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Shadow inventories threaten the struggling real estate sector

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Shadow inventories are not mythical

In recent years, the concept of shadow inventories in the real estate industry has been questioned and even mocked, but a new Equifax trend report for May 2011 shows that delinquencies still exceed pre-crash levels and are still climbing. Home finance dollars (including revolving accounts, first mortgage and home equity loans) being written off are still climbing and it does not appear the increase will slow any time soon at its current pace. Equifax’s U.S. analysis is compiled from data on roughly 585 million consumers.

The Equifax study revealed that mortgage loan write-offs reached $304.6 billion in 2010, nearly three times higher than 2006 and 2007 combined, and the rate of increase has continually risen each quarter since Q1 of 2010. According to Equifax, REOs present an especially tricky challenge as the volume is on the rise as many lenders struggle with property divestment of properties not sold at auction or through short sale.

Rising REO rates

In May 2011, 3% of all first mortgages were REO properties, accounting for $21.8 billion in loans and Equifax asserts that because foreclosure completion rates (of 1.45%) parallel bankruptcy rates (of 1.6%) that most REO properties are a result of bankruptcy.

“Shadow inventory and real estate owned properties are still playing a dominant role in today’s mortgage market and slowing the pace of economic recovery. While we are seeing stabilization across multiple sectors of lending, there remains a significant volume of delinquent first mortgage loans, which has slowed the foreclosure process. Until these foreclosures are processed, the mortgage market will continue to impact economic growth,” said Craig Crabtree, senior vice president and general manager, Equifax Mortgage Services.

Most past due balances trace back to 2005-2007

Equifax also reported that as of May, nearly 2/3 of past-due balances are from loans originated between 2005 and 2007. The home equity revolving potential foreclosures now totals $11.9 billion. That is a substantially large number of troubled loans.

Contradicting key economists

Some are claiming that because home equity line originations this spring rose for the first time in over four years, but Equifax’s new study shows that the average credit limit on a home equity line dropped 15.07% in the same window of time, so the picture isn’t quite as rosy as some are aiming to portray.

It isn’t the end of the world, this is all a part of the economic cycle, but it is not mythical nor something to mock as shadow inventory is real, and tightened lending, rising rates of REO inventory and delinquencies still rising, challenging the real estate sector which is certainly not in recovery mode.

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60 Comments

60 Comments

  1. Stan Brody

    July 4, 2011 at 5:10 am

    With over 24 million homes under water, the shadow inventory is a joke… either housing is stabilized, soon, or using FHA/HUD. actuarials there will not be any real recovery prior to 2022… stanbrody.blogspot.com for the cliff notes of the Real Estate Stabilization Act…

  2. Joe Loomer

    July 5, 2011 at 9:20 am

    The trickle-release of REO properties to the market ensures we'll be dealing with them for quite some time before they return to historic norms (as a percentage of homes on the market). Even HUD/Government-owned homes seem to be taking forever to get back on the market.

    Navy Chief, Navy Pride

  3. Susanne Novak

    July 7, 2011 at 1:23 pm

    Based on what we see here in Ohio, the so-called shadow inventory does not flood the market, yet. As a matter of fact the number of available HUD homes in Central Ohio is now only 30% from what it was in February. We could easily sell more HUD homes columbusohiohudhomes.com , Fannie Mae homes or other bank-owned properties.

    I think the problems lies with the asset managers or HUD themselves. They just can't get properties on the market quickly enough. Another reason may be the delays caused by the foreclosure process, including the time it takes to get a Sheriff's deed (6 months) once the property was sold at auction.

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Economic News

Is the real estate industry endorsing Carson’s nomination to HUD?

(BUSINESS NEWS) Ben Carson’s initial appointment to HUD was controversial given his lack of experience in housing, but what is the pulse now?

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NAR strongly backs Dr. Carson’s nomination

When President-Elect Donald Trump put forth Dr. Ben Carson’s name as the nominee for Secretary of Housing and Urban Development, NAR President William E. Brown said, “While we’ve made great strides in recent years, far more can be done to put the dream of homeownership in reach for more Americans.”

At the time of nomination, the National Association of Realtors (the largest trade organization in the nation) offered a positive tone regarding Dr. Carson and said the industry looks forward to working with him. But does that hold true today?

The confirmation hearings yesterday were far less controversial than one would expect, especially in light of how many initially reacted to his nomination. Given his lack of experience in housing, questions seemed to often center around protecting the LGBT community and veterans, both of which he pledged to support.

