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Shadow Inventories Are Up Fifty Five Percent Over the Last Year

Huge stumbling block?

Shadow houseJust when we thought maybe we were bouncing at the bottom and about to jump back up in the real estate market, First American CoreLogic estimates that in September, there were 1.7 million shadow units not yet on the market, up 55% over September 2008. The pending supply of this shadow inventory is at 3.3 months, up 37.5% from last year.

In real estate, we know and have discussed that shadow inventories (pending homes withheld from the market by banks) would hold back economic recovery.

Ryan Hukill, Oklahoma Realtor said, “Personally, it’s tough for me to put a finger on the exact motivation behind the lenders holding back on foreclosures. On one hand, we could look at it as an indicator of their confidence that the country is rebounding, but on the other hand they’re already overwhelmed with the foreclosures they’ve processed and now have an inventory they can’t manage, so continuing to foreclose would only intensify the problem. There’s also the theory that it looks better on paper to have the delinquencies than the foreclosed assets.”

Hukill continued, “in my opinion, they’re just trying to curb an already monstrous problem – managing their inventory – by holding off on foreclosures, and hoping (not so much predicting) that at least some percentage of those home owners will find a way to get caught up.”

With stats flying around us like this, we have to ask- what will it take to stabilize the market? Are we already nearing stabilization? Are you optimistic or pessimistic about this news? Tell us in comments what youthink?

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Lani is the COO and News Director at The American Genius, has co-authored a book, co-founded BASHH, Austin Digital Jobs, Remote Digital Jobs, and is a seasoned business writer and editorialist with a penchant for the irreverent.

21 Comments

21 Comments

  1. Greg Cooper

    December 21, 2009 at 2:43 pm

    Nice piece Lani….I’ve been screaming about this in my local market for the better part of a year. There IS no doubt significant held back inventory. It will ultimately come back to bite these deed holders when the stimulus programs go away and rates begin to edge up later in 2010. The day will come when they will realize they should have purged these properties long ago no matter how it furthered the mess. When the moment comes that affordability declines and the value of these properties does the same, you may just hear a collective ‘Oh Sh*t’ from those who chose to hold these props back in the first place.

  2. Tyler Wood

    December 21, 2009 at 3:10 pm

    As with everything in RE, it’s all local.

    By shaodow inventory, are they referring to properties already owned by the bank or those in the foreclosure process? I think that is the key question. My guess is that once the banks foreclose, and own the property, they will try to sell it ASAP. They have no reason to hold it at that point.

    If the property in just in default, that is where the time frames get messy.

    What I am seeing locally is that banks are not going thru with the foreclosures, and that is creating the build up of a lot of properties in trouble. What will happen to these properties? These are the possible scenarios I see playing out.

    Short sale
    Loan Mod
    They pay up
    Sells at trustee sale to third party
    Goes back to the bank

    This is way it is hard to draw conclusions. My gut tells me 80% or more will hit the market. Tsunami? I don’t think so. But a steady supply of bank owneds hitting the market over the next couple years is very realistic in my market.

  3. Ryan Hinricher

    December 21, 2009 at 8:56 pm

    The Fed’s are turning a blind eye to the amount of inventory banks are holding on to. Wells Fargo just inked a deal with a national property management company to manage many foreclosures and get them producing revenue.

    I’m sure other banks will be doing this too. The good news is the sub-prime adjustments are pretty much out of the market. Unfortunately the recover is going to be slow and painful. I don’t think the ARM adjustments coming in the next couple years will be nearly as bad as the sub-primes.

  4. Russell Shaw

    December 22, 2009 at 1:35 am

    I can not speak authoritatively regarding the national inventory but I do NOT believe there IS a “shadow inventory. This has seemed to me to be a “media driven story” – with one parrot after another repeating the same nonsense and then backing it up with “facts” that are nothing short of gibberish.

    For the Greater Phoenix market there is NO question: There is no “shadow inventory”. It does not exist. Oh sure, we have local “experts” here blathering on how it is going to cause problems, etc. But it does not exist. Tom Ruff from the Information Center and Mike Orr from the Cromford Report (these two have accurate data that I trust) have actually counted all of the foreclosures in Maricopa County as well as the number of homes currently offered by lenders for sale in the MLS. Conclusion: No shadow inventory.

    This is not to say that there will not be another wave of foreclosures in 2011, when the big batch of Alt A loans reset. But the idea of all the banks “holding them back” seems absurd.

    In our area REO listings are dropping and many REO agents are practically out of business as a result. Their asset managers have been telling them for almost a year, “we are going to get a big bunch of inventory any day now”.

    Any day now. But don’t hold your breath.

  5. Thomas A. B. Johnson

    December 22, 2009 at 12:40 pm

    Russell: Thank you for a voice of reason. Houston has not been awash in foreclosures, so we haven’t seen the shadow issue bounced around. If there were shadow inventory it would be fairly simple to determine by running the property tax accounts and by polling homeowner associations as to who the owners are. More data can be pulled to see if posted foreclosures are selling at the courthouse.

    There is probably no way to efficiently determine how many delinquent homeowners are living for free, but that should flush out as property taxes and HOA dues are not paid. Revenue starved governments will not allow taxes to go unpaid for very long. Of course, if the banks are conspiring with the taxing authorities to keep the inventory off the market, well,

    Only the Shadow knows!

  6. Benn Rosales

    December 22, 2009 at 1:57 pm

    There may not have been shadow inventory in Phoenix as it was one of the first devastated markets in the country- a practice run if you will. If there isn’t shadow inventory, then there should be or it’s just bad business. If you toss 100 bad units on the market versus 10 bad units at a time you have no opportunity to move prices upwards, they remain flat and the loss is staggering. In many areas of the country inventory is so low prices are swelling again, I don’t believe it’s by accident, I think it’s by design. Either way, I’m not sure shadow inventory is a bad thing as it mitigates the overall loss to market values.

  7. Duncan Logan

    December 22, 2009 at 8:33 pm

    I believe that their is a shadow inventory but what is defined in this “media term” is open for debate.
    There are people who are simply not paying for their mortgages whom the banks have not yet foreclosed on. Why? Firstly because there is a backlog of paperwork in many banks and secondly when a bank forecloses they have to write down the value of the asset and declare it as a loan default. Too many at once and the bank looks bad. Do these people fall into the shadow inventory bucket?
    There are also a great number of people who are holding off putting property on the market until demand picks up and properties start to sell quicker. We see many of the offers from sellers to buyers here at NationalBLS coming from sellers who have not yet put the property on the market. They are not wanting to cut out agents they simply don’t want to see their home with 100+days on the market. Do these people fall into the shadow inventory bucket or are they simply “passive sellers”.
    Either way we look at it, I think supply will outstrip demand for all of 2010.

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