Pop goes the market: Are we headed toward another housing bubble?
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Seven years ago, the fuse was lit, here in Las Vegas, on a fiscal bomb that eventually would destroy the economy and usher in the Great Recession.
Easy-credit mortgages were handed out like cheap Halloween candy to people with no proof of income. Or literally no income at all. The effect of all that borrowed money was to rapidly push up the price of housing, and here in Southern Nevada, the hyperinflation of housing prices led the country, quarter after quarter. The savage increases would have chased buyers away, but because the banks were lending money to anyone, anyone could get a mortgage.
And as long as housing prices escalated, everyone was happy. But a slight downward tick of the economy in 2006, which any other time might have been shrugged off, led to casinos tightening their belts with layoffs.
The laid-off employees suddenly couldn’t pay their mortgages, especially the exotic balloon payments that lenders promised could be refinanced. Only now there was no credit available for refinancing. Seemingly overnight, Las Vegas led the nation in mortgage defaults. It turned out that those loans and similar loans handed out in other rapidly developing parts of the Sunbelt — Florida and Arizona — had been sold and resold so many times that they had become an industry on their own. Thousands of families lost (and are still losing) their homes here, but the default crisis was suddenly a lot bigger than Southern Nevada.
It was a global catastrophe. International banks, insurers and financial giants collapsed. The economy went into a tailspin. The bubble that was Las Vegas growth turned into a bomb that took with it more than a decade of investment and trillions out of the economy.
So Las Vegas homeowners, would-be buyers and sellers might be excused for being very, very nervous about speculative real-estate bubbles. And they might be thoroughly confused by today’s newspaper headlines.
Is this a good time to buy? Is the market hyper-inflated, setting us up for another huge crash? Should we hunker down with our existing housing choice, or get in while the gettin’ is good? Is it time to capitalize on the 30 percent gain in Las Vegas housing prices last year with a quick sale?
To all of the above, the answer is: yes. And no.
Housing prices, especially in some key neighborhoods, are definitely on the way up. That’s good news for homeowners, who are beginning to recover a bit from years of declining value. Foreclosures are leveling off as the economy slowly recovers. Buyers still are finding it hard to find lenders, but cash is king in local residential real estate — and there are buyers for homes on the market in Las Vegas.
Is it a bubble? Not yet, say some Southern Nevada observers.
“We may be building a foundation for what would become one [a speculative real estate bubble] in the future, but even the price increases we have seen would not bring us to parity,” says Jack LeVine, a Southern Nevada real estate agent. By parity, he means the housing prices we would expect to see if we had continued a healthy, moderate growth rate of 2 or 3 percent from 2003 to the present.
It will take several years even at the startling rate of appreciation in today’s market to correct for the last six years of recession, he says.
“We’re just undoing the extraordinary bust that happened,” LeVine says. “The 30 percent increase in one year only reflects the rapid correction of an undersold market. … Two years ago I was begging people to buy something. Of course, they all missed the bottom.”
John Restrepo, a Las Vegas financial analyst, says he doesn’t think we’re in a bubble — but he sees a few signs that it might be on its way.
“You do not see a lot of superheated price increases on the commercial side, but you do see some on the residential,” Restrepo says. But he’s looking at more than just real estate prices. He’s looking at secondary indicators that reflect what’s happening to the public’s perception of the market.
“You’re starting to hear the same sort of hyperbole in the media that you saw in 2006,” Restrepo says.
That is, the headlines are urging people to jump into the market because prices are going up so fast. The effect of them jumping into the market, of course, is exactly what would drive up real estate prices quickly.
That’s not how you want to build your market, Restrepo suggests.
“The housing market is largely being driven right now by cash investors and fundamentally low interest rates, not by rising incomes in real terms,” he says. “That’s what we’d like to see: incomes rising above the rate of inflation — and we’re not seeing that yet. We’re seeing wages rising, but rising below the rate of inflation.”
There is some significant “fragility in the strength of the current housing boom,” Restrepo says, including many more homeowners having difficulty meeting mortgage payments.
Stephen Brown, director of UNLV’s Center for Business and Economic Research, agrees that the price increases of the last year are not sustainable, but he doesn’t believe we’re in, or will soon be in, another housing bubble, in part because of the number of people who are underwater in their homes and are having trouble meeting mortgages. Brown says he doesn’t see a flood of those homes onto the market like we saw from 2007-2011.
In part, the banks just don’t have the capacity to foreclose on all those houses, he says. Also, the laws were changed following the crash so that it is harder for the lenders to foreclose — no more computerized foreclosure processes.
“Banks just don’t have the staffs to do that,” Brown says. “They can’t do the ‘robo’ foreclosures. They just can’t put the houses on the market as fast. They’re coming on the market in a very slow manner.”
However, the economy is improving. Brown says he’s not sure if it will continue to slowly improve or if pent-up demand will spur higher growth rates. Either way, “We see the economy improving and demand increasing.
“In some parts of the market, there are investors buying houses, and they’re paying cash,” he says. But unlike in the super-heated 2000s, the banks aren’t lending willy-nilly and selling the risk. That means that more people will be renting. That gives investors some opportunity. Buyers are paying cash, and many are investors from California, Canada or Asia.
“The rental market in Las Vegas is so strong, they can buy a house and rent it out and make a nice return,” Brown says. “When the house price goes up, they get the capital return and a nice profit.”
For homeowners who are already here, the economic situation is “a happy place,” he says, “as long as the economy keeps growing and as long as the local economy grows.”
Of course, there are some “ifs” in there. Things could go south, if the local or global economy also soured. But Brown says he sees growth, not recession, in the coming months.
“Looking nationally, there’s a lot of pent-up demand,” he says. “Consumers and businesses to some extent are sitting on piles of money. And the financial sector is sitting on piles of money. What we need to do is turn those piles of money into grease for the economy. … I don’t see much likelihood of a downturn.”
Restrepo agrees that some of the fundamentals look good — but he also says people should not forget the lesson we learned in 2007.
“You cannot raise prices like you did last year steadily,” he says. “Something is going to adjust. We just don’t think it’s going to be a collapse like we saw in 2007.”
The lesson we learned? “Just be careful. Pay attention to the information. Look below the headlines,” he advises.
Restrepo says another reason we won’t see the kind of collapse we saw in 2007 is that investors are different from who they were during the bubble. Today, they are cash investors, looking for quality and a good price.
Those without good incomes are not going to qualify for mortgages.
“They won’t be qualified to buy a home,” Restrepo says. “They will become renters. What is that going to do to the market? It’s going to help the rental market. But it won’t serve as a catalyst as they did for the collapse.”
He says that we’ll know we’re in a real bubble when people get very excited, as they were in 2006.
“There’s a lot of dust in the air right now. Just be careful. You start hearing the same type of hyperbole that you did in 2006 and 2007 — we should have learned, right?”