Page 14 - 2016 Las Vegas Residential Real Estate Report

PRICING
& INTEREST RATES
The median single family home price nished
the year at $235,000, up over eight percent from December 2015. However, the trend was far from a straight line upwards, with some months posting minor declines, much of the year being at, and just a handful of months accounting for all of
the year’s gains.
THE MEDIAN SINGLE FAMILY HOME PRICE FINISHED THE YEAR AT $235,000, UP OVER 8% FROM DECEMBER 2015
Generally, we view the price behavior of 2015 and 2016 as a healthy consolidation of the spirited increases that were achieved from 2012 to 2014. In one sense, many of those gains pre-dated signals of strength in the recovering economy and therefore some tempering of the trajectory was welcome.
To give a picture of forward expectations, the accompanying exhibit, the S&P/Case-Shiller home price index and the futures contracts that trade on the Chicago Mercantile Exchange, give a sense
of the expectations of true market participants, rather than deriving a forecast through econometric or more naive forecasting means. The market anticipated trend appears to follow the glide path closer to the trend that started near the in ection point of late 2013.
Digging deeper into the fundamentals, price-rent and price-income ratios are closer to the levels of the late 1990’s and early 2000’s, nowhere near the levels of the bubble period, which is comforting. Another indicator of market health that we like
to examine are vacancy rates. After peaking at a shockingly high level in 2011, vacancy rates subsided materially. This is important to the concept of asset utilization and value, as value will decline if assets
are not utilized ef ciently. Whether investor held or owner-occupied, it’s important that dwellings are being used for their intended design, rather than as an instrument of pure speculation.
The risks to prices in 2017 may come from spikes in mortgage interest rates and this is something we will monitor closely. An increase in interest rates could be precipitated by many reasons;
the Federal Reserve, in response to signals of
an improving economy raise short-term rates or use non-traditional measures to in uence rates, in ation expectations could alter the views of bond investors, scal policy surprises investors, and other risk-based factors may in uence bond rates which than are transmitted in some proportion to mortgage rates.
In the most obvious sense, higher mortgage interest rates hurt homebuyer potentials and homebuyers will either substitute and buy older or smaller homes than they wanted, or stay out of the market altogether. Ultimately this would impact home prices and most likely in an asymmetric way across the home price spectrum. However, none of this happens in a vacuum. A rebounding job market
and possibly higher wages, may in uence demand positively, negating some of the effects of increased interest rates. An additional factor that can cloud the picture of the housing markets reaction to
rate increases is something called “rate lock” in which current homeowners are hesitant to move- up in housing because their current rate is so low. Conversely and to add to the murkiness, some homeowners, in anticipation of higher rates, may act now.
Taken together, potential jumps in mortgage rates aren’t likely to lead to tit for tat changes in home prices because of all of these other variables. However, the potential shift in demand due to rising rates is something to bear in mind.