Vegas House Bargains Dry Up

Las Vegas is one of the foreclosure capitals of the U.S., with about one in four households behind on house payments or in mortgage foreclosure. Yet all three of these shoppers—a professional real-estate investor, a county official with federal funds designated for stabilizing neighborhoods and an installer of security systems who needs a new place to live—are frustrated.

"I thought it would be a heck of a lot easier," said Mr. Iuso, a renter who wants to buy a home but has been outbid eight times, usually by investors able to pay cash.

Bargain hunters here and in many other metropolitan areas are up against a paradox. By far the biggest wave of foreclosures since the Great Depression was expected to be a bonanza for anyone with cash or the ability to get a loan. But prospective home buyers say it is increasingly difficult to find foreclosed homes at attractive prices in desirable neighborhoods.

Supply is shrinking largely because of federal and state efforts to help millions of distressed homeowners avert foreclosure, which have delayed many likely foreclosures, keeping the homes off the market for now.

The bargain chase is even tougher for those buying with a loan. Investors with cash have an advantage in that their offers aren't conditional on obtaining a loan so banks often prefer selling to them than taking the risk that another offer will fall through. They are also often quick to react when bargains appear.

So while it is still relatively easy to find a home for a few thousand dollars in Detroit, few want to move there. In the more-desirable Orange County, Calif., bidding wars are the norm on foreclosed homes.

Although the percentage of borrowers behind on payments continues to grow, the number of homes lost to foreclosure in California—and thus available for resale—fell 19% in 2009 from a year earlier to 190,360, according to MDA DataQuick, a real-estate data provider. The number of foreclosed homes owned by banks or mortgage investors and available for sale nationwide dwindled to 617,000 in December from a peak of 845,000 in November 2008, estimates Barclays Capital.

To those frustrated by the drop in supply, John Burns, a prominent real-estate consultant based in Irvine, Calif., counsels: "Just be patient. They're coming." His firm, John Burns Real Estate Consulting, estimates that five million households, currently behind on mortgage payments, will end up losing their homes, dumping supply on the market over the next few years. In Las Vegas, this "shadow" inventory of pending supply is enough to last 18 months, the firm estimates.

But there is also lots of demand, especially from investors, for those homes. As a result, Mr. Burns says home prices are likely to level out rather than plunge further, assuming that mortgage rates don't rise sharply and the economy continues recovering. But if mortgage rates do surge and the economy goes into another swoon, he says, there is a "massive risk" of a sharp drop in home prices.

Mr. Iuso, the installer of security systems, isn't waiting. He is looking for a home priced at $120,000 to $150,000. "There really isn't much inventory to chase," Mr. Iuso said. His agent, Bryan Mitchell of Re/Max Associates, says some bank-owned homes have attracted more than 20 offers within days.

Investors have complaints, too. "This market has been kind of saturated" by people looking for deals, says Mr. Griffin, the investor, who bought camouflaged duck-hunting blinds to protect his employees from the wind and sun as they sit through foreclosure auctions held in a parking lot in downtown Las Vegas. More than 50 people show up daily for the auctions, about triple from the year earlier, says Mr. Griffin.

Mr. Griffin represents and advises scores of investors who are trying to buy foreclosures here. Among Mr. Griffin's regular clients is Rutt Premsrirut.

"Last summer you could make good margins," said Mr. Premsrirut. At so-called trustee sales of homes in foreclosure cases, he could win with bids at around 70% of the estimated market value. Now, he says, with more bidders, homes are likely to go for 85% to 90% of resale value. After accounting for real-estate commissions, repairs and other costs, that leaves little margin for error.

Also competing with the investors is Mr. Pawlak, head of community-resources management for Clark County, which includes Las Vegas. Mr. Pawlak leads a team charged with spending about $30 million of state and federal money awarded to the county to purchase foreclosed homes.

The federal money comes from the $6 billion Neighborhood Stabilization Program created by Congress in 2008. That program is supposed to help local organizations buy and repair foreclosed homes so they don't drag down neighborhoods. Those organizations then sell or rent the homes to people with low or moderate incomes.

Mr. Pawlak says he is handicapped in vying with private investors. For one thing, federal rules require that he buy homes at a discount of at least 1% to appraised value. Appraisers are often more cautious than buyers in estimating values. He also can't make an unconditional offer because the rules require his staff to check for toxic wastes, pests and compliance with building codes, among other things.

"We're competing against people who say, 'I'll take 50 properties, sight unseen,' and we just can't do that," Mr. Pawlak said.

Given strong demand from private buyers, why should the county be in the market at all? Mr. Pawlak says his program tries to ensure homes are occupied by stable owners or renters. Investors, he says, won't necessarily repair homes thoroughly and find long-term occupants with a stake in the neighborhood