Las Vegas is all about gambling and entertainment. The local economy is almost entirely dependent on casinos and hotels operating. If they dry up, so does the city. Thus, you can imagine the concern when the COVID-19 pandemic all but brought the city’s tourism sector to a standstill.
The city’s housing market was plunged into turmoil as well. With so many people out of work and no end in sight, buyers suddenly were not interested. Inventory shot up and prices fell. Months later, Las Vegas still isn’t out of the woods economically. But suddenly the housing market is on fire. Why?
It’s not because builders are putting up scores of luxury homes outfitted with swimming pools, three-car garages, and all of the smart home features you could dream of. In fact, new housing starts are really not a factor in Vegas right now. It is all about resales.
Real Estate Supply and Demand
Residential real estate is one of the few industries driven almost entirely by supply and demand. Everyone needs housing of some sort. Moreover, the long-term balance between supply and demand remains fairly steady. So it’s not like builders and real estate agents can create demand where none exists.
For purposes of comparison, consider something like a video doorbell. Vivint, a nationwide company that deals in home security and automation systems, was one of the first companies of its kind to offer video doorbells. They can rely on tried-and-true marketing principles to create a buzz around the latest and greatest model, thereby creating demand for it.
That does not happen in residential real estate. Supply organically increases every spring as current homeowners seek to either move up the property ladder or downsize to something smaller. Likewise, demand also increases as spring and summer are considered the best times to move.
The one thing that always interrupts the normal cycle is economic downturn. When people cannot afford to buy, they stop looking. When buyers dry up, sellers stop listing. It is no more complicated than that. And yet, it leads us back to the question of why housing in Vegas is so hot right now.
A Market on Fire
A Recent Las Vegas Review-Journal story described the city’s real estate market as being “on fire.” According to their numbers, the median sales price of an existing home was up 1.5% in July to $330,000. That number eclipsed a previous record set in June and represents a nearly 9% increase since the first of the year.
In terms of units sold, just over 3,300 houses changed hands in July. That is up nearly 35% from June. All of this occurred even as supply shrank. The total number of listings is down just over 38% year-on-year.
All of this points to something very interesting. Demand for existing houses in Vegas is up despite ongoing concern about the local economy. Prices are also on the rise in response to higher demand and lower supply. The explanation for all this can be found in two factors: interest rates and unemployment.
Lower Interest Rates
People look for all sorts of things when buying homes. They obviously want homes that are in good condition and located in nice neighborhoods. They want homes with easy access to local amenities. Some buyers, willing to spend more, want extra amenities like smart home features and wireless security systems. Yet the one thing they all have in common is their interest in mortgage rates.
Mortgage interest is the single biggest factor that goes into monthly payments aside from principle. In fact, just one half of one percentage point can drastically change a buyer’s monthly payment. So when interest rates fall, people are more likely to buy. More importantly, buyers tend to spend more on purchases when interest rates are lower.
Comparatively low interest rates explain why the median home price in Vegas is rising. People can afford more, so they are willing to pay more. Low interest rates are also encouraging those who were otherwise concerned about buying to go for it.
Unemployment in Las Vegas
The other thing to remember is that unemployment influences housing demand. At the height of the COVID-19 pandemic, unemployment in Vegas reached 34%. It dropped to about 18% as casinos and hotels began reopening. It is expected unemployment will continue to drop steadily throughout the remainder of the year.
Just as high unemployment destroys economic confidence, falling unemployment increases confidence. That is one of the things now being observed in the Las Vegas real estate market. People have more confidence in the local economy. As a result, those who put home buying plans on hold are starting to move forward.
It is All about the Mindset
Las Vegas is a microcosm on the broader real estate market in the US. Because we focus so much on single-family homes here, our market is somewhat unique. It is a market driven by supply and demand which, in turn, is driven by the public mindset. Therein lies the secret.
Housing is a basic human need. Ultimately, what people believe to be the truth about the housing market influences how they feel about buying and selling. A positive mindset based on economic confidence and future hope drives people to buy. A negative mindset fueled by poor economics and less hope for the future scares buyers away.
The Las Vegas market is doing very well right now because the city is enjoying the resurgence of a positive mindset. Locals are coming to grips with the idea that the COVID-19 pandemic will not last forever. They are also seeing that the city is able to adapt to whatever circumstances are in play.
Perhaps the best news of all is the fact that the fear is starting to subside. People do not buy houses when they are afraid for their own economic futures. The fact that they are buying in Las Vegas demonstrates that people are less fearful about the future today than they were back in March. That’s a good thing.