Another Chapter in the Increasingly Boring Tale of the Shadow Inventory

Submitted by Rich Toscano on July 10, 2009 - 4:22pm

This is all becoming a bit routine. I write about how little housing inventory is currently for sale in San Diego. Then I write about the apparent mountain of "shadow inventory" -- homes that have entered foreclosure, or may yet do so, but that are not yet on the market. And then I go on and on about the irony, market distortions, and general analytical weirdness that result from having so much shadow inventory looming alongside so little genuine inventory.

In my defense, sometimes I reverse the order in which I write about these things.

continue reading at voiceofsandiego.org

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Submitted by drboom on July 10, 2009 - 6:04pm.

I don't think it's "routine" at all. That increasingly spiky graph illustrates the magnitude of the market manipulations we've seen over the past year and a half.

If the MSM had a clue they'd be all over this. Supply is nonexistent, yet NODs are at record highs and NOTs are headed back to record highs. Something stinks, yet all we get from the usual suspects is recycled NAR/CAR "great time to buy" garbage along with median price smoke and mirrors.

Thanks for the numbers and pretty graphs (ooooh! colors!) as always.

Submitted by peterb on July 10, 2009 - 7:01pm.

The calm before the storm? "When things get wierd, the wierd turn pro." It's getting pretty wierd.

Submitted by no_such_reality on July 10, 2009 - 9:23pm.

Go looking for a home, you'll understand just how little inventory really is available.

You can't buy shadow inventory. And there's 10 buyers for every realistically priced real inventory out there.

Submitted by drboom on July 10, 2009 - 10:17pm.

no_such_reality wrote:
Go looking for a home, you'll understand just how little inventory really is available.

You can't buy shadow inventory. And there's 10 buyers for every realistically priced real inventory out there.

Heh, at first glance I thought your user name was "no_such_realty" :-)

And you are correct. Bidding wars are alive and well .... until the appraiser shows up and pops the balloon.

Submitted by CA renter on July 11, 2009 - 2:40am.

no_such_reality wrote:
Go looking for a home, you'll understand just how little inventory really is available.

You can't buy shadow inventory. And there's 10 buyers for every realistically priced real inventory out there.

This is true. Right now, I feel as though we are in the 2003-2005 period when we had record low inventory (2004 just had a few thousand homes in all of San Diego County), and everyone was competing with each other to overpay for houses that sold for a mere fraction just a few short years earlier.

It doesn't make any sense, and when it doesn't make sense, it's always best to sit things out, IMHO. We avoided getting hit by the internet bubble and the housing bubble by sitting out the manias.

Submitted by jpinpb on July 11, 2009 - 8:02am.

no_such_reality wrote:
Go looking for a home, you'll understand just how little inventory really is available.

You can't buy shadow inventory. And there's 10 buyers for every realistically priced real inventory out there.

That is what most people like point to. However, just b/c the market is manipulated doesn't make it right. Most areas are still out of alignment w/rents and incomes.

Inventory is artificially low thanks to moratoria and the kicking-the-can. This is causing buyers to bid. This is creating a false urgency, the same kind of urgency in the bubble up. Didn't make it right and we all saw how successful that was. The hot potato worked for some and others have burned hands.

As Rich said, the question is how will it resolve? Will all the homes be moded? Will they continue to trickle in? Will they be unleashed to the market? Will investors pick up 100s at a time and what will they then do w/it? Until something gets done w/the shadow, it's still unchartered waters.

Personally, I think unless we get lax lending again, people will have to prove they can afford and that pretty much is the bottom line. That will dictate what gets sold, and right now it's looking like anything under 500k moves along. Everything else seems to take a little more effort. That price point will end up forcing higher end to adjust when the buyers' pool shrinks. As also mentioned elsewhere, the moving up group is low. One would have to sell their lower/median end at a profit to move up.

And yes, sdr. There are people w/money. Eventually that pool will shrink, too. There's only so many out there w/that much cash and only so many houses they can buy w/all that money. The ratio of how many homes are out there and people with big bucks is what?

Submitted by dimmer on July 11, 2009 - 10:02am.

