The liquidation of bank REO is pushing prices lower. Prices are extraordinarily affordable in Las Vegas as the market there overshoots to the downside. How does that compare to Irvine?

Irvine Home Address ... 556 ALBACATE St Henderson, NV 89015
Resale Home Price ......  $65,000

To anyone drinking the morning away
The afternoon will prove a mistake
They never will get it right
Now they've got it so low

Ocean Colour Scene -- So Low

How low will prices go in Las Vegas? Affordability is no longer a problem, so now it comes down to supply and demand. On the supply side, the behavior of lenders is not helping their own cause. As they continue to release properties to the market for much less than recent comps, the perpetuate the decline that is wiping them out.

Today's featured property is a recent closing of an REO resale in Las Vegas. I discovered this neighborhood while looking at another auction property nearby. The property of interest is in a cluster product neighborhood in a nice part of Henderson, Nevada. All the properties were built in 2005 and sold new in the mid 200s.

We all know prices are falling throughout Las Vegas, but when I saw the comps for this property, I couldn't believe my eyes.

The list of comparables below are all in the cluster neighborhood, and they are arranged in decending order of closing dates. Take a careful look at the sales price in the column second from the right.

If I had looked at these comps last November, I would have estimated the resale value at between $105,000 and $110,000. Further, I would have likely set an initial asking prices of about $114,000 without much fear of a low appraisal forcing me to lower my price to an FHA buyer.

What would possess an asset manager at a bank to let properties go in the mid 60s? There are limited possibilities:

Capitulation may be motivating asset managers to take any deal presented to them. If they have a caseload of thousands, they care less about maximizing recovery and more about processing files. The asset manager could also be incompetent.

Fannie Mae has the Homepath program where they allow owner occupants to bid on properties and sell them at a reduced price. I understand their desire to put owner-occupants back into homes, but when they let them go for 40% under comps, they merely take down the values throughout the neighborhood and dramatically increase the pain for other owners and sellers in the area.

Another possibility is fraud. The listing agent could have submitted comps from properties in another neighborhood to the lender to justify a $65,000 selling price. The lender may have approved this sale without realizing there were model-match properties in the same neighborhood selling for much, much more.

This property was quickly listed on the MLS, but the seller probably realized they were not going to be able to sell the property as it had already been sold twice in the last year. Neither the GSEs or FHA will insure a loan on a property sold three times in a year. Further, if it was purchased through an owner-occupant deal with Homepath, the owner also faced resale restrictions because the GSEs don't want to sell to flippers.

$40,000 in value gone in three months

How would you like to be the next-door neighbor at 555 Albacate St. who paid $105,000 three months before the model-match at 556 Albacate St was sold for $65,000?

House Address ...  555 ALBACATE St Henderson, NV 89015   

Resale House Price ......  $105,000

House Purchase Price … $253,900
House Purchase Date .... 2/28/2005

Net Gain (Loss) .......... ($155,200)
Percent Change .......... -61.1%
Annual Appreciation … -13.9%

Cost of House Ownership
-------------------------------------------------
$105,000 .......... Asking Price
$3,675 .......... 3.5% Down FHA Financing
4.56% ............... Mortgage Interest Rate
$101,325 .......... 30-Year Mortgage
$22,158 .......... Income Requirement 

$517 .......... Monthly Mortgage Payment 
$91 .......... Property Tax (@1.04%)
$0 .......... Special Taxes and Levies (Mello Roos)
$22 .......... Homeowners Insurance (@ 0.25%)
$117 .......... Private Mortgage Insurance
$41 .......... Homeowners Association Fees
============================================
$787 .......... Monthly Cash Outlays

$0 .......... Tax Savings (% of Interest and Property Tax)
-$132 .......... Equity Hidden in Payment (Amortization)
$6 .......... Lost Income to Down Payment (net of taxes)
$33 .......... Maintenance and Replacement Reserves
============================================
$695 .......... Monthly Cost of Ownership 

------------------------------------------------------------------------------
GREAT 3 BEDROOM AND 2 AND HALF BATH; WITH CORIAN COUNTERTOP AND UPGRADED MAPLE CABINETS 

Based on the cost of ownership and comps to date, the buyer of the above property must have felt they got a good deal last October. It was. At least until the identical property below sold for $40,000 less.