In fact, Dr. Carson said the Fair Housing Act is “one of the best pieces of legislation we’ve ever had in this country,” promising to issue a “world-class plan” for housing upon his confirmation…

>>>>>Click to continue reading…<<<<<

#CarsonHUD

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Economic News

Job openings hit 14-year high, signaling economic improvement

The volume of job openings is improving, but not across all industries. The overall economy is improving, but not evenly across all career paths.

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Job openings hit a high point

To understand the overall business climate, the U.S. Labor Department studies employment, today releasing data specific to job vacancies. According to the department’s Job Openings and Labor Turnover Survey (JOLT) for April, job openings rose to 5.38 million, the highest seen since December 2000, and a significant jump from March’s 5.11 million vacancies. Although a lagging indicator, it shows strength in the labor market.

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The Labor Department reports that the number of hires in April fell to 5 million, which indicates a weak point in the strong report, and although the volume remains near recent highs, this indicates a talent gap and highlights the number of people who have left the labor market and given up on looking for a job.

Good news, bad news, depending on your profession

That said, another recent Department report notes that employers added 221,000 jobs in April and 280,000 in May, but the additions are not evenly spread across industries. Construction jobs rose in April, but dipped in professional and business services, hospitality, trade, and transportation utilities. In other words, white collar jobs are down, blue collar jobs are up, which is good or bad news depending on your profession.

Additionally, the volume of people quitting their jobs was 2.7 million in April compared to the seven-year high of 2.8 million in March. Economists follow this number as a metric for gauging employee confidence in finding their next job.

What’s next

If you’re in the market for a job, there are an increasing number of openings, so your chance of getting hired is improving, but there is a caveat – not all industries are enjoying improvement.

If you’re hiring talent, you’ll still get endless resumes, but there appears to be a growing talent gap for non-labor jobs, so you’re not alone in struggling to find the right candidate.

Economists suspect the jobs market will continue to improve as a whole, but this data does not pertain to every industry.

#JobOpenings

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Economic News

Gas prices are down, so are gas taxes about to go up?

Do low gas prices mean higher gas taxes are on the way? Budgeting for 2015 just got a bit more complicated, if some politicians have their way.

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Gas taxes and your bottom line

Many industries rely heavily on time in their vehicle, not just truck drivers and delivery trucks. Sales professionals hop in their vehicles throughout the day, as do many other types of professionals (service providers like plumbers, and so forth). For that reason, gas prices and taxes are a relevant line item that must be budgeted for 2015, but with politicians making the rounds to push for higher gas taxes, budgeting becomes more complicated.

Gas prices are down roughly 50 cents per gallon compared to a year ago, which some analysts say have contributed to more money in consumers’ pockets. Some believe that this will improve holiday sales, but others believe the timing is just right to increase federal taxes on gas. The current tax on gas is 18.40 cents per gallon, and on diesel are 24.40 cents per gallon.

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Supporters and opponents are polar opposites

Supporters argue as follows: gas prices are low, so it won’t hurt to increase federal gas taxes, in fact, those funds must go toward improving our infrastructure, which in the long run, saves Americans money because smoother roads mean better gas mileage and less congestion.

Gas taxes have long been a polarizing concept, and despite lowered gas prices, the controversial nature of the taxes have not diminished.

While some are pushing for complete abolition of federal gas taxes, others, like former Pennsylvania Governor, Ed Rendell (D) tell CNBC, “Say that cost the average driver $130 a year. They would get a return on that investment” in safer roads and increased quality of life, he added.

The Washington Post‘s Chris Mooney points out that federal gas taxes have been “stuck” at 18 cents for over 20 years, last raised when gas was barely a dollar a gallon and that the tax must increase not only to improve the infrastructure, but to “green” our behavior, and help our nation find tax reform compromise.

Is a gas tax politically plausible?

Mooney writes, “So, this is not an argument that a gas tax raise is politically plausible — any more than a economically efficient tax on carbon would be. It’s merely a suggestion that — ignoring politics — it might be a pretty good idea.”

Rendell noted, “The World Economic Forum, 10 years ago, rated us the best infrastructure in the world,” adding that we “need to do something for our infrastructure, not in a one or two year period, but over a decade.”

Others would note that this rating has not crumbled in just a few years, that despite many bridges and roads in need of repair, our infrastructure is still superior to even the most civilized nations.

Regardless of the reasons, most believe that Congress won’t touch this issue with a ten-foot pole, especially leading up to another Presidential campaign season starting next year.

“I think it’s too toxic and continues to be too toxic,” Steve LaTourette (the former Republican congressman best known for his close friendship with his fellow Ohioan, Speaker John Boehner) tells The Atlantic. “I see no political will to get this done.”

Whether the time is fortuitous or not, and regardless of the positive side effects, many point to a fear of voters’ retaliation against any politician siding with a gas hike, so this matter going any further than the proposal stage is unlikely.

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