Reverse-Shadow Inventory

Submitted by Rich Toscano on June 15, 2009 - 4:06pm

San Diego housing inventory dropped again last month, but supply may be even tighter than it appears. I'll talk about that more below, but first, let's have a look at the data.

The number of existing San Diego homes for sale last month was 32 percent lower than the same time last year, while the volume of sales was 19 percent higher. These two trends combined to make for the lowest supply of for-sale housing in years.

continue reading at voiceofsandiego.org

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Submitted by propertysearcha... on June 15, 2009 - 8:11pm.

That is a great article. I have seen the active listings with my search criteria on Redfin drop down from about 60 to 13 in the last 4 weeks. This market is just as crazy going up as it is going down!

Submitted by DWCAP on June 15, 2009 - 8:22pm.

"Historically, bank sales and short sales constitute less than 5 percent of active "for sale" stock in the MLS. Currently, they represent the vast majority in many markets both locally and nationally."-Dan Cassidy

As your Dan the Relator said, Short sales or foreclosures usually make up a tiny minority of total listings in any usual inventory reading. Now they really are the market. So, if the market has changed drastically, as it would be safe to say, then how can you compare past norms to the current market? I would argue that the historical months of inventory is near meaningless in a market where nearly every houses listed HAS to sell, and a new catagory has been created that didnt exist before. I would think that we would have to watch the percentage of non-distressed inventory, and wait for it to return to below 25% of total inventory before we could use months of inventory as a predictor of future housing changes again.

Submitted by peterb on June 15, 2009 - 9:01pm.

If someone had told me it would be like this 3 years ago...I wouldnt have believed it. Amazing.

Distressed properties ARE the market! So now it's a waiting game with 20% to 30% of existing mortgages under water and unemployment at record levels and probably rising.

Submitted by drboom on June 15, 2009 - 10:06pm.

Here are the numbers from everyone's favorite ZIP code: 92020

Total "Active" SFR listings: 55
Minus "Contingent" listings: -17
Total available for sale: 38

Nearly a third are reverse shadow inventory, which aligns nicely with Dan Cassidy's estimates in the ZIP codes he looked at.

Last summer, the "active" figure was in the 140s for SFRs and the proportion of short sales was lower. Inventory that you can actually buy is down by at least two thirds, I'd say.

My agent says the current situation is going to really hurt the RE business if it goes on much longer. Yes, volumes have been up over last year, but the market is now running on fumes and there soon won't be enough business to go around unless the REO floodgates finally open up.

Submitted by SD Realtor on June 15, 2009 - 10:34pm.

You don't have to tell me how bad it is out there. It is a nightmare. Been saying this for awhile.

Submitted by urbanrealtor on June 15, 2009 - 11:03pm.

DWCAP wrote:
"Historically, bank sales and short sales constitute less than 5 percent of active "for sale" stock in the MLS. Currently, they represent the vast majority in many markets both locally and nationally."-Dan Cassidy

As your Dan the Relator said, Short sales or foreclosures usually make up a tiny minority of total listings in any usual inventory reading. Now they really are the market. So, if the market has changed drastically, as it would be safe to say, then how can you compare past norms to the current market? I would argue that the historical months of inventory is near meaningless in a market where nearly every houses listed HAS to sell, and a new catagory has been created that didnt exist before. I would think that we would have to watch the percentage of non-distressed inventory, and wait for it to return to below 25% of total inventory before we could use months of inventory as a predictor of future housing changes again.


The basic concepts of supply and demand do not change.
The only real variable that has been changed is that there is lower demand relative to supply.
The period before and after 2005 are totally comparable.
Just different.
Are you seeing something I am not?
Although you have a point with must sell inventory.
I am not sure how one would control for that.

Submitted by Eugene on June 16, 2009 - 3:33am.

To answer the question whether months of inventory still matter, you have to explain why 6 months is "normal" in a non-distressed market.