House Address ...  556 ALBACATE St Henderson, NV 89015    

Resale House Price ......  $65,000

House Purchase Price … $268,656
House Purchase Date .... 1/4/2005

Net Gain (Loss) .......... ($207,556)
Percent Change .......... -77.3%
Annual Appreciation … -21.2%

Cost of House Ownership
-------------------------------------------------
$65,000 .......... Sale Price
$2,275 .......... 3.5% Down FHA Financing
4.56% ............... Mortgage Interest Rate
$62,725 .......... 30-Year Mortgage
$13,717 .......... Income Requirement 

$320 .......... Monthly Mortgage Payment 
$56 .......... Property Tax (@1.04%)
$0 .......... Special Taxes and Levies (Mello Roos)
$14 .......... Homeowners Insurance (@ 0.25%)
$72 .......... Private Mortgage Insurance
$41 .......... Homeowners Association Fees
============================================
$503 .......... Monthly Cash Outlays

$0 .......... Tax Savings (% of Interest and Property Tax)
-$82 .......... Equity Hidden in Payment (Amortization)
$4 .......... Lost Income to Down Payment (net of taxes)
$28 .......... Maintenance and Replacement Reserves
============================================
$453 .......... Monthly Cost of Ownership 

Cash Acquisition Demands
------------------------------------------------------------------------------
$0,650 .......... Furnishing and Move In @1%
$0,650 .......... Closing Costs @1%
$0,627 ............ Interest Points @1% of Loan
$2,275 .......... Down Payment
============================================
$4,202 .......... Total Cash Costs
$11,100 ............ Emergency Cash Reserves
============================================
$15,302 .......... Total Savings Needed

Property Details for 556 ALBACATE St Henderson, NV 89015
------------------------------------------------------------------------------
Beds:  3
Baths:  2
Sq. Ft.:  1354
$048/SF
Property Type: Single Family Residential, Detached
Year Built:  2005
County:  Clark
MLS#:  1071785
Source:  GLVAR
Status:  Closed
------------------------------------------------------------------------------
Great 3 Bedroom 2 1/2 Bath home with a 2 Car Garage and a nice back yard. 

Affordability is the best ever in Las Vegas 

Take a look at the cost of ownership and the income requirement for this house. The monthly cash outlays and total cost of ownership are lower than the cheapest rental in all of Las Vegas. Even 1 bedroom apartments in most complexes rent for more than this property costs to own.

Prices are trading at their 1995 levels in Las Vegas, and interest rates are south of 5%. Even back in 1995 when prices were at the same level, interest rates were north of 8%. The cost of home ownership has never been less expensive in Las Vegas than it is today -- ever.

Lenders wonder why buyers are sitting on the sidelines, but with liquidation behavior like this and the future REO inventory ballooning, buyers should be worried. This could happen anywhere at any time -- including Irvine.

Irvine Comparables

People in Irvine, California, make about 50% more than as workers in Henderson, Nevada. Therefore, it is logical to assume house prices in Irvine for comparable properties should be roughly 50% higher than what people are paying in Henderson. The historic relationship between Orange County and Clark County where Irvine and Henderson are respectively located is shown below.

So what are Irvine comps asking? 

$439,900 -- 32 Alevera St., 2/2 1,050 SF

$449,000 -- 33 Alevera St. 2/2 1,200 SF

$519,900 -- 40 Alevera St. 3/2.5 1,500 SF

$525,000 -- 8 Sonata St. 3/2.5 1,300 SF

The four properties above are all located in a cluster community in Oak Creek. The properties in Irvine are older, most are smaller than the Las Vegas properties, and two of them have one less bedroom.

The least expensive of these properties if 4 times as expensive as the $105,000 property, and the most expensive comparable is nearly 9 times more expensive than the $65,000 comparable.

Does that seem right to you?

Which is a better investment? 

Which is a better place to invest, Irvine or Las Vegas? I am putting my money where my mouth is and investing in Las Vegas. I believe the historic relationship between house prices in the two cities will be restored over time, probably through continued erosion of pricing in Irvine and a rebound in pricing in Las Vegas. Plus, while waiting for prices to revert to the mean, the cashflow in Las Vegas is outstanding while the cashflow in Irvine is breakeven at best.

There is no reason to believe the premium in Irvine doubled in 2009 for any reason other than the housing bubble has not deflated here and it has overshot to the downside in Las Vegas. Despite problems with unemployment, the relationship between wages in the two cities has not changed, and although most readers of this blog find Irvine a more desireable place to live (me included), nothing has made Irvine twice as desirable as it was for the prior 20 years. 

Take where you would want to live out of the equation, and ask yourself where you think your investment -- combined cashflow and appreciation -- has greater upside potential over the next 10 years, Las Vegas or Irvine?