Published on January 1, 2022
Justin Miller
Principal, Co-Founder Chong Miller Group, LLC
As we welcome the new year, some people throw confetti, some people sing confusing songs, and I write my plans and forecasts. And my forecast: 2022 will be a strong year in the Las Vegas real estate market. While anyone can make claims about the future, and nobody actually possesses the mythical crystal ball, my forecasts are informed by a set of important attributes.
First, I’m an active participant in the local real estate market – engaging with a steady stream of buyers, sellers, developers, investors, bankers, inspectors, and escrow officers. In 2021, I was among the top 100 Realtors in the Las Vegas Valley (of more than 18,000).
Second, I have a strong formal educational foundation on which I’ve built my practice, and through which I analyze a wide array of market data and research. Before licensing as a real estate broker/salesperson and opening my own practice, I spent a decade as a business school professor. My Ph.D. training at NYU’s Stern School of Business grounded me in Statistics, Sociology, and Economics, as well as the specific literatures of Business, Management, Entrepreneurship, and Negotiation.
Every day, I use my extensive educational and experiential backgrounds to help ensure my clients gain advantage in the real estate market. And every day I track market activity and forecast the future to make sure my clients know what is most likely to impact their property investment portfolios. While I publicly report on market data monthly, once each year I make my forecasts available more broadly.
Forecast
2022 will see continued strong growth in sales volume for single family residences, condos, and townhomes. This builds on the record-breaking volume of 2021. Specifically, I forecast annual volume to increase 12-15 percent, to yet new records. Inventory constraints will likely slow volume growth in the first quarter, with significant increases in Q2 and Q3 before settling back to a more measured rate of growth.
2022 will also see continued price appreciation for single family, condo, and townhome residences. While 2021 saw record pricing during 10 of 12 months (single family), I expect much of the price appreciation in 2022 will occur in the first half of the year before stabilizing in Q4 and ending up another 12-15% year-over-year.
Rationale
In addition to the ongoing very limited inventory of homes for sale, several factors underly my forecasts for 2022. These can be categorized via three primary drivers: Financial, Demographic, and Structural.
Financial issues supporting the growth of the residential real estate market include low interest rates, significantly increased conforming loan limits, and a lack of distressed properties entering the market.
Interest rates continue to remain near historically low levels, and while likely to increase this year, rates are very likely to remain under 4% for the entire year. At these rates, houses remain inexpensive (on a monthly-cost basis). Additionally, rates this low remain attractive as long-term investments with many people realizing they should lock-in these interest rates before rates start to potentially rise later this decade. To the extent some people fear inflation to be accelerating, a mortgage at 3.5% against background inflation of 4% means banks are literally providing free money. While I think current inflationary forces are transitory, I also strongly believe over the next 30 years inflation is likely to average more than 3% per year.
In addition to low interest rates, 2022 conforming loan limits increased to $647,200. Assuming an 80% loan to value (LTV) mortgage, that means properties priced at $809,000 or lower qualify for conventional financing. Home sales at that level (or higher) represented less than 6.8% of the market in 2021. In other words, 93+% of the houses for sale would qualify for a conventional loan at 80% LTV. And the underwriting guidelines have changed so that many banks are now writing conventional loans with as little as 5% down (with private mortgage insurance). The enhanced availability of conventional financing will act as an accelerant to the market in 2022.
And because of the mortgage forbearance programs designed to soften the impact of the pandemic induce lock-downs, mortgage distress levels are at historical lows, meaning distressed properties will not be flooding into the market. So interest rates, conforming loan limits, and mortgage workouts are all highly supportive of my market forecast.
Demographic issues supporting my real estate market forecast include increased purchase activity by millennial-generation homebuyers, the increased sales activity from baby-boomers looking to ‘right-size,’ and the ongoing growth of the Las Vegas Valley population due to in-migration trends.
