Real Estate "Shadow" Inventory Sasquatch

By now thanks to recent articles in The Wall Street Journal, New York Times, Bloomberg, CNBC and other media, so called Shadow Inventory has come to the mainstream, but it is more elusive than Sasquatch. Real Estate Agents have been blogging about this for months. For those who may have missed it, Shadow Inventory is the defaulted loans that the lenders are allegedly not releasing for sale. According to Rick Sharga, VP of RealtyTrac “We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market” Lawrence Yun, NAR chief economist called it a business decision by the banks “ I believe many banks including Fannie and Freddie, who are holding onto some properties, are releasing foreclosed properties in a measured way so as not to flood the market which they perceive then perhaps could lead them to even more drastic price cuts .So they are releasing properties on a measured pace as a business decision to minimize losses”How big is this Shadow Inventory? Well that depends on what you’re counting, and who is doing the calculations. Some statistics include foreclosures that have been completed, plus NOD (Notice of Defaults), NTS (Notice of Trustee Sales), Strategic Defaults (borrowers that are capable, but not willing to continue to pay on negative equity properties), possible Builder Bankruptcy’s, Vacant lots, Zombie Subdivisions, Commercial Loans, Debt-Securitization Markets, Side-line Sellers, and future Option Arms set to re-set in 2010.The problem here is that no two experts are counting the same. Just as followers of Sasquatch, Bigfoot and Yeti fantastic creatures can’t agree on the details, neither can the forecasters of Shadow Inventory. A recent report from Amherst Securities Laurie Goodman, which took into consideration reports from Mortgage Banker’s Association, Trulia, Core Logic and RealtyTrac led to the report that 7 million properties are in this inventory, and this was not including half of the items listed above. https://www.youtube.com/watch?v=stVgR0SeiQoShe further concludes that 7 million understates the problem because it does not include borrowers that are currently 30- 90 days late in paying, only those which already have received NOD. According to Ms. Goodman’s research, a borrower that misses 1 payment only has a 25% chance to recover, after 2 missed payments 5%, and after 3, only a 1% chance to recover.That is only 2 experts, and quite the disparity between 600,000 and an understated 7 million. Atlanta Federal Reserve real estate expert Analyst K.C. Conway, who is part of the central bank’s Rapid Response program to spread information about emerging problems to bank examiners focused on commercial real estate at a Sept 29, 2009 presentation “Banks will be slow to recognize the severity of the loss-just as they were in residential”In my opinion let’s take the monster out from under the bed, and really look at it. Lenders may have inventory of foreclosed homes that have not been released yet. It may be that the process is taking longer, and the REO departments cannot handle the volume, some may have title issues, some might be in a short sale process, or some may be occupied by tenants that just were granted a whole slew of rights through Protecting Tenants at Foreclosure Act in May 2009. Mistrust of Wall Street and Banks is leading some to a conspiracy theory. As someone who has been a Real Estate Broker for 18 years, and has lived through the Savings and Loan Meltdown, sold properties for the RTC and FDIC, I do not believe they are taking into consideration any of the positives in future-casting. Current foreclosed single family residential property inventory is down. Days on the market from list date to under contract is down. Multiple offers on foreclosed homes becoming the norm. What about sideline buyers pent up demand for these properties? Investment firms and private investors itching to buy bulk portfolios? Housing Affordability Index is at a 20 year high, which brings even more buyers into the market. It will take further stimulus, credit market liquidity, lower unemployment rates, and restored consumer confidence to beat the monster, but it can be done.
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  • Does anyone know how to get in touch with someone who bought bulk property in the Los Angeles area I would pay referral fees I have so many buyers and no inventory. Another question I have for people doing short sales I started one on equator and now there is nothing to do but wait. I had all the information I needed and faxed it to BofA but now that I used equator I am in a holding pattern. Any suggestions there.
  • You gotta think a bit and ask who is to benifit from this current situation? Bidding wars in a deep recession? That's just plain wrong and not supposed to be happening right now. People are getting the wool pulled over their eyes and nobody is speaking up. My local market is horrible. We were almost 100% REO driven and now we have no inventory. I have not closed a deal in months. I have buyers waiting, but they certainly don't want to get into a bidding war. And I don't want them to either. I am behind on bills now and I received a notice of default last week. And this is all happening why? Who is behind making these stupid decisions?
    The best way to get this economy going again it to release these REOs! It is common sense that real estate is the biggest purchase and a no-brainer to get our economy back on track. So many people rely on home sales for an income...Realtors, escrow/title, appraisers, inspectors, handymen, Home Depot and so on...And all that income being held up is not going to these people and not being injected back into the economy...
  • I heard Fannie Mae and Freddie Mac have the bulk of REO properties now. I have also spoken to asset managers and bank VP's they have told me that 'AS PER GOVERNMENT ORDERS", they are NOT to release REO properties. This will cause lack of inventory and increase values on their assets and will help stabalize the economy. Linda is looking at the same picture!
  • I agree with Jesus...I have heard that homeowners are still in their properties and haven't made a pmt in over 10 months and haven't even received a notice of default yet! This doesn't help the homeowner...they know they can't recover, they don't sleep at night & they are on the edge of their seat not know what is going to happen next. Obviously something fishy is going on and I don't think we'll hear the scandal til way after it's over!
  • First, Great Blog Billie! Second I agree with Johnny; as I always tell my clients - It's not a buyer's market, it's a banker's market.
  • I have heard a lot of scuttlebutt talk about this and I believe it based on the volume of foreclosure notices that flow through weekly in my city alone; yet we see the MLS stats telling us inventory is decreasing????? Hmmmm something isn't adding up to 2+2 equaling 4. I can see how Mark's
    theory of the banks holding them on the books as an asset to bolster their stock market rating
    could very well be true. The property is only a commodity to the bank and their desire to improve the housing market is questionable if not nil.
  • I do a lot of Loss Mitigation, or in other words, I do a lot of Forecloaure Avoidance Counseling and Home Retention Counseling and I can atest, in my area, we are finding people who are upside, late and can't pay but, they are still in the home now 9-10-14 months with no foreclosure sale date.

    My point is, however the "shadow inventory" is being calculated, if it's not taking into account the hundreds of thousands that are "Inevitable Foreclosure" but it hasn't happened yet, then it's not taking a solid look at the picture as a whole.

    My other concerns is the high recession rate of Loan Modification fall out after three months, is anyone calculating them into the "shadow inventory" numbers?

    I do believe a shadow inventory exist, I do believe that with our jobless recovery, unprecedented goverment spending on social projects and social endowments, inability to reduce interest rates any further, increased taxes, higher energy cost, trading deficit and whatever else you can throw at us, it may be another 3-7 years before we see a true recovery in the housing markets across this nation as a whole.
  • I drive by some neighborhoods and see these shadow inventory, they are the ones with somewhat of a green grass, no cars, one light (or some) with some shades opened. They are at least taking care of some property (unless it's a real dump or certain under priviledged area of the city, they may not). What I don't understand is that if we have such a buyer demand with low DOM, why don't they release the inventory? Two words, consipracy theory. The bankers are controlling the debt, which controls the market.
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