Las Vegas 2019 - A Place to Make Money

At the start of each year I publish my forecast for Las Vegas investors, incorporating national and world events that could have positive or negative impacts. Before I start I will first explain why the data you will see in this paper is probably different than what you see in the national press.

The Data

Most news articles are primarily sound bites, providing generalized high level assessments and broad metro area averages because they have neither sufficient print space nor readers who are willing to invest the time to consider a detailed analysis. For example, if two homes sold in an area: one for $10,000,000 and the other for $50,000; a reporter would mathematically calculate that the average price of homes sold today at $5,000,000 (($10,000,000 + $50,000) / 2 = $5,025,000). While the information is mathematically correct it is meaningless due to over simplification and improper use of averages. This paper strikes a balance between the highly detailed data my firm uses for mining properties (subdivision/individual property level) and the broad generalizations in newspapers by focusing on a specific property profile in the areas where our clients own properties.

Client investment property locations

We track a relatively narrow set of properties in specific areas.

  • Single family
  • 3 bedrooms
  • 2+ baths
  • 2 car garage
  • Built after 1985
  • One or two story Having established the data basis, let's first review 2018.

2018 in Review

Note: The source for most of the data in this section is the Las Vegas MLS. In 2018, our investors saw significant increases in both rents and property prices. Below is a chart showing $/SqFt for rent growth for conforming properties in the primary zip codes we recommend. According to Core Logic, Las Vegas had the highest year-over-year rent price increase of any major US city at 6.6 percent (1).

Real estate appreciation by zip code

Demand remains high, with the time to rent ranging between 15 and 30 days, mainly because there are relatively few good properties available for rent. Larger homes (>3,000SqFt, 5+ bedroom) normally take longer to rent (~45 days) but these tenants tend to stay in the properties for extended periods. Our average tenant stay is between 5 and 6 years.

real estate investing - available conforming rental units by month performance
Some articles claim that Las Vegas prices are "over heated". I do not agree. Las Vegas home prices are still about 20% below June 2006 peak prices(2).See the chart below. In fact, I consider that Las Vegas prices are still recovering(3) and have a long way to go.
real estate investing - price per soft - conforming rental units by month
It has also been claimed that housing prices are dropping in Las Vegas in the 4th quarter. Once again, the properties we target are the ones in the highest demand with no prices decreases.
real estate investing - median price per soft - conforming rental units by month
Inventories have risen for conforming properties and because of this we are seeing some very good deals and less competition. Below is months of supply for 2017 and 2018.
real estate investing - months of supply by month

What I Expect in 2019

2019 Las Vegas investment property projection
Time for the crystal ball with the two following caveats:

"Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window." ...Peter Drucker
"Predicting anything beyond yesterday is guessing." ...Eric Fernwood

Significant Appreciation and Rent Increases

The Las Vegas Market is healthy and will continue to grow: Las Vegas housing prices have risen 66% since 2008(3) yet home prices are still the lowest of any major US city. Also, despite the large increases, Las Vegas home prices are still 20% below June 2006 peak prices. Las Vegas is still in recovery mode, the market is not over heated. Also, while inventories have increased in the last three months, they are still low compared to 2017 and prices are not decreasing.

Rising Property Prices

Property prices should rise significantly during 2019, starting off slow in the first half and accelerating in the second half as Californians and others realize the impact of the 2018 Tax Act. Bloomberg is projecting a 7.9% increase in Las Vegas property prices(4). According to GO Banking Rates(5): "Home values in Nevada are expected to rise 14.4 percent between 2018 and 2019 the largest percent increase of all the states." A significant number of people will be fleeing California and other blue states to Las Vegas, which will drive up prices and rents significantly.

Rising Rents

Rents will rise at a faster rate in 2019 than they did in 2018, given the declining inventory of available rental houses, rising interest rates and an increasing number of people migrating to Las Vegas in 2019. I expect the rise in 2019 to be between 6% to 8%. My forecast is based on the following:

Las Vegas Growth Drivers in 2019

  • The broader US economy is slowing but not crashing as in 2008(6). For example, in 2008, sub-prime mortgages and other economic insanities were the norm. The situation is entirely different today. So, no wave of mortgage defaults like in 2008.
  • Interest rates are not expected to rise significantly in 2019.
Las Vegas will do well for investors in 2019 because of the following growth drivers:
Las Vegas - major real estate growth drivers by month

