Prices Continue to Rise in Las Vegas as Foreclosure Freeze Drags On

For several years, Las Vegas made headlines nationwide as the foreclosure capital of the United States.  Now the big news coming out of Las Vegas is the complete lack of foreclosures.  In September of 2012 less than 300 homes were foreclosed upon in the Las Vegas valley.  There are only 375 foreclosures listed for sale on the MLS as of November 15, 2012.  There are 876 short sales listed.  A year ago today, there were approximately 12,000 short sales listed on the MLS!  Great news for homeowners right?  Not really.

At the moment, real estate in Las Vegas is very clearly divided into two groups.  In group #1 are the few foreclosures that are available, short sales, new construction, and certain other properties that can be priced, for one reason or another, at current market value.  These properties are selling...and selling quickly.  United Press recently quoted real estate agent Keith Lynam who said that the problem in Las Vegas is, "There is just zero inventory."  But why?

The answer to this question lies in group #2.  Group #2 is composed of all the homes in Las Vegas that are still “under water.”  With all of the talk of a recovery in the Las Vegas real estate market, it is interesting to note that according to the Las Vegas Sun, 70% of Las Vegas homeowners are still underwater.  In fact, 36% owe more than double what their homes are worth.  These are homes that cannot be sold.  But, because the median sale price of homes in the Las Vegas area has risen almost 20% in the last year, many of these homeowners are holding on...hoping that this small recovery will blossom into a return to the prices of 2007.  Unfortunately, this is extremely unlikely.

During the real estate boom in Las Vegas in the early 2000’s, prices soared to highs well above the steady 3-4% annual growth that real estate typically generates.  As far as prices have fallen since then, surveys show that they’ve really only just about returned to the trend line.  Prices aren’t supposed to be any higher than they are right now.  This point is illustrated by the return of new construction to the Las Vegas housing market.  For several years, new housing starts were virtually non-existent in Las Vegas because foreclosures were selling for less than their replacement value...that is, less than what it would cost to build the same house from scratch.  As prices have risen, new home starts have rebounded because it is now possible for home builders to compete with foreclosures.

The combination of these factors have created a very odd dichotomy in the Las Vegas real estate market.  We have homeowners that are months (or even years) behind in payments but are not being foreclosed upon because of the halt in foreclosures brought on by AB 284 and other factors.  We have homeowners who are buried in debt holding out a desperate hope that the market will once again soar and their homes will no longer be upside down.  We have new homes being built and sold to fill the vacuum of demand created by the fact that 70% of potential Las Vegas real estate is essentially frozen.   It is an interesting paralysis.  

In the midst of this mess, Las Vegas remains very attractive as an investment destination.  For those investors who can secure affordable properties in Las Vegas, these properties are generating great returns and very strong cash flow.  If you are interested in purchasing Las Vegas investment real estate, contact me.  There are ways to beat the crowd using non-traditional buying methods and we specialize in those methods.

Judicial Foreclosures Fuel Speculation on the Future of Home Prices in Las Vegas

Just when you thought it was safe to go back in the water...  Median home prices in Las Vegas have been rising steadily since shortly after AB 284 was passed last October.  In fact,  many Realtors have noted that the last few months have felt more like the boom years prior to the housing bubble collapse then the middle of an economic recession.  Extremely low inventory, brought on by the sudden, dramatic decline in foreclosures in the wake of AB 284 have created a Sellers’ market where multiple buyers are often competing for the same property and homes are selling at or above list price.

In the midst of this enthusiasm reminiscent of the “good old days” many financial analysts and real estate guru’s (including myself) have been consistently warning that the final effects of AB 284 are likely to be negative, not positive, and that things which appear too good to be true generally are.  We are just now beginning to hear the first rumblings of what the exact nature of this inevitable reprise might be.

A few days ago, a blog post from a local Las Vegas Realtor was brought to my attention.  His entry discussed a Judicial Foreclosure that had just recently been carried out against a client of his.  No clue what a Judicial Foreclosure might be?  Not surprising...they haven’t traditionally been used in Nevada, because there has been no need.  Foreclosure proceedings have typically been handled in Nevada, as they are in most of the rest of the country, through the normal notice of default, notice of foreclosure, Trutees’ sale/auction process that we have all come to understand.  However, with the passage of AB 284 the banks were faced with a dilemma.  With AB 284, the State of Nevada made it impossible for banks to initiate and proceed with foreclosures through the usual channels without utilizing countless employee hours to verify paperwork at every step.  All the additional regulations in AB 284 that were designed to “protect” the homeowners, increased the amount of time and effort required by the banks to initiate a foreclosure proceeding without incurring large fines.  This put the banks in a difficult position.  They could, conceivably, continue to foreclose, but the procedure they must now use would be so time consuming that it bordered on “not worth it” financially.

The solution to the banks’ problems may be Judicial Foreclosure.  In a Judicial Foreclosure proceeding, banks actually sue the homeowner in a court of law for breach of contract.  They then call upon clauses that exist within most mortgage contracts guaranteeing the plaintiff (the bank) all legal fees required to collect the defaulted upon debt from the defendant (the homeowner.)  Do Judicial Foreclosures take more employee hours and more out of pocket costs for the banks than even post-AB 284 standard foreclosure proceedings?  Of course.  But, the banks can seek additional damages through Judicial Foreclosures (like legal fees) that they cannot seek via the traditional foreclosure process.  

In the example cited in the blog, the homeowner was sued for their back payments plus interest, plus forefeiture of the property, plus the deficiency (difference between what is owed on the home and the amount borrowed), plus legal fees and other costs associated with the foreclosure.  The defendant was served in June of 2012 and less than two months later she had lost her home and had to declare bankruptcy.  Ironically, she had planned to list her home for short sale just as soon as she received an NOD from the bank.  She never received one.  Instead, she was summoned to court.

There is a lot of speculation beginning in the Las Vegas real estate world as to what a wave of Judicial Foreclosures might mean for the housing recovery.  Some say that it would usher in a fresh wave of foreclosures that would halt the rise of home prices and drive Las Vegas real estate into another recession.  Others, myself included, believe that even if Judicial Foreclosures become rigeur de jour in the Las Vegas real estate market, the procedures are likely to be more time consuming for the banks and, as result, are less likely to result in a large number of foreclosures being dumped on the market at one time.  They would more likely create a steady flow of foreclosures which would certainly not drive home prices up, but would likely be absorbed by the high demand for affordable Las Vegas real estate and would not, therefore, result in prices decreasing dramatically either.

Only time will tell whether or not Judicial Foreclosures will catch on in Las Vegas or what the effects will be.  But one thing remains certain: buy and hold investors who purchase properties with strong positive cash flow will be cushioned from the short term market movements that can cripple investors looking to turn quick, flip profits.  Las Vegas remains a great place for investors to purchase rental real estate, as long as they buy smart.