This may be a bit cynical or even completely off the mark, but here's a theory. What if the banks are purposely holding onto forclosed homes? They know that a lack of supply will increase prices. I suspect that "normal" home owners are delaying selling their homes because of how much prices have dropped. If there aren't enough "must-sell" home owners to make up the difference, prices will start going back up. Therefore if the banks hold onto their large supply of foreclosed homes, prices will go up.

And how can banks afford to maintain such a balance sheet? The taxpayer is keeping them in the black thanks to bailout money. With the bailout money and the low Fed rate, banks can probably afford to wait out "must-sell" inventory and distort the market.

I hope this isn't true, but I'm also wondering why the shadow inventory hasn't hit the market yet.

Submitted by peterb on July 11, 2009 - 10:20am.

Over at Zero Hedges site you can find the latest T2 Partners housing analysis from July 3rd. It's about as bad as I've seen. Hansen is quoted towards the end of it. It kept me awake last night. And that's not an easy thing to do.

I wonder how all these NODs are effecting the revenue stream of the lenders that own the loans? Just because they cant or wont take foreclosure action does not mean it's not costing them money in many ways.

Submitted by atlaslover on July 11, 2009 - 10:23am.

It doesn't need to be "right"; it just needs to work. As the economic recovery takes hold by the end of this year, lots of people will unleash their saved $$ and buy above-median properties. Your view is a time-limited one, and its expiration date is looming.

Submitted by patientrenter on July 11, 2009 - 3:29pm.

atlaslover wrote:
It doesn't need to be "right"; it just needs to work. As the economic recovery takes hold by the end of this year, lots of people will unleash their saved $$ and buy above-median properties. Your view is a time-limited one, and its expiration date is looming.

This is what our political and economic masters are hoping for. Do whatever it takes to lower supply, by allowing lenders to hold onto properties (changing accounting rules, buying loans at book, lowering banks' cost of funds......). Do whatever it takes to increase demand (pouring unlimited amounts of easy into housing through tax credits, FHA guarantees, bank arm-twisting etc.)

They are hoping the downward momentum is reversed, so the bubble stays inflated. And other people (taxpayers and net savers) pay for it, so it's free!

Submitted by jpinpb on July 11, 2009 - 5:46pm.

People. You still need to qualify for the loan. You have to prove you can make the payments. I submit the median income is barely going to get you a median home. If you look at DTI, people have credit cards, car payments, student loans, etc. And I don't want to hear that a median income never got you a median home in San Diego b/c that's bull. I've done it in the past and I know others who have as well.

Submitted by CA renter on July 11, 2009 - 6:05pm.

jpinpb wrote:
People. You still need to qualify for the loan. You have to prove you can make the payments. I submit the median income is barely going to get you a median home. If you look at DTI, people have credit cards, car payments, student loans, etc. And I don't want to hear that a median income never got you a median home in San Diego b/c that's bull. I've done it in the past and I know others who have as well.

All true, jp. But what's replacing easy money is artificially low rates, low-down FHA loans, and free give-aways ($8,000 and $10,000 tax credits/incentives) to impatient buyers.

Whenever they lower the rates like this, it forces lenders further out onto the risk curve. We are still seeing plenty of attempts to make lending easy, even if it's not as easy as 2003-2006. IMHO, we cannot know what true market prices are until these artificial props are taken out of the equation.

They are trying to get people to perceive money as being worthless. For example, we've been desperately trying to find a decent return on safe, fixed-income securities for many years now. With the exception of 2007 (IIRC), the rates have been so pathetically low that our savings/buying power is being eaten up by inflation. Case in point: people today think a $500K house is a reasonable price for a starter home.

One can easily be tempted to think it's better to just get rid of the money rather than save it. Not sure if it's a deliberate attempt to convince sheeple, or if it's just a general feeling, but even I am feeling like a chump because we've been sitting and waiting with cash for a long, long time.

Submitted by propertysearcha... on July 11, 2009 - 8:10pm.

