Written by Richard K. Green, Director, USC Lusk Center for Real Estate
CNBC reports that houses in Las Vegas are falling apart, and that at least one buyer went to a homebuilder for a new house because she couldn't find any existing home that was acceptable.
This is actually a good example of what Ed Olsen was writing about in his seminal paper, "A Competitive Theory of the Housing Market." When prices fall below replacement cost, housing deteriorates until its depreciated cost equals price. Once this happens, housing markets are in equilibrium. The fact that the inventory of houses available for sale in Las Vegas has dropped to four months suggests that it is near its equilibrium level.
We could just be happy that the market in Vegas had returned to normalcy where it not for the fact that the deodorization of houses has almost certainly produced negative externalities--i.e., blight. (I was last in Vegas late last spring, and it looks pretty awful). But it is amazing how quickly markets adjust.
We must thank the real estate agents for blowing the prices up on homes for sale during the last bubble.