2018 Tax Act

Many people in blue states like California will experience huge increases in taxes on April 14th due to the $10,000 local tax cap imposed by the 2018 Tax Act. Note that in 2018, one third of all property sales were to Californians but these were due to the soaring housing prices and high cost of living. The impact of the tax act hasn't hit yet. Consider the impact of even a small increase in migration from California to Las Vegas on real estate prices. If 0.25% of the 6 million retired Californians(8) decide to relocate to Las Vegas, and one residence is needed for every two people: 0.25% x 6,000,000 / 2 = 7,500 residences. Only about 35,000 residences were sold in 2017 so an additional 7,500 would drive up sales and rental prices significantly. Below is a chart from the Investing Channel showing the top migration states.(9).

Population migration to Las Vegas by state

Land Shortage

When people see the vast open space around Las Vegas they assume there is infinite room for expansion. This is absolutely not the case. Las Vegas is an island surrounded by federal land. Approximately 84% of all land in Nevada and 87% of Clark County (in which Las Vegas is located) is owned by the federal government. See the map below for what has happened between 1984 and 2016. Note that 2017 and 2018 were huge growth years for Las Vegas(10) so even less land is available now.

Las Vegas land shortage 1984 to 2016
Since there is limited room for expansion, Las Vegas can not have urban sprawl, the only growth path is redevelopment. This is a huge advantage for investors. In most cities urban sprawl leaves formerly desirable areas "behind" and they tend to decline with increased crime. Not the case for Las Vegas:

  • Class A properties will stay class A in the future.

  • Due to the lack of expansion room, increased demand created by people and companies migrating to Las Vegas will almost guarantee price and rent increases.

Major Projects

Las Vegas has a large number of major projects that drives present and future growth. Below are the biggest projects under construction. Remember that all this money is in a city with a 2.2M population, not in a large state.

  • Sphere Las Vegas(11) - $75M, will create 4,400 permanent jobs.

  • Resorts World Las Vegas(12) - $7B

  • Drew Las Vegas(13) - $3B

  • Raider's Stadium(14) - $2B

  • Las Vegas convention center expansion(16) - $750M

These major projects are creating or will create thousands of short term and long term jobs. There are also other developments underway that were designed to diversify the economy(17).

Job Creation

  • Las Vegas is either #3 or #5 in the nation for job creation(18, 19).

  • Nevada is a right to work state. Jobs and disposable income has grown much faster in right to work states than non right to work states(20, 21).

Low Business Operating Costs

Many companies are also fleeing California to Las Vegas due to the lower cost of doing business, reduced regulations and proximity to California. Below are just five examples of the cost difference.

Business FactorCaliforniaLas Vegas
Electricity Cost$0.1917/KWH$0.0816/KWH
Marginal State Income Tax Rate13.3%0%
Corporate Income Tax Rate8.84%0%
State Sales Tax7.5%6.85%
Right to Work StateNoYes

The types of businesses that will choose Las Vegas will primarily be infrastructure and tech(25, 26). For example, construction has started on a 750,000 SqFt data center(27). This is in addition to the ongoing expansions of Switch, which when completed will have 5.2M SqFt of server space(28).

Some other factors that will drive business growth in Las Vegas:

  • Las Vegas is one of the few cities with dual sources of electric power (California and Hoover dam). Uninterrupted power is critical for modern manufacturing and computer centers.

  • Computer infrastructure growth will continue in part because the fiber optic lines connecting Southern California and the East coast go under Las Vegas.

  • Las Vegas is within two days drive time of 20% of the US population - an important factor for services and manufacturing.

  • Los Angeles cost of living is 62.4% more expensive than Las Vegas(29). This is a big attraction for "property wealthy cash poor" Californians(30, 31).

  • Some of the funds that companies are repatriating from overseas(32, 33) will go into infrastructure, some is expected to end up in Las Vegas.

  • There is a shortage of affordable family housing in costal California(34). It is expected that an increased proportion of workers will telecommute from home. Las Vegas is an hour's flight to either LA or the Bay Area and would be an excellent location for telecommuters(35, 36).