Rich,
It's good to hear I am not the only one bored out of my mind with this market and shadow inventory.
On a good note...it is causing me to find new hobbies. Gardening, cooking, and running. I have to cure my boredom somehow and the housing market just isn't cutting it anymore.

Submitted by fredo4 on July 11, 2009 - 9:43pm.

Damn right this is getting boring. It's forced Guido and I into looking for a new rental house. We had not planned to be where we are now for nearly this long.

Submitted by UCGal on July 12, 2009 - 6:09am.

I think many of the "organic" sellers are choosing to wait it out. Within 2 blocks of my house there are 3 rentals on the market and 1 for sale. I know from talking to the owners of 2 of the rentals - they made the decision NOT to sell in this market - and rent in the meantime. They can hold out for a few years. As I've posted elsewhere - the one house for sale near me is so overpriced it will take a "special" buyer and will have problems getting appraised at that price.

I have to assume that the real Shadow' inventoryu is non-distressed houses that would normally be put on the market because the owners have moved... but are choosing to wait it out.

Submitted by jpinpb on July 12, 2009 - 8:04am.

That works if they don't have an Option ARM, if they didn't buy at peak or taken a HELOC. Otherwise, rent wouldn't come close to covering their nut.

Submitted by no_such_reality on July 12, 2009 - 5:20pm.

UCGal wrote:
I think many of the "organic" sellers are choosing to wait it out. Within 2 blocks of my house there are 3 rentals on the market and 1 for sale.

There's very few organic sellers. Look that the change in property value since 1999, it will tell you how massively turned over the property base is today. With the pull back in prices, very few have equity and if you don't have equity, you're not going to be an organic seller.

My point above about the lack of inventory ties to that. It's not 'right', it's not sustainable. But in the short term, it is. So you're best off sitting out because the market is set by supply and demand and there's no supply. ( At least in OC)

But... if you don't mind being chained to the house and stuck with an inflated property tax bill, you can find homes that are competitive with rents, if you look at it right and you tend to hit the upper quartile of rentals in that segment...

Submitted by Groundhogday on July 12, 2009 - 9:56pm.

jpinpb wrote:
That works if they don't have an Option ARM, if they didn't buy at peak or taken a HELOC. Otherwise, rent wouldn't come close to covering their nut.

Many are losing money every month on rentals, hoping to get it back by selling "when the market comes back."

I agree with the original proposition: a significant part of the shadow inventory is currently driving down rents. This will delay home price falls, but also drag out the downturn for years and years as accidental landlords eventually give up.

Submitted by temeculaguy on July 12, 2009 - 10:37pm.

jpinpb wrote:
I submit the median income is barely going to get you a median home. If you look at DTI, people have credit cards, car payments, student loans, etc. And I don't want to hear that a median income never got you a median home in San Diego b/c that's bull. I've done it in the past and I know others who have as well.

I hate disagreeing with you jp because I am a fan of yours, but median to median is a statistical trap. If on a scale of 1-100 for home prices, lets say you pick #50, that is the median, half are more, half are less. Then you take median income, choose that same #50 out of the one hundred earners. #50 earner doesn't line up with #50 home because only the top 55-58% of the earners own a home. The other 40+% never buy. So Mr. and Mrs #50 on the earner scale line up with #90 out of 100 homes on the home scale.

Submitted by peterb on July 12, 2009 - 10:47pm.

This is why deflation is a slow and drawn out process. Everyone tries to fight the tide until they finally capitulate under the constant downward pressure of the market. Holding out for a recovery, legislating moratoriums, etc...
We have world record debt levels in both the private and public sector and record level defaults with growing unemployment. Escalating defaults are the end-result of an over-leveraged position that can no longer be sustained. This is a lethal combination.

Submitted by ibjames on July 13, 2009 - 9:10am.

I would like to know who thinks 500k is an entry level house!

In mira mesa you can see houses going in the 300's very regularly, poway has gotten to that level also, do you guys think that the higher end, since it is still very bloated and sitting, will affect lower tier housing when it contracts?

Submitted by jpinpb on July 13, 2009 - 9:22am.

tg - I'm not saying it's easy to do. It takes effort, but it can be and has been done. In the past few years it was done only b/c of trick loans. If it weren't for trick loans, it would have been impossible on a standard 30 yr fixed.

