I’m regularly asked about the so-called “shadow inventory” of bank owned homes that are supposed to flood the market at any moment. First, lets be clear about what shadow inventory is. These are homes that the bank has already foreclosed on, but has not yet listed. It obivously does not inlcude homes the bank has already sold, nor the ones it has listed for sale.
We know exactly how many homes the banks have taken back. In California they’ve taken back a total of 419,183 from January 2007 through June 2009. We also have an estimate of how many have been sold during that period: 328,645. Subtract the two and you have a total possible shadow inventory of 90,538, but that’s not the whole story. Around 20,000 REO’s have been selling each month and a typical escrow is 30 days, so subtract 20,000 that are currently pending and are likely to close. We also know that some of these are listed, but not yet pending, but unfortunately we have so many MLS’s in CA that it is hard to get the exact number. Let’s shoot low and assume there is only another 20,000 listed. We are now down to a shadow inventory of just 50,538.
But there is something else implied when people talk about shadow inventory… the notion that banks are holding properties back, in the shadows, in an attempt to hide something. To see if that might be true, I think it is only fair to remove those properties that likely will be listed as soon as they are available. Afterall, the banks get these properties back at the foreclosure auction with the current still in the property, requiring eviction. They may also have to make repairs, or haul away trash and debris. This process usually takes somewhere around 120 days. During the last 120 days banks took back 56,086 properties, though certainly some of these will be clean and vacant. But again lets be conservative and only deduct half from the shadow inventory – we now have a total possible shadow inventory of 22,495 REO’s.
At the current rate of REO resales that means that even if banks are purposefully withholding properties, the truth is that it can’t be very many — a months worth at most.
What’s your thoughts on those who are trying to modify, but due to existing protocal, will not be able to and the option arm inventory that when defaults, will cause a fair percentage of the Alt-A to make business decisions ove the morals ones they are currently struggling with?
I’m not a fan of the current loan modification programs. I think they are generally bad for both the homeowner and the lender as it just kicks the can down the road since most programs don’t adequately address negative equity.
Those in favor of loan mods tend to delusionally believe we will see home prices return to 2005/2006 levels. As you’ll see from my past posts I believe price is a function of income and loan terms – so the only way we get back to those prices is a return to toxic loans that allow people to pay more than they should, or rampant inflation that results in nominal income increases. Neither is a great choice… so payment based loans mods due litle more than extend and pretend.
Sean:
Good breakdown and, as is said, “the numbers don’t lie.”
However there is also data “GIGO” – garbage in, garbage out.
I do not intend any offense nor imply that your numbers are “garbage”; just an old programming saying.
One thing I am curious about, though:
We also have an estimate of how many have been sold during that period: 328,645.
How did you arrive at this number? Estimated how? Is this compiled MLS data? Are these total sales? What is the mix? I know in my local MLS, general “solds” can include 1-4 Res, Res Inc, Commercial, and even res leases and business opps transacted.
And “20,000″ REOs/month selling? I dunno….
All I can tell you is that there are about 1300 REOs indicated as SOLD in the last 30 days in the MLS covering Alameda and CoCo counties (combined populations of ~ 2.504M or about 7% or CA’s population).
Doing a bit of (admittedly weak) extrapolation, I come out with about 18,000 REOs statewide being sold.
Ok – a bit of hairsplitting, but over 12 months that could be a difference of ~ 24,000 properties.
And “20,000 that are currently pending and are likely to close” could be off as well. There are REOs that have been sitting in PENDING status for several months with no projected CoE date indicated.
Add to this the increasing numbers defaults now being processed, the rise of ruthless default and job loss, loss mit that is just extend and pretend, and the rise of prime, AltA, and optionARM paper defaults and “shadow inventory” could grow.
I don’t subscribe to bank conspiracy to keep properties off the mkt so as to not have the prices drop through the floor. I don’t think the bureaucratic institutions are that bright or nimble. But I do subscribe to incompetence and apathy. These REOs could be processed faster, but many people in the chain are LAME and many frankly don’t give a sh!t! It’s not their money or property. They’re just getting a paycheck to slog through a big mess.
There’s also a newer phenomena I’m starting to see:
The Double-Dip REO Boomerang! (would you like whipped cream with that?)
That’s right boys and girls, some of the early movers who wanted to play knifecatcher are getting skewered.
Case in point:
I think I was pretty clear that it wasn’t compiled MLS data, and that it was an estimate. But we can estimate which properties have resold from the public records we do have so I don’t think we are far off.
I have no issue with you having a difference of opinion on the estimates… but even using your numbers I don’t see that it would result in a significantly different conclusion.
The truth is that shadow inventory has been declining since last September, and its pretty much a non-issue at this point.
That said, I totally agree that there is an awful lot in the pipeline that could be foreclosed on. For my thoughts on that see: Waiting to catch a wave? Surge of REO listings is unlikely.
