Back to Regular Shadow Inventory

Submitted by Rich Toscano on June 28, 2009 - 7:34pm

Frequent readers know I've spilled a lot of virtual ink on the concept of "shadow inventory" -- the fairly vast category of homes that are in foreclosure but not for sale. This overhang of potential but not-yet-actual inventory contrasts with the very low levels of inventory currently for sale.

The title of this post refers to a recent entry describing how current inventory is even lower than it seems. That prior article contained a graph showing that the amount of current inventory is unusually low compared to the number of sales, even before taking account of the reverse-shadow inventory effect.

But while sales are numerous in comparison to available inventory, homes in foreclosure are quite numerous in comparison to sales.

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Submitted by peterb on June 29, 2009 - 9:40am.

If you compare this recent data to the unemployment and foreclosure graphs of the last 3 recessions, it's fairly clear that this contraction is far more abrupt and severe.

Making the assumption that this contraction will play-out like the last 3 could be a very costly mistake for many people.

Submitted by GH on June 29, 2009 - 4:13pm.

Isn't this more indicative of the success of bank bailouts to allow them to hold hundreds of thousands of foreclosed homes off the market? I have no real data here so this is speculation on my part.

Submitted by Rich Toscano on June 29, 2009 - 5:00pm.

GH wrote:
Isn't this more indicative of the success of bank bailouts to allow them to hold hundreds of thousands of foreclosed homes off the market? I have no real data here so this is speculation on my part.

That's not exclusive with the idea of shadow inventory... unless they are going to keep the homes forever.

Rich

Submitted by SD Realtor on June 30, 2009 - 12:16am.

I don't think they plan to keep them forever. They just need to keep them as long as they need to keep them. I think it will be interesting to see how long they can hold out. I am sure the gubment will give them as much rope as they need.

Submitted by sreeb on June 30, 2009 - 12:48am.

As long as they can get money from our government for near 0%, they don't need to rush to sell. When interest rates go up, they will need to sell at the same time they get a lot of new inventory and fewer buyers.

Submitted by Scarlett on June 30, 2009 - 1:26pm.

SD Realtor wrote:
I don't think they plan to keep them forever. They just need to keep them as long as they need to keep them. I think it will be interesting to see how long they can hold out. I am sure the gubment will give them as much rope as they need.

Anybody has any idea what happens with those houses? Do people live in them? If not, who takes care of their minimum maintenance, the banks? I assume they are somehow maintained...

Submitted by urbanrealtor on July 1, 2009 - 5:53am.

I spoke with a dude at Utopia a while back.

He mentioned that someone there had signed a ginormous rental management contract with three of the largest asset management firms.

To Rich and Adam:
What effect would holding inventory back for, say, 3 years have?

Seems like it could have a lot with regard to lowering inventory and raising the equilibrium price.

If the prices increase I wonder how tough it would be to unload them in a couple years without creating a glut.

Submitted by Scarlett on July 1, 2009 - 8:46am.

urbanrealtor wrote:
I spoke with a dude at Utopia a while back.

He mentioned that someone there had signed a ginormous rental management contract with three of the largest asset management firms.

To Rich and Adam:
What effect would holding inventory back for, say, 3 years have?

Seems like it could have a lot with regard to lowering inventory and raising the equilibrium price.

If the prices increase I wonder how tough it would be to unload them in a couple years without creating a glut.

Clever little scheme, for the banks I mean. They will rent out those places they repossesed - they don't have to unload them any time soon. no hurry. In the longer run it may make more sense to get some income from rents than to dump them in the next few years. They can wait until the prices are 'right'.

Bye-bye true bottom that everybody was waiting for! Bye-bye shadow inventory! If you haven't bought by now, you'll be priced out forever. Especially if they raise the mortgage rates. Prices WILL increase, especially with the paucity of inventory. Hello, sellers market, hello, bubble!

Submitted by sreeb on July 1, 2009 - 8:56am.

Banks can be successful landlords while they get very low interest rates but that won't last for ever. Essentially all their money is adjustable rate and short term. Renting out properties may ease their short term pain but higher rates will bring a perfect storm as their costs increase, defaults and forclosures rise, and qualified buyers vanish. Renting out properties won't smooth the crash, it will aggravate it.

Submitted by Scarlett on July 1, 2009 - 9:22am.

sreeb wrote:
Banks can be successful landlords while they get very low interest rates but that won't last for ever. Essentially all their money is adjustable rate and short term. Renting out properties may ease their short term pain but higher rates will bring a perfect storm as their costs increase, defaults and forclosures rise, and qualified buyers vanish. Renting out properties won't smooth the crash, it will aggravate it.


How do you know they won't get very low interest rates long term? Maybe the government will lend them money for nearly 0 interest forever, or at least 10 years. It's unbelievable to what lengths the government might go, nothing surprises me anymore.

Submitted by Rich Toscano on July 1, 2009 - 9:46am.

Dan - If banks were just to keep this inventory for 3 years I absolutely agree the equilibrium price would end up higher than it would have otherwise. The flipside is that as that inventory was eventually released into the wild, it would put a damper on price increases as that happened. So taking it to extremes, if everyone dumps inventory now then "the bottom" will be at a lower price but with more of a v-shaped recovery in prices; whereas if they dribble inventory out over years the bottom price will be higher but with more of an l-shaped recovery in real terms anyway. That would be my guess.

The big question is are they planning to do that? I haven't heard much indication that they are except for your info about the property management contracts... it would be great to have a clearer answer on that.

Rich

Submitted by urbanrealtor on July 1, 2009 - 2:19pm.

I would agree except that, as you have pointed out to me before, we are not just dealing with a single equilibrium price equation. We are dealing with about 3. Those are for property, money, and (weirdly)bad money. I think it is safe to say that bad money as an item for sale is less available now than before (though I have said that before and been woefully wrong). Money is still cheap (though not as cheap as before). Property is also very cheap (though that varies depending on economic and geographic market segment).

I think some areas (again both geographically and financially)get an almost cartoonish V and others get a sort of flaccid L.

Thoughts from the peanut gallery?

Submitted by San Diego Remodeling on July 30, 2009 - 10:49pm.

There is faster turn over right now. There a are a lot of guys out there buying up 20 homes for rentals.
www.remodelingsd.com/bath_remodeling.html

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