Real Estate Investors

Extremely volatile stock market

stock market volatility by month
With all gains wiped out in the 4th quarter of 2018, more people will shift money into real estate due to the non-volitale nature of real estate. Investing in the right properties will greatly reduce the impact of even severe market crashes like 2008. For example, during the 2008 crash, our clients' properties dropped in market value but rents did not decrease. As the following charts indicate, rents remained basically flat even though sales prices fell.
Las Vegas real estate performance 2008 to 2014
The Eurozone's instability will divert more investment to the US(37).

  • Las Vegas has had significant appreciation since 2013. In 2018, the year to year appreciation was 13.5%(38). This will attract even more investors, both domestic and international.

  • Real estate and landlord laws and regulations favor property owners in Las Vegas. For example, in Las Vegas an eviction typically takes less than 30 days and costs less than $500. Tenants know this so there are relatively few evictions. We have only had 3 evictions since 2006 in our class A properties.

  • Las Vegas is one of the few locations in the US where you can buy class A properties with financing and have a positive cash flow.

  • While Las Vegas home prices have risen, they are still well below peak prices in 2006/7(3).

  • Many investors with California properties have negative cash flows plus newly passed legislation will make the situation worse. We expect an increase in 1031 Exchanges in 2019(39).

  • Low cost of managing properties. It is not how much money the property generates, it is how much you net after all expenses. For example, maintenance costs are very low in Las Vegas due to the climate and resulting construction.

Las Vegas investment real estate construction

Growth Driver Summary

A large number of people and companies and investment funds are pouring into Las Vegas. Las Vegas is a relatively small city of 2.2M people with limited land for expansion. It is a well managed, business friendly city actively diversifying its economic base(17).

However, there are factors that could derail the US economy and Las Vegas including the following.

  • Significant interest rate increases(40, 41).

  • An economic collapse in China(42, 43, 44, 45, 46), though the likelihood is small. (46, 47).

  • A Democrat lead government could increase the business burden(48, 49).

 

Investor Considerations

For people who are already invested, increases in rent will continue to drive up returns. For those looking to do 1031s or refinance, rising property prices will be very advantageous. For people planning to buy properties in 2019, I recommend buying earlier in the year as opposed to later in the year. If you buy later in the year you may face the combination of higher interest rates and higher prices.

Summary

2019 will be another great year for investors and I believe the Las Vegas investor market will continue to do well for the foreseeable future.


Thank you for taking the time to read this report. I hope you find it useful and as always, I welcome your feedback.

I wish you the best,

Eric Fernwood
Las Vegas Real Estate Investment Group
702-358-8884
EricFernwood@gmail.com

Sources

Below are the articles upon which this paper is based. If you know of other sources I should consider, please let me know.


  1. MSN: Some of the hottest housing markets are falling the hardest 

  2. NewMax Finance: Shiller: 3rd-Largest US Housing Boom 'Can't Go On Forever' 

  3. Washington Post: Mortgage rates plunge to their lowest level in three months 

  4. CNBC: TEN YEARS ON-Las Vegas is booming again, and bracing itself for next slump 

  5. Forbes: The U.S. States People Are Fleeing 

  6. US News: New Census Report Shows Growth, Changing Demos in Las Vegas 

  7. East Bay Times - California migration: What states got the most who left? Who moved here? 

  8. Bloomberg: 2019 market growth projections- Las Vegas projected to have 2nd highest appreciation in US, 7.9%. 

  9. Dow Jones: Case-Shiller Las Vegas Home Price NSA Index 

  10. Federal reserve: S&P/Case-Shiller NV-Las Vegas Home Price Index 

  11. Las Vegas review Journal: Southern Nevada home prices climbing more than twice national rate 

  12. Bloomberg: Trouble in Housing? Its More 1994 Than 2007 

  13. Yahoo Finance: There could be an unlikely place to hide out if a recession is coming: Housing 

  14. Freddie Mac: The Major Challenge of Inadequate US Housing Supply 

  15. Wolf Street: Bubble Trouble: Silicon Valley & San Francisco Housing Markets Head South 

  16. Yahoo Finance: U.S Mortgages Rates Down Again, With More to Come IF the FED Turns 

  17. Business Insider: A housing-market slowdown could be bad news for renters 

  18. The Mercury News:Employer taxes, rent caps, and more in big, bold Bay Area housing plan 

  19. The Vegas Post: Las Vegas Housing Prices Reach Highest Level Since 2008 

  20. The Vegas Post: Over 100,000 Californians Migrated to Las Vegas in 2018 to Escape the High Cost of Living and Taxes 

  21. Market Watch: Californias emigrants arent all moving to cheaper housing markets 

  22. Trulia: Case-Shiller: Price Growth Continues to Decline, Marking Slowdown 

  23. Digital Journal: Las Vegas may be the best city to retire in the US - "Today, 30% of the homebuyers on the Las Vegas real estate market are in fact Californians, a majority of them being members of the Baby Boomers generation." 

