by Dana Gentry, Nevada Current
Will the Federal Reserve’s quarter of a point increase in its benchmark rate cool Nevada’s red-hot real estate markets?
Depends who you ask.
“I cannot deny the continued stress this could put on current homebuyers,” said Sarah Scattini, president of the Reno-Sparks Association of Realtors, where the median price of a home in February was $559,000, up more than 24% from a year ago. “The higher rates will make it more expensive to borrow money to curb surging prices of household essentials, and mortgage lenders will most likely raise their rates alongside the Federal Reserve.”
In Southern Nevada, where the median price of a home last month was $450,000, up almost 27% from a year ago, Las Vegas Realtors president Brandon Roberts doubts higher rates will slow demand or pricing.
“It will price some people out of the market. But rates are about 4.5% now, which matches the rate in 2019 when the market was still pretty strong,” Roberts says. “I think they’re still relatively low. Obviously, if it gets up in the sixes and sevens, that’s going to be more of a severe impact.”
The Federal Reserve’s bump in its benchmark rate brings it to the .25% to .50% range, after historic pandemic-era lows. The Fed is expected to increase the rate half a dozen more times this year as it attempts to curb inflation, which is at a 40-year high. The idea is to make borrowing more expensive for consumers, who will presumably spend less.
But mortgage rates, unlike consumer loans, are not directly tied to the federal funds rate – the interest rate banks charge each other for overnight loans. Instead, they track the 10-year treasury bond index, which has been climbing the past year (from 16.84 a year ago to 22.45 on Monday), partially as a result of inflation, experts say.
As a result, the market may be stabilizing, at least in some places.
The median price of a home in Reno fell by almost 2.5% from January to February, according to RSAR. Still, the average home is on the market for just five days before going into contract.
“On a positive note, these rates could actually reduce some of the demand crowding our housing market currently due to higher mortgage rates, allowing some of our supply to come back and lowering prices in the long run,” says Scattini. “However, those presently looking for a home will need to shop around more fervently for a mortgage lender to get the best deal possible. Rates will be higher, but one lender might offer you a better deal than another.”
“For 12 years, we’ve been saying ‘rates are at an all-time low,’” says Derek Parent of PRMG in Las Vegas. “That is no longer the truth.”
Parent says the cost of a $475,000 loan at 4% equates to a monthly principal and interest payment of $2,250. At 5% the payment increases to $2,533. The difference could disqualify prospective buyers with an annual income of $80,000.
He predicts rates could reach as high as 9% or 10% without causing a “massive slowdown.”
Refinances are especially popular, as homeowners with equity rush to take advantage as rates begin to rise.
“But the people who are taking cash out may think twice,” Parent says.
In Southern Nevada, houses are selling faster this year than last, according to LVR, despite higher interest rates.
In February, about 89% of homes and 93% of condos and townhomes sold within 60 days. A year ago, 82% of existing homes and 77% of condos and townhomes sold within 60 days.
With home values increasing close to 30% in the last year and income growth in the low single digits, Roberts acknowledges prices are unsustainable. Maybe.
“They are but they’re not,” he says. “They’re unsustainable for the majority of the working class in Nevada, but they are selling. That’s the weird thing.”
The paradox is easily explained with a nod to the west. The majority of out-of-state buyers are from California, according to Roberts.
“Our prices are still relatively lower than theirs. So it’s a good buy for them,” says Roberts. “Okay. I know that doesn’t help the local people, and it doesn’t help some of our service industry workers. But, that’s kind of the reality of it.”
Another factor shaping the market: Investors are betting against the American Dream and gobbling up homes in Las Vegas, many of them for use as rentals.
Investor purchases made up 29.2% of all fourth quarter sales in Southern Nevada. Investor purchases increased by 105.5% in 2021 in the U.S. over the previous year, according to Redfin, a web-based real estate service. Only Jacksonville had a higher increase in homes sold by investors – up 157% year-to-year.
Cash talks
Cash purchases, immune to the effects of mortgage rate hikes, are on the rise. LVR reports 30% of properties sold in Southern Nevada in February were purchased with cash, up from 26% a year ago.
Cash purchases peaked in March of 2013 at 59.5%, not long after post-recession median prices bottomed out in January 2012 at $118,000.
The median price has since more than tripled in the last decade, but Roberts says he’s unconcerned about a bubble “because with the amount of equity people have in their homes, it would have to be a pretty significant decrease in values.”
Roberts says homeowners in Southern Nevada gained on average $80,000 in equity in just the last year.
“We had almost a 30% increase in prices last year. So a 10% drop would still put us above where we were before,” he says. “So, I think that’s relative.”
Five years ago foreclosure and short sales accounted for more than 10% of all sales. In February, they amounted to less than half a percent.
Market forces
A move by the Clark County Commission to cut into the estimated 10,000 to 12,000 illegally-operated vacation rentals in Southern Nevada by imposing hefty fines could prompt some owners to put their properties on the market, says real estate agent Cindy Lowman, who moonlights as a short-term rental host.
“They would definitely get gobbled up quickly,” she says.
“Anything that would help increase our inventory would be a good thing, no matter how it happened. But honestly, I don’t think that would do it at this point,” says Roberts, who estimates the number of homes builders are bringing to market is about “15,000 a year short.”
Homebuilding, by Parent’s estimation, is “ten years behind in Las Vegas. The recession just made it stop.”
“They’re not building fast enough,” Roberts concurs. “Until we can get more inventory, we’re going to have steady price increases, it will be hard to get into a home, and rental rates will be going up.”
Nevada Current is part of States Newsroom, a network of news bureaus supported by grants and a coalition of donors as a 501c(3) public charity. Nevada Current maintains editorial independence. Contact Editor Hugh Jackson for questions: [email protected]. Follow Nevada Current on Facebook and Twitter.
