“The influx of REOs definitely drive down the price, but the quality of a lot of REOs is in doubt and some of them might have been severely damaged. Price may be low in these kind of properties but who wants them??”

Me.

Wealth, is in residential real estate in a few places.
Location
The dirt.
Cash flow derived from rents.
Any tax break.
Sweat.
Benefits to future income stream/wealth building IF equity grows and rents go up relative to aquisition and holding costs.
ect.

It is not in…

nice cabinets,
Nice paint.
Granite counter tops etc. etc.

The prices you say are holding up are doing so to a large degree because of the perceived element of luxury, not value. From an economic point of view,I would be concerned about buying those more than the low priced “undesirable” stuff for the next few years. If you can afford the luxury, go for it.