The economic law of supply and demand says that when demand increases and supply falls, prices are sure to rise. Apparently that law has an asterisk that says “except for Las Vegas.”
For months now I’ve been hearing about how brisk sales have been, especially in the REO, or foreclosure, market. Looking at the numbers you will see that the available supply has been steadily trending down and sales have been setting all-time records. A bank puts an REO on the market and within days there are multiple offers on the property. So why are prices still falling?
On The Street
One realtor that I know specializes in these REO properties. What he sees are a lot of cash buyers from other areas stepping in. That would seem to mean that investors are seeing the value while local buyers are still gun-shy. Are they missing a golden opportunity?
He told me a story last week of an out of state investor who made an all-cash offer for 10% below the listed price on an REO. He warned him that he had virtually no shot at that deal. His buyer said, “but it’s all-cash.” The agent’s response was “so is everybody else’s offer.” Sure enough that REO was in a multiple offer situation and sold for about 10% more than the listed price on a 100% cash deal. He went on to say that the standard practice for the banks is to place a property on the market at a price that is lower than they expect to get. After a number of offers come in they counter by asking the buyers for their “highest and best” offer. The banks seem to have hit on a winning formula for liquidating properties.
The REO Myth
I have been asking a lot of veteran real estate agents and seasoned investors why prices are still falling. It would seem that a number of people think that there is going to be another wave of foreclosures that will be a tsunami that will cause prices to fall even further. Another opinion is that banks are sitting on a significant number of foreclosures and are releasing them piecemeal in order to keep prices from collapsing altogether.
Will there be another wave of foreclosures? Perhaps, more likely than not it will simply be a continuation of the wave we’ve been riding out for some time now. In the Las Vegas market demand has been outpacing supply for a while now, can that much more supply suddenly hit?
As for the theory that banks have all of these properties hidden under a tarp somewhere I say simply, where are they? These banks are public corporations and their assets are not invisible. If they were there someone would have found them by now.
The Smart Money
Are all of these cash investors wrong? I have a feeling that they’re not. Las Vegas prices have fallen so far below replacement cost that it would seem that they are significantly undervalued. For the longest time it had been virtually impossible to get a property to cash flow in the Las Vegas market, now it is a piece of cake. How much longer before everybody else notices?
Whenever you find yourself on the side of the majority, it is time to pause and reflect. – Mark Twain