While millennials have been slower than prior generational cohorts to enter the housing market, their numbers have increased markedly over the past two years. Every generation goes through a set of maturation processes, from birth through death. And as a generational cohort reaches a certain age, members start to form households, move into, and purchase their own housing units. These processes are triggered at the individual level, but the various members of the generational cohort can be examined collectively for trends. And this generation is now trending into homeownership at the rates associated with the prior three generational cohorts. As their household formations accelerate, and as they gain the additional financial security arising from increased employment status and purchasing power, this trend will continue.
Similarly with baby boomers. As a generational cohort reaches a certain age, their housing needs change. Children have moved out, retirement approaches, and people start thinking of right-sizing their housing in order to pull some funds out of housing to deploy to other projects. With older generations, life-expectancy and financial capacity often meant moving in with their children or seeking retirement communities. For baby-boomers, the shift means seeking easier housing options such as single-story homes, smaller homes, and perhaps adult communities. As baby boomers increase their movement into right-sized housing, this also frees the larger houses they had owned for sale to move-up buyers.
In addition to these generational phenomena happening among the Las Vegas population, it is also true that Las Vegas remains an in-migration destination. Now ranked as the 19th largest metropolitan statistical area (MSA) in the US, Las Vegas was the 21st fastest growing large MSA in 2021. As employment trends improve, and as the economy continues to diversify, in-migration trends can be expected to accelerate. While some other areas of the country may also be experiencing growth, there is no rational reason to believe Las Vegas will become less desirable as a place for new retirees, as a place to find work, or as a place to seek greener (and warmer) opportunities. As such, these demographic trends are strongly supportive of my real estate market forecast.
Structural issues supporting growth of the residential real estate market including a number of interesting factors: Increasing and variable rental housing costs; Return of international travel; and Return of convention business to Las Vegas.
Perhaps the most interesting structural feature is related to rental housing. When one purchases a house, one owns an appreciating asset at a fixed cost. Assuming a fixed-rate mortgage, one knows month-to-month, year-to-year what their housing payment will be. In a rented house, one lives in a place with potentially year-to-year increasing costs. While it’s easy to think of renting as providing flexibility, in truth, the landlord is the one with flexibility – they can increase rents and they can even terminate the lease. Sure, a renter can go elsewhere, but what security is that? What rental property will be available next year (and you’re still saddled with the cost and inconvenience of moving). And all that without gaining any equity.
Assuming a normal property market, equity increases approximately 5-7% per year for homeowners (between price appreciation and loan balance reduction). That represents increased net wealth. Renters experience no such housing-associated increase in net wealth. And over this past year, many homeowners saw price gains that generated six-figure increases in net wealth.
Of course, some will note there are other investments that could generate those types of returns. Except other investments carry greater speculative risk (volatility), provide none of the tax advantages (mortgage interest rate tax deductibility), and do not provide shelter. Since one has to live somewhere, owning one’s home provides significant financial advantage. While this is true every year, in a market with rapidly escalating rents, this issue becomes more cognitively compelling.
That does not mean everyone should buy – there are excellent reasons to rent. But if one has the capacity to buy, and if one has a time horizon of 2-3+ years, in a residential housing market like Las Vegas, the purchase decision is almost always the correct one.
And as the impacts of the pandemic wane, international travel and conventions return to Las Vegas. Since conventions are a major economic driver for the region, their return means increasing employment levels and increasing wages. International travels are interesting because they spend more money per day (and stay longer) than domestic travelers, on average. Even more, in some specific real estate market segments, the international traveler is the marginal buyer – and so their absence has negatively impacted some housing segments while their return will boost those segments.
Risks to Forecast
Of course, any forecast is rooted in an understanding of the environment as existing. Just as the pandemic arose in 2020 as an unexpected issue, unforeseen issues arise. Interestingly, I had suggested in early 2020 the pandemic would actually accelerate the housing market – and so it did. While some things are truly unforeseeable, other risks are more or less likely. The primary risks to the forecast are related to recovery from the pandemic. Specifically, this means ongoing pandemic and ongoing supply chain issues resulting in additional inflation and the potential corrective actions to a higher-inflation environment.