  24. Kiplinger: 10 States With the Fastest Rate of Job Growth, 2018 - Nevada ranked #3 in the nation. 

  25. CNBC: The top 10 states in America where you are most likely to land your dream job - Nevada ranked #5. 

  26. Las Vegas Review Journal: Southern Nevada home prices up more than twice national rate - Up 13.5% year to year. 

  27. Manufacturing jobs growing at fastest rate in 23 years 

  28. U.S. Chamber of Commerce: Right-to-Work Laws: The Economic Evidence (2018 Update) - Private sector employment grew by 27 percent in Right to Work states between 2001 and 2016, compared to 15 percent in non-Right to Work states. 

  29. Kiplinger: The Outlook for Interest Rates in 2019 

  30. Bankrate: What to expect from the December Federal Reserve meeting 

  31. The Guardian: Eurozone growth slumps to lowest level in more than four years 

  32. Fortune: Apple Leads These Companies With Massive Overseas Cash Repatriation Tax Bills - "Apple initiatives which will contribute $350 billion to the U.S. economy and create 20,000 new jobs over the next 5 years." 

  33. devdiscourse: Las Vegas shining again a decade after recession as it braces itself for next possible fall 

  34. Forbes: Is China's Economy Just A Giant 'Ponzi Scheme'? 

  35. South China Morning Post: Could China find itself at the centre of the next financial crisis because of its mounting debt? 

  36. CNBC: Trump's tariffs threaten China's economy. It already has cracks 

  37. South China Morning Post: IMF warns shadow banking poses high risk to Chinas financial stability 

  38. Bloomberg: China Move to Cut Duties on U.S. Imports Lifts Auto Stocks 

  39. Reuters: China announces fresh import tariff cuts amid brewing trade war 

  40. Quartz: The US midterms might mark the end of the strong dollar 

  41. CNBC: Democrats' capture of the House could drive down investment into the US, strategist says 

  42. Wikipedia: 2017 Las Vegas Shooting 

  43. LinkedIn Workforce Report | United States | October 2018 - Job growth - Las Vegas is #5. 

  44. New large data center - possibly for Google. - This is just one example of California companies relocating infrastructure to Las Vegas. 

  45. Switch - Las Vegas 

  46. Best Places: Las Vegas, Nevada vs Los Angeles, California - "Los Angeles, California is 62.4% more expensive than Las Vegas" 

  47. Clark County Goverment: Federal Land in Clark County 

  48. Mercury News: Heres how fast Californias elderly population is growing and where 

  49. Tax Foundation: Marginal State Income Tax Rate 

  50. Tax Foundation: Corporate Income Tax Rate 

  51. Tax Foundation: State Sales Tax 

  52. Wikipedia: Right to Work States 

  53. New York Post: Apple to build $1B Austin campus for 15,000 workers 

  54. Investors Business Daily: Google To Spend $1 Billion On New York City 'Global Business' Campus 

  55. Mercury News: Housing shortage will bite Californias economy 

  56. This Map Shows How Housing Prices Have Changed Over the Decade in All 50 States 

  57. Remote working will rival fixed office locations by 2025 

  58. New details emerge for Sphere Las Vegas project near Strip 

  59. Resorts World Las Vegas 

  60. The Drew Las Vegas 

  61. Raider's Stadium 

  62. Wynn Resorts World 

  63. Las Vegas convention center expansion 

  64. The Long-Run Relationship between House Prices and Rents 

  65. Best city for telecommuters? Its Las Vegas, analysis says 

  66. Go Banking Rates: Planning to Move? These 21 Cities Will Get Cheaper in 2019 

  67. CoreLogic Reports Rent Prices Are Plateauing in Select Metros Despite High Employment Growth 

  68. Forbes: 2019 Real Estate Investment Preview 

  69. Investing Channel: Where are people moving? And why? 

  70. Study: What Homes Will Be Worth in Your State One Year From Now