credit. While they wait the pros clean up. The amateurs will probably jump back in around the time that irrational exuberance reappears. They’ll wind up losing again too.
I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said. – Alan Greenspan
Photo Credit: Wikipedia