VICTOR JOECKS: Las Vegas’ housing market is ready to plummet

The Las Vegas housing market bears a concerning resemblance to Humpty Dumpty.

You probably remember this well-known nursery rhyme. It starts with Humpty Dumpty ascending to a great height — he sat on a wall. Local housing prices have done something similar. In January 2019, the median price of a single family home was $300,000. That was a 13.2 percent increase from the previous year. Sales were down and inventory almost doubled. Buyers seemed to be holding back, worried about affordability.

That was understandable. Just four years before, in February 2015, the median home price was only $205,000. How quaint that seems now.

You could have made a plausible case that in 2019, Humpty Dumpty — Vegas’ housing prices — was already sitting on the wall, ready to topple. But then prices skyrocketed. The pandemic produced an unexpected buying binge. To land a home, buyers had to submit their bids very quickly. Homes frequently went above asking price and sold within days — or hours. Homebuilders put people on waiting lists or held drawings to determine who would get into a new home.

This frenzy of demand pushed prices ever higher. In May, the median sales price hit $482,000. Rents soared, too.

This left Humpty Dumpty perched precariously on a much higher wall. And now, he’s tumbling down. By September, the median sales price had dropped to $450,000. That’s a 6.6 percent decrease but still a historically high number. It’s 50 percent higher than in 2019 and more than double prices in 2015.

The obvious culprit for this decline is the increase in interest rates. The rate on a 30-year mortgage was more than 7 percent last week. It’s likely to continue increasing as the Federal Reserve raises rates to combat inflation. In 2021, the average rate was under 3 percent. That may not sound like much, but it makes a dramatic difference.

Consider that $450,000 price tag. Assume a 10 percent down payment. With a 3 percent interest rate, the monthly payment is just more than $1,700, not including property tax or PMI. But at a 7 percent rate, the payment is almost $2,700 a month. Ouch.

To reach a $1,700 monthly payment at 7 percent rates, the price has to drop to just more than $300,000, assuming a $45,000 down payment. At 8 percent rates, the price has to be under $280,000.

This means Humpty Dumpty is a long way from hitting bottom. Not great.

Don’t miss the cause of this. Las Vegas’ housing bubble didn’t happen randomly. Prices exploded, because mortgage rates fell. Rates dropped as the result of actions by the Fed to prop up the economy. Government interventions caused the housing bubble, which is now bursting.

After he hit bottom, all the king’s horses and all the king’s men couldn’t fix Humpty Dumpty. That analogy holds here. Government created the housing bubble by artificially reducing the cost of home ownership. Don’t trust government officials who claim their next set of interventions will put the market back together again.

Victor Joecks’ column appears in the Opinion section each Sunday, Wednesday and Friday. Contact him at vjoecks@reviewjournal.com or 702-383-4698. Follow @victorjoecks on Twitter.