It's not all that obvious, when you think about it. 6 months of inventory means that an average house sits on the market 6 months before selling or withdrawing. Some sell sooner, some sit for a year then go away. It would appear that normal months of inventory account for some degree of stubbornness on the seller side.

In a 100% REO market, 2-3 months of supply would represent a stable rate where banks are able to get rid of inventory quickly enough, without having to cut prices.

Submitted by sdrealtor on June 16, 2009 - 9:09am.

Nothing new here. Adam (SD R) and I have been talking about this for several months. A few months back my guestimate was about 40% of the inventory was not really available (i.e. short sales with multiple offers on them) which these new statistics support.

Submitted by DWCAP on June 16, 2009 - 12:11pm.

Eugene wrote:
To answer the question whether months of inventory still matter, you have to explain why 6 months is "normal" in a non-distressed market.

It's not all that obvious, when you think about it. 6 months of inventory means that an average house sits on the market 6 months before selling or withdrawing. Some sell sooner, some sit for a year then go away. It would appear that normal months of inventory account for some degree of stubbornness on the seller side.

In a 100% REO market, 2-3 months of supply would represent a stable rate where banks are able to get rid of inventory quickly enough, without having to cut prices.

Very well said. Basically I am saying that what was equilibrium in a "normal" market most likley will not be equilibrum in a very 'distorted' market. 'Normal' was 6 months, and now we are trying to find a new equilibrium in a new market. I would guess it ranges between 2-4 months; or a rough estimate of the time it takes for a short sale/REO to process.

This assumes that demand continues to outstrip supply of affordably priced houses (with constant GOV 'stimulating' this is a rather safe assumption). The limiting factor in this situtaion is bank processing speed; not seller/buyer rationality.

Submitted by an on June 16, 2009 - 12:15pm.

What we have right now is not normal, just like 2005 wasn't normal. Unless you truly believe this "distorted" market will continue forever and the only sale in foreseeable future is REO. Sooner or later, we have to revert back to long term mean, which is ~6 months of supply.

Submitted by SD Realtor on June 16, 2009 - 1:12pm.

Except we got skewered for making those outlandish statements back then....

Submitted by DWCAP on June 16, 2009 - 1:49pm.

AN wrote:
What we have right now is not normal, just like 2005 wasn't normal. Unless you truly believe this "distorted" market will continue forever and the only sale in foreseeable future is REO. Sooner or later, we have to revert back to long term mean, which is ~6 months of supply.

I deleated the section I wrote about how things will return to normal becuase it was a hard read. I totally agree that things will return to a 'normal' state eventually, though I dont know when.

Basically I think it depends on what happens in the economy.

1)If things get better, we'll see months of inventory fall until we see strong price increases, which will lure back 'normal' sellers and things will level out.

2) If things get worse, we'll see NOD/NOT sales attempts increase and demand for housing decrease which will lead to increasing months of inventory and a decrease in prices.
-This is a temporary effect which will not last more than a few years. Eventually we will have to go through #1.

Submitted by Eugene on June 16, 2009 - 2:39pm.

Eugene wrote:
To answer the question whether months of inventory still matter, you have to explain why 6 months is "normal" in a non-distressed market.

It's not all that obvious, when you think about it. 6 months of inventory means that an average house sits on the market 6 months before selling or withdrawing. Some sell sooner, some sit for a year then go away. It would appear that normal months of inventory account for some degree of stubbornness on the seller side.

In a 100% REO market, 2-3 months of supply would represent a stable rate where banks are able to get rid of inventory quickly enough, without having to cut prices.

I have to correct myself. In a normal market, X% of all houses sell after sitting on the market Y days on average, and (100-X)% of houses withdraw after sitting on the market Z days. Months of inventory: Y + Z*(100-X)/X.

So, we could have 6 months of inventory if, for example, Y = 3 (an average house that sells, sells in 3 months on average), Z = 9 (an average house that does not sell, sits for 9 months on average) and X = 75% (3 out of 4 houses do sell).

In a 100% REO market, X = 100% and months of