Seven Questions for Economic Analyst Jeremy Aguero

Southern Nevada’s leading analyst on the Valley’s continued recovery, the drought’s impact on growth and the pros (and cons) of skyrocketing home prices

Photo by Jim K. Decker

Photo by Jim K. Decker

Nearly 100,000 new residents moved into the Valley in the past two years, and home prices are on the rise. Can we finally say officially that the Great Recession is in the rearview mirror?

Yeah, I think we can. Are we back to where we were at the peak, or anything along those lines? The answer to that question is absolutely not. I also think it’s somewhat unhealthy to ask, “Well, when are we going to get back to that level?” And I don’t have a lot of clients that are currently spending a lot of time thinking that way. But for the last two years, we’ve added jobs—every sector of our economy added jobs over the past 12 months. We’ve also added income, housing prices have risen, [and] you’ve seen increases in investment on and off the Strip. The combination of those things is a clear indication to us that, yes, we have transitioned from an economy that’s in decline to an economy that’s growing again.

But you can’t talk about population growth anymore without also talking about water. Given our water scarcity, aren’t we nearing the point of having to turn away people at the border?

I don’t know that we’ll ever turn people away at the border. At some point, however, the [water] restrictions that are going to be imposed will make it very difficult for us to accommodate growth, whether that’s because the quality of life is reduced or you’re just not allowed to build more housing.

The drought is a long-term issue, [and] water policy—in particular conservation—is going to permeate almost everything we do from an economic standpoint over the next decade, and probably longer. Water right now is probably in our top three in terms of issues we’re keeping an eye on.

What are the other two?

One is employment formation. We are very, very concerned about being able to continue to see jobs [created]. The other is going to be income growth. What we’ve seen over the past year is that jobs are being created, but the number of hours worked has not come back. And for a long time there, weekly wages were also dropping even though jobs were being created. Now weekly wages are starting to find their way back up, and that’s pretty encouraging.

Some of that has to do with the fastest-growing sector of our economy: construction. Where the overall economy grew by about 2.5 percent in the past year, construction grew by in excess of 9 percent.

Your firm, Applied Analysis, recently released the Las Vegas Perspective, the annual comprehensive report for the Valley. What’s the one statistic in there that would give the average resident reason to smile?

That’s gotta be home prices. We’ve got the highest home-appreciation in the United States today. That means $30 billion worth of recovery. That’s debt that someone doesn’t have anymore, and that’s equity that they found in that house again.

From our perspective, though, it’s not all smiles. We’ve gone from being the fastest-appreciating market in the United States to the fastest-depreciating market in the United States, and now we’re the fastest appreciating again. We’ve been on this roller-coaster ride before, and we know how it ends. Right now, we’re OK relative to where prices are in comparison to incomes, but we’re keeping a very close eye that we don’t create a bubble.

How do we know another bubble hasn’t already started to form?

Two reasons: The median home price is only about $165,000, which is pretty close to where it should be relative to where incomes are, and you don’t have as much bank capital really pushing those values up. A lot of the transactions that we’re seeing are cash transactions. So if the property values go down, it’s not as though the banks will be in as much trouble as the investors. Now, the next logical question is: What if those investors start to divest? They own thousands and thousands and thousands of homes in the Las Vegas Valley. If they start to get skeptical about [our] real estate market, they’re going to start to pull out.

And then we’re back to square one again?

I don’t know that we’d go back to square one. I don’t foresee that you’re going to see a $100,000 [home] unit again anytime soon. And if you did, people would come from all over the place and gobble them up—it would be short-lived. But if those investors [start to sell off], could we see a 10 percent decline in prices? Yeah. And would that make people pretty nervous again? Yes. And the single most important indicator in terms of how we’re going to perform [economically] is the confidence of local consumers. Things are better. More people have jobs. Their incomes are going up. They’re feeling better because their home prices are going up. But we need to recognize that that confidence is fragile.

So should we be more wildly enthusiastic or cautiously optimistic that home prices are up more than 20 percent from a year ago?

Absolutely cautiously optimistic. Look, the recovered equity is important, as is the fact that housing prices are closer to equilibrium. But the expectation that housing prices are going to increase by double digits over double digits over double digits may feel really good, but that’s a recipe for disaster over the short run. I’d much rather see 10 years of 5 percent growth than two years of 25 percent growth.