The Las Vegas Bubble Machine
We are beginning to again hear a great deal about the Las Vegas market being back in a bubble. Some fear we are doomed to experience inflated market valuations and prices simply because Las Vegas has managed to make a healthy rebound this past eighteen months.
It’s certainly true that the sales price of a single family residence in Greater Las Vegas has increased 32.8% in the past twelve months. However, there have been a number of national articles written in the past few years that suggest the Las Vegas may have been about 20% undervalued – perhaps in part as an over-correction to the previous bubble. One thing is well documented! Appraisals in Greater Las Vegas were artificially low in past years as a direct result of the Home Valuation Code of Conduct (HVCC) legislation in 2009. Appraisals remain erratic and patently inconsistent!
What Can We Learn from the Case Shiller Indices?
You may click on any of these charts to download the pdf version. The black, dotted line represents a four percent per year market value increase in property value. For example, this suggests that if a home was purchased for $63,000 in January 1987, that it would be worth $180,000 today – assuming a steady 4% per year increase in value. The red line represents actual market fluctuations in the Phoenix market, while the green line depicts the Las Vegas market. The other two lines show the seasonally adjusted Case Shiller Composite 10 and Composite 20 indices for the same timeframe. It is clear that no market has outperformed the 4% per year market value appreciation.
This chart illustrate how the Case Shiller Composite 10 index underperformed a 4% market appreciation rate by 6.2%. Phoenix lagged by 25.5% and Las Vegas by 37.9%.
Therefore, these charts suggest that a home purchased in Phoenix in January 1987 for $63,000 would only be worth $134,000 – or $46,000 below a 4% per year appreciation rate. Meanwhile, the same home purchased in Las Vegas would only be worth $112,000 – or $68,000 below a 4% per year market value increase.
Admittedly, both Phoenix Las Vegas are back on a steep incline for appreciation, but will that translate into a bubble? That will depend upon how long this level or rate of appreciation continues in these markets. However, there are a number of factors which may slow down the rate of increase. Will investors continue to dominate these markets? What will happen to future supply and demand? What effect will rising interest rates have on future market value increases or decreases?
We will have to wait, watch, and see how the market unfolds in the months ahead before rushing to judgment about any bubble! For now it will be great just to catch up and get back on track with the 4% per year appreciation line!