Couldn’t agree more. Sean, I run a non-profit, we bring together other non-profits as well as, Fannie, Freddie, BofA, Wells, Chase, HSBC and others to match those in trouble with their lender. In this “class”, I discuss the second wave. Of the 700 billion in Option Arms, 300 billion were funded here in Ca. I am confident that a huge percentage did stated income (Liar Loan) and when their payments double at the end of this year and over the next two years, they will walk, thereby forcing those who are on the edge (Alt-A) to walk as well. You have written about this in the past. However, I am wondering if you believe the Feds will actually be able to take on this problem and bail these reckless lenders and borrowers out? I cannot believe that these home won’t have to be foreclosed on. Thoughts?
I believe lenders will get bailed out by the Fed, not homeowners. Don’t forget who the Fed works for, its not the govt or the public. I also doubt Congress will do much to really help homeowners. Our society seems to have the political will to bail out failed car companies and financial institutions, but not the guy down the street.
Sean, seriously, how do you feel about helping me create a Housing Summit in Sacramento? As a former Mayor, I have some decent contacts. I believe if we make this an educational summit with HUD and some of the non-profits as well as some of the key lenders, we may be able to pull enough Assembly members to the meeting that it might have an effect.
Speaker Bass as well as Assembly women Carter have expressed their support. Assemblymen Lieu, who carried the Foreclosure Prevention Act of 2009 is now in charge of the rules committee, but is still also heavily involved in this crisis. He held a Town Hall meeting in Riverside in Mayor Loveridges office two weeks ago and I discovered that while he is in need of details, he is a decent guy who could make a difference.
As head of the rules committee, he could get an amendment to his original Act brought to the floor in record time.
Strategic partner?
Chris – I’d be happy to participate, but know that the State can’t do much when it comes to real solutions. The problem is that they can’t enforce much on these federal institutions, other than adding delays to the foreclosure process (which is handled under State law). It should be pretty clear at this point that adding delays isn’t a solution, and it’s not clear there’s much else they can do. That said, feel free to send your contact details to info@foreclosureradar.com and we can discuss further if you’d like.
Agreed, with a few caveats. I will e-mail you. The DOC does have authority over the outsourcing companies.
I thought someone would make a reference to the homes that SHOULD be in foreclosure, but are not….
i.e….What about all of these people who say they haven’t paid their mortgages in 6 mos? 9 mos? or even a year waiting for the NOD? (and they haven’t received one….YET!)
If the banks know they will soon be able to sell the homes for 93% of book value to the taxpayer, (via the soon-to-be-released PPIP…thanks Timmy!) I can’t imagine why they would do ANY foreclosures in the meantime…
That is the shadow inventory I was thinking about…
Once the PPIP is in place, I would imagine there would THEN be a surge in NODs / foreclosures, because at that point the banks wouldn’t be worried about taking the mark-downs when the house resells, but getting a non-performing asset off their books for 93% of book value…
The real shadow inventory are homes with borrowers not paying their mortgage and the lenders not foreclosing. My nieghbor has not paid since Jan 2008 and still no trustees sale. They have repeatedly asked for a loan mod and been denied, yet no trustees sale. It has been scheduled and postponed many times. Why? I think the lenders are doing this to cook their books and to simultaneously manipulate the housing market in as covertly suggested by the Fed
I agree with both prior posts that that delinquent and in foreclosure properties represent the possibility of substantial future inventory.
Also, what about all the folks who want to sell, but not at current prices. I think there is significant pent-up inventory there as well.
I agree with this post. I know someone who stopped makeing payments on his home over a year ago. It’s officially in short sale but the bank won’t accept any offers, the price has consistantly been reset every three months. From what I’ve heard this is quite common right now. How many pre-forclosures and shorts sales are sitting stagnet and not moving forward? These are the true shadow inventories.
I am a member of a group of investors who buy at the foreclosure sales in LA County. We have seen a sharp rise in the “Opening Bid” for foreclosure properties. They used to discount the properties much more in an effort to not have to take them back in house as a REO.
We are also seeing more homes that are occupied, due I think to the freddiemac.com recommendation that borrowers stay in their homes in order to negotiate with their lender for a recast of the loan.
I am trying to understand why the banks are pricing them such at the foreclosure sales now so that they end up keeping them again.
A little more inventory wouldn’t hurt. These bidding wars are frustrating for first time home buyers. More inventory equals more transactions and happy clients.
Just putting it out there.
What completer and total fucking lies. Shadow inventory stands at over 600,000 residential properties (nationwide) as of 2 months ago. Bleeding over a half million jobs a month, the foreclosure trend will only continue, and home purchases will only decrease. Since the bankster bailout allocated 23.7 trillion dollars to billionaire bankers, they have plenty of $$ to clean up these homes, or just sell them as is. They aren’t listing property to try and keep a bubble inflated. Housing prices will only continue to fall, probably bottoming out somewhere around late 2010 or early 2011 after another 7 or 8 million US jobs are lost, and the homeless begin squatting in all the REO property. At that point when a million or so REo properties are all listed residential real estate prices will have their final plummet to what they should be.
Cash is trash – I’ll put 10 ounces of gold on my being right within 5% on the number of remaining REO’s in CA. We can go address by address if you want, I’m ready.
Maybe your national numbers are right, I don’t know as I don’t have national data. But for CA, there is no question, the REO inventory is manageable and expected, not hidden in the shadows.