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Shadow Inventory Undermining All Major Metro Markets Now


In order to make an informed decision, you need to have a good sense of what's coming down the pike. To do that, it is essential to consider the so-called "shadow inventory."

Featured Housing Market: Las Vegas

The Greater Las Vegas housing market is perhaps ground zero for the housing bubble and collapse. In 2003-2004, speculators swarmed there like locusts looking to make easy money in what was becoming the hottest market in the nation.

According to a little-known 2005 study by CoreLogic, flippers were playing a major role in the Las Vegas market as early as 1999. Take a good look at this revealing chart from that study.

Notice that in 2004, more than 40% of all sales in Clark County (where Las Vegas is situated) were by flippers who had bought the property within the previous two years. Two other charts from the study showed that nearly 20% of all sales were properties which had been purchased by flippers within the previous six months.

The speculative madness was nicely captured in a May 2005 online article posted by The author described the adventure of a 30-something California couple who had moved to Las Vegas in 2003 after making some money on foreclosed properties purchased in Florida a year earlier. By early 2005, they had purchased 20 properties, most in Las Vegas, having borrowed some $400,000 in down payment money from friends and family when they ran out of cash. She admitted to the author that "it's a risk." But she pointed out that even if the market crashed, "it's not like it's worth nothing."

Although the median sale price of homes rose an incredible 40% in 2004, warning signs started to appear in early 2005 when the percentage of six-month flips began to decline. The market was beginning to run out of buyers at those elevated prices and speculators started to dump condos and single-family homes onto the market. One young flipper interviewed for the CNNMoney article had sold five of his seven properties by the spring of 2005. The reason was that he was seeing the same investors at each new development site. This convinced him that the bottom was about to fall out of the market.

Although median prices continued to rise nearly 20% in 2005, that statistic hid the fact that inventory on the market was soaring and that thousands of speculators were trying to cash out before it was too late. By the spring of 2006, sales volume started to plunge and the market has never recovered. The chart below from shows what happened to prices and sales volume.

This chart needs to be explained. To read it correctly, you must understand that it captures only sales which were financed with a mortgage. I learned this when I checked with a reliable source at mortgagedataweb. While the chart gives us a good picture of what has occurred in Las Vegas, it does not portray the entire story.

The median sales price and sales volume numbers in the chart exclude all the low-end distressed properties bought as all-cash deals because no mortgage was involved in these transactions. So keep this in mind as you review the chart.

What Is Really Going on in Las Vegas?

To truly understand the Las Vegas market, it is necessary to dig beneath sales volume and median price figures. What I found is that the housing market has been kept from collapsing by investors purchasing most of the low-end distressed properties with cash. The Greater Las Vegas Association of Realtors (GLVAR) reported that in January of this year an incredible 51% of all resales were bought with all cash. They pointed out that this percentage had been rising steadily for a year.

Cash buyers have been focusing on the thousands of bank REO properties and short sales hitting the market each month. The website is a widely read and highly regarded source of data for major housing markets. They reported that 56% of all December sales were bank-owned or bank-serviced foreclosures. It was the third straight month that this percentage had risen.

These foreclosed properties were overwhelmingly sold at prices substantially below the median price level and roughly 36% were under $100,000. Also, the GLVAR reported that more than 26% of purchases in January were short sales. Taking these two reports together, only one out of four purchases is what we might call a normal sale.

This enormous appetite of cash buyers for foreclosure properties could not prevent the median sale price for single-family detached houses from dropping to $72 per square foot in December. That figure was at the lowest level since November 1996.

Although the median price of $130,000 for single-family homes in December was only 4% lower than a year earlier, it was $5,000 lower than the previous month. Back in June 2006, the median sale price had peaked at $312,000. That is an incredible collapse.

The median price for condos in December was down a whopping 14% from the previous year to $62,700. Why? It was partly due to the supply, but largely because it is much harder for investors to find tenants for a condo than for a detached house. Most homeowners who have lost their property to foreclosure or a short sale prefer to rent a house, not a condo.

Is It Time to Leap Into the Las Vegas Market?

With median prices having plunged so far since mid-2006, many investors are probably thinking that now may be a good time to invest in one or more properties in Las Vegas. Surely we must be near the bottom.

It isn't really that simple. In order to make an informed decision, you need to have a good sense of what is coming down the pike. To do that, it is essential to consider the so-called "shadow inventory." As I've written in a previous Minyanville article (see In Reality, Housing Is Not Even Close to Stabilizing), this shadow inventory is very real and extremely important.

Go back to the table on the opening page of this report (Top 10 Counties). It shows that in Clark County (where Las Vegas is situated), nearly 33,000 first liens were seriously delinquent by 90 days or more at the end of the third quarter of 2010. An additional 32,000+ properties had been placed into default by the banks but had not yet been foreclosed. That is a total of more than 65,000 properties which are almost certainly going to be thrown onto the market as either foreclosures or short sales -- 18.1% of all properties with first liens.

Let's not forget to add in all the bank-owned properties. Most of them are not currently on the MLS active listings. It is not easy to determine the full count of bank-owned properties since the banks don't like to publicize that number. The website, listed a total of 15,486 foreclosed properties for Clark County on February 20 of this year. Adding this number to all those not yet foreclosed gives us a total of more than 80,000 distressed properties that will be hitting the market in the next few years.

Do you think the Las Vegas housing market can absorb that many properties without a further decline in prices? No way. Keep in mind that only 3,214 existing single-family homes, condos and townhouses were sold in January according to GLVAR. To clear so many distressed houses not yet on the market will require prices to drop.
No positions in stocks mentioned.

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