How to Win in Vegas


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Few real estate bubbles swelled larger, and none burst louder, than Las Vegas. 

During the boom years - 1998 through 2006 - Las Vegas residential real estate prices increased 150%. That's a 12% average annual gain, well ahead of the norm.

Someone with impeccable timing could have turned a $100,000 home purchase in 1998 into a $248,000 home sale in 2006. 

But who among us is so incredible? Few people actually time the top and bottom of a market. And so the vast majority of Las Vegas homeowners have also endured the post-2006 housing bust.

Las Vegas was hit especially hard. Unemployment soared to 14.2%. And residential real estate was crushed. The home that could have been sold for $248,000 in 2006 would have fetched $94,000 five years later.

By late 2010, the media was rife with mournful essays penned in apocalyptic language. Business Insider captured the mood at the time: " No, there really isn't any way that the death of Las Vegas can be avoided. Just like the U.S. economy as a whole, it is inevitably doomed. The numbers don't lie. "

I was in Las Vegas in 2010. It was bleak, but I could sense opportunity. And so could a small cadre of contrarians. 

A few months earlier, Carl Icahn had acquired the Fountainebleau Resort for $150 million after the original developers had sunk more than $2 billion into the project. He knew that prices eventually bottom and that markets rebound. Today his Las Vegas investment is valued at $400 million. 

A couple locals I spoke with in 2010 were also cautiously opportunistic. They suspected that the torrents of dreadful news were signaling a bottom.  And they were right. The Las Vegas housing market has bounced back over the past 18 months.

Prices have been soaring. New and existing Las Vegas home prices have jumped 37% and 33% in the last year. The median home price for a Las Vegas home has risen to $175,000.

The final laggard - Las Vegas - is finally coming back. And that tells me the national residential real estate market is also well on the road to recovery. 

Sales and price data from CoreLogic, Trulia, and Zillow show local markets across the country appreciating quickly. The most followed S&P/Case-Shiller Home Price Index recently posted its largest year-over-year gain since March 2006. Prices are up 12.1% in the top 20 metropolitan areas.  

A recovery for housing prices is good news for most Americans. This - coupled with a stock market at record highs - provides a wealth affect that can encourage spending and economic activity.

But before jumping in with both feet, I want to advocate caution.  Whenever any investment appears to be a sure bet, I get a little nervous. 

The housing market seems to be far away from another bubble. After all, new home construction of 950,000 units annually is still far below the historical average of 1.5 million. Similarly, "underwater" homeowners aren't putting their homes on the market. And this is keeping inventory tight in many markets.

There are many reasons to believe home prices will continue to rise this year and next. But investments in the sector have already performed handsomely, reflecting the comeback.

For example, the iShares Dow Jones US Home Construction ETF ( ITB ) has more than doubled over the past two years.

Just like the last housing boom, buying at the top can be disastrous.  Whenever prices and valuations soar, I prefer to stay away.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks

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