As to the ongoing pandemic itself, I think 2020 and 2021 have clearly demonstrated the pandemic will not stop people from moving. And where will people move – increasingly to the houses and geographies in which they wish to live. Las Vegas has fared very well under such constraints and there is no reason to think that changes unless one believes early adapters were statistically more likely to like Las Vegas relative to their slow-adapter peers. That seems farfetched.
But the spill-over effects of the pandemic, as seen in supply-chain constraints are real. And those have not only not yet resolved, but they could well continue for months after the cause of the pandemic has been eradicated. That means we could be looking at supply-chain problems throughout 2022. These problems include delays in getting materials for new construction and remodeling projects. But more particularly, they mean inflation as demand for various goods and services outpaces availability of supply. Supply-constraint induced inflation has been visible throughout 2021 and is likely to continue. The question is how policy makers respond?
To the extent the US Federal Reserve (FED) believes inflation is transitory, their responses are likely muted. If they perceive inflation expectations increasing, they become more likely to take stronger measures. To date, the FED has stated inflationary forces are transitory and I believe this continues to be their stance throughout 2022. Under this belief, the FED has stated they intend to raise the Fed Funds rates three times this year. While mortgage interest rates are not tied to the Fed Funds, there is a strong correlation, and this suggests interests increase to approximately 3.75% by the end of the year. Such an increase (to 4.0%) is built into my forecast and therefore posses no risk.
If they FED takes more aggressive action, they could raise rates faster and higher. This could become disruptive to the housing market. At the same time, the FED is aware of the mortgage market’s susceptibility to interest-rate induced slowdowns and given the amount of wealth invested in the housing market they’re likely to be cautious. More probably, the FED undertakes more targeted measures to reduce inflationary forces (or investment market speculation), without significantly altering from their stated interest rate course. I assess this risk as low.
In fact, to the extent inflation increases and the FED restrains increases in mortgage interest rates, this becomes even more supportive of the housing market.
One last risk is housing price affordability. As I’ve noted in some of my videos (https://YouTube.com/ChongMillerGroup), housing price affordability is better now than it had been in 2006 (when Las Vegas was last talking about record housing prices). In fact, assuming a 30-year fixed-rate mortgage at 80% LTV, the median single family home at the end of 2021 would cost approximately $1,650 per month. The equivalent median home in June 2006 cost $2,496 per month (inflation adjusted). Housing costs are therefore only 66% of the level they were in 2006. And I do not believe affordability is a major issue at this time.
To the extent some potential buyers are priced out of the market for single family residences, they’ll adjust their expectations to either smaller homes, condos, or townhomes. And so the product mix may change. But rental prices are going up, and so the rental market is not a viable relief valve for perceived affordability issues. People in need of housing will continue to drive this market.
Thus, I believe my 2022 market forecast (12-15% increase in prices for single family residential, and 12-15% increase in sales volume) is well supported and is of low risk.
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Justin Miller is a Las Vegas-based real estate expert and principal co-founder of the Chong Miller Group. He is an award-winning real estate agent (NRED: BS.0145509) associated with Keller Williams Marketplace 1, where he serves on their Associate Leadership Council. Before opening his own real estate practice, Justin was a business school professor at the Marshall School of Business (University of Southern California) and the Fisher College of Business (Ohio State University). Justin earned his Ph.D. in business (with an emphasis in financial entrepreneurship) at the Stern School of Business (New York University). Justin also holds a JD, and masters’ degrees in both Public Administration and Electronic Commerce. Justin did his undergraduate work at the US Naval Academy and is a US Navy Veteran. Justin serves on the Las Vegas area US Naval Academy Alumni Association board of directors and as a ‘Blue and Gold Officer’ (USNA Admissions Office liaison) in the Las Vegas area.
