Real Estate - Supply vs Demand…which is more important?

Real estate is a major focus of The Capitalist Manifesto due to the fact that I own a lot of real estate and have heard everyone’s opinions, solicited or not, on where I should be investing.  Obviously, this past decade has been one of the most, if not THE most, amazing decade for real estate growth and collapse as any other decade in history.  Fueled by low interest rates during the 2001 recession, real estate went on a rampage.  But one of the frustrations I have is that everyone equates “hot” areas to real estate growth.  I am picking on Las Vegas in this article, not because it has seen the biggest collapse, but also because it probably saw the biggest population increase out of any single major city in this country. This coupled with its hot tourism economy made it a great example for what makes up growth in real estate values.  (I will also be mentioning Columbus, the capital of my great state of Ohio, as well as NYC in an upcoming follow-up article to this)

Las Vegas, since 1990, has seen its population go from 816,000 to 1,920,000 in 2009, which is an annualized rate of 4.6%! This is an astounding amount of growth.  The country, as a whole, saw growth of just a shade under 1% per year.  That’s 4.6X the national growth rate! Cleveland saw a mere 9,000 people move into the area from 1991 until 2009.  9000 people. That’s it!

So every real estate pundit, myself included, will talk about how important population growth is to real estate values.  Supply and demand, right? Well, is it really supply AND demand or are they just talking demand?  That’s where the breakdown occurs, in my opinion.  Of course demand is essential…as more people go into an area, demand increases.  BUT, have you been to Las Vegas lately? Is there a lack of land to build on out there?  HECK NO! There is nothing but land.  So the supply is huge.  So those wannabe economists out there know that with a lot of supply, prices are driven down.

Look at the graph below to show the property values in Las Vegas vs Cleveland from 1991 until 2009…This chart makes 1991 equal in terms of value for both cities. So they both start out at price level 100 and the increases show how much prices go up relative to 1991.  So in 2000, Cleveland was at the level of 150  which means that prices in Cleveland were 50% higher in 2000 than in 1991. At the peak, for Las Vegas, prices were as high as 2.6 times the level they were in 1991!

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Look at that collapse! Now, some of you may say “yes, but Las Vegas was just overbuilt and things got crazy which is why prices are below the growth levels of Cleveland.”  However, look at something very interesting…When did Las Vegas finally beat Cleveland in terms of price appreciation?  It took until 2003 when rates were low and the markets were booming before Vegas surpassed Cleveland’s property value growth! In that same time, the population of Las Vegas went from 816,000 to 1,600,000! That’s almost a doubling of population while Cleveland went from 2,882,000 to 2,938,000. That’s barely 50,000 more people (2% in 13 years TOTAL! Not per year…TOTAL!)

So why is that happening? Well, I have my theories.  If you’ve ever been to Cleveland, half of our potential land is in Lake Erie.  We can’t build North.  Just south, east, and west.  Not a big deal to some, but that’s half the possible land another city would have available to them. So there is still a lot of demand within the Cleveland MSA and not as many lots or vacant land to build on that people want to live, so the supply is cut.

Demand will come and go based on many factors, but the supply of land can’t come and go.  It is what it is. Yes, we can demolish houses and such to build more, but that’s still the same amount of land available.  It’s not decreasing the amount of land available.

So before you go buy that house/building in that hot spot where everyone wants to be, understand supply and demand and remember BOTH are factors in determining price. Not just one. 

 **Data for this chart was pulled from www.Economagic.com

Comments

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