Pity The Retail Seller

Home sales in many markets are dominated by bank REOs, or Real Estate Owned as foreclosures are called after they have gone back to the bank. Generally these REOs will sell below market and can be a great deal for the buyer. However in areas that have an overabundance of REOs they do not sell below the market, they are the market.

Las Vegas

On the surface it may appear that the Las Vegas market is going to lead the housing market out of the doldrums. Looking strictly at the numbers you will see that April home sales were up 78.3% from April of 2008. The median price has dropped to $141,720, a 39.9% reduction from a year ago. Figures for inventory, days on market, and days of supply have dropped as well. These are all good things, right?

Not so fast, it depends on which side of the transaction you are on. For buyers these numbers are awesome. Homes in Las Vegas are more affordable than they’ve been in a very long time. First-time homebuyers can take advantage of an $8,000 tax credit to make it even more affordable. For buyers it’s all good.

Which leaves the sellers. REOs absolutely dominate the Las Vegas market and there are a large number of short-sales as well. In a normal market these distress sales would be an aberration and not a major factor in real estate prices. However, distress sales in Las Vegas counted for a whopping 86% of all closings in April. In a normal market an appraiser can overlook distress transactions when compiling comparable sales. When 86% of closings (article) are distress sales, they become the comps and there isn’t much that you can do about it.

Hobson’s Choice

A seller is now left with the choice of pricing a property low enough to compete with the REOs or not selling it at all. Indeed, many homes have been pulled off the market as sellers wait for prices to improve. Many sellers can’t lower prices to compete because they owe too much on the house. A recent report shows that an astounding 67% of Las Vegas homeowners owe more than the house is worth (article). Their options are to sit tight, try for a short-sale, or lose the home to foreclosure. Ouch!

New homebuilders are facing the same pricing pressure. However, they have overhead and holding costs to deal with as well. They have reacted to this by limiting the number of new homes to a bare minimum and greatly reducing prices on homes that are at or near completion. Some Las Vegas builders have actually reduced prices to a point that is below their cost in an effort to finish projects even if it means taking a loss. The positive point here is that a reduction in the supply of new homes will lead to an increase in sales of existing homes.

In their attempt to alleviate the foreclosure problem the Government created programs to help struggling homeowners. Unfortunately these programs may only prolong the agony. One program, Fannie Mae’s Home Saver, has experienced a re-default rate of 70% (article). Not exactly a promising statistic and it shows that this mess is going to be with us for quite some time.

The bottom line is that this is a terrible time to be a retail seller. If you are an investor who is looking to buy for cash flow, it’s a great time. If you’re an investor who is looking to buy cheap rehab properties and flip them at low prices, it’s not such a bad time. If you are someone who absolutely must sell, good luck because you are going to need it.

What do you think a stimulus is? It’s spending – that’s the whole point! – Barack Obama

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.