When Black Knight, Inc., released its most recent Home Price Index (HPI) Report, analysts immediately noted that 12 of the 40 largest U.S. metros hit new highs in home values by the end of 2017. That list included Boston, Massachusetts; Charlotte, North Carolina, and Dallas, Texas. Notably, it did not include Las Vegas, which saw 13 percent gains in home prices over the course of 2017 but, “lagged behind,” according to reports on the HPI release.
This verbiage is deceptive. Yes, Las Vegas lagged behind, but it is lagging in a very relevant and positive way for real estate investors. Las Vegas home values are still hovering about 25 percent below the metro area’s high point in 2006, unlike the dozen markets heading up home values in the Black Knight report.
Not Necessarily a Negative Position
Why is this covered in the media (even investing-oriented media) as a negative thing? Mainly because for homeowners who purchased at or near those peak values in 2006 right before the housing crash, their homes may still be underwater. A position that far below the peak from 2006 could represent serious trouble for property owners and developers who did not lose their investments in the area already. However, for real estate investors considering activity in the area, that lag is a good thing. When markets surpass their previously existing peaks, become a more volatile environment for real estate investors because conventional wisdom about real estate markets holds that what goes up must eventually come down (and vice versa). Investors are schooled to buy when there is the potential for upward movement, and that potential becomes more difficult to estimate and forecast when a new home value peak is established.
This type of incomplete coverage (at least as far as real estate investors are concerned) also manifests itself when economists talk about markets that have recovered. We are socially geared to feel that a recovery is healthy, and it is. However, for real estate investors, a recovery could mean that the market actually will become slightly less predictable as it enters new, potentially uncharted territory. On the other hand, with Las Vegas sitting roughly 20 percent (according to Zillow as of the end of January 2018) below the peak and demonstrating what Zillow senior economist Aaron Terrazas calls “the scars of the housing bust,” that metro area may represent more potential for investors and interested homeowners simply because it is still in the recovery process.
Of course, this is not to say that recovery is bad or that lagging is good. Real estate investing is not a practice of absolutes. Savvy real estate investors will have clear facts about their target audiences, including buyers, sellers, and clients, and a well-planned strategy in place that is tailored to their site of operations. The question is not how to gain access to a market that is “surging” forward, as Zillow’s report puts it, but whether surging or “trailing” is the right type of market for you.
Investor Insight: Before you write off local markets for “lagging” on the national scene, remember investors make their money where there is a need for their capital, strategies, and expertise.