Submitted by an on July 13, 2009 - 10:56am.

ibjames wrote:
I would like to know who thinks 500k is an entry level house!

In mira mesa you can see houses going in the 300's very regularly, poway has gotten to that level also, do you guys think that the higher end, since it is still very bloated and sitting, will affect lower tier housing when it contracts?


A lot Piggs have high standard. MM is not an entry level area either. If you want true entry level SFR in SD, you'd go to Escondido, San Marcos/Vista, Chula Vista, San Ysidro, etc. You can easily find entry level SFR for less than $150k there. That's entry level.

Submitted by drboom on July 13, 2009 - 11:06am.

AN wrote:
A lot Piggs have high standard.

Oooh! Oooh! High standards! That's me! That's me!

Sadly, I don't have the income to match, so I'm buying a 1950s era 1,000sf 3/1 in 92020. :-/

It could be worse, like southern 91977. =:O

Submitted by tom on July 13, 2009 - 3:15pm.

Raw NOD/NOT june numbers posted just fyi, you know if you're not into the whole brevity thing ;)

http://www.foreclosureforum.com/stats.html

Submitted by CA renter on July 14, 2009 - 12:39am.

temeculaguy wrote:
jpinpb wrote:
I submit the median income is barely going to get you a median home. If you look at DTI, people have credit cards, car payments, student loans, etc. And I don't want to hear that a median income never got you a median home in San Diego b/c that's bull. I've done it in the past and I know others who have as well.

I hate disagreeing with you jp because I am a fan of yours, but median to median is a statistical trap. If on a scale of 1-100 for home prices, lets say you pick #50, that is the median, half are more, half are less. Then you take median income, choose that same #50 out of the one hundred earners. #50 earner doesn't line up with #50 home because only the top 55-58% of the earners own a home. The other 40+% never buy. So Mr. and Mrs #50 on the earner scale line up with #90 out of 100 homes on the home scale.

Back when people had to have larger (20%+) down payments, this would have been true. As you've noted here before, in many areas, PITI = rents. If there is no barrier to "ownership" and there is rental parity, then the medians should line up fairly well. There will be some distortion as you move up the price ladder because many are willing to pay a premium over rents to "own" in a premium neighborhood. I am not an economist, so please feel free to poke holes in that theory! ;)

Still, I believe the median income should line up somewhat below median prices when things are "normal." Many people who earned $30K-$50K in the 90s were able to buy starter to mid-level homes (including myself at the time). We are getting there on the lower end again, which is good to see, finally! :)

Submitted by sobmaz on July 14, 2009 - 7:58am.

CA RENTER

You said it so well.

I have 550K sitting waiting to buy a house. They have me feeling like it is worthless. It earns less than the inflation rate and I have to pay taxes on what I do earn. The earnings won't even cover my rent.

A 550K house that is free and clear would produce far more income than having that money in the bank. I think a lot of these cash buyers are looking at that equation but that equation won't last for ever.

The have created the perception that 550K is not very much money, even though it would buy a crap load of "stuff". AND, it would take a crap load of time to save that amount of money for most people.

They are hoping I cave in and "capitulate" which would help provide a cushion for the collapsing housing market.

Take my story and multiply by millions.

Submitted by Huckleberry on July 14, 2009 - 6:57pm.

CA renter wrote:
no_such_reality wrote:
Go looking for a home, you'll understand just how little inventory really is available.

You can't buy shadow inventory. And there's 10 buyers for every realistically priced real inventory out there.

This is true. Right now, I feel as though we are in the 2003-2005 period when we had record low inventory (2004 just had a few thousand homes in all of San Diego County), and everyone was competing with each other to overpay for houses that sold for a mere fraction just a few short years earlier.

It doesn't make any sense, and when it doesn't make sense, it's always best to sit things out, IMHO. We avoided getting hit by the internet bubble and the housing bubble by sitting out the manias.

So true CAR. Like Warren Buffet says, "If I don't understand how it works or the rules that govern it, I don't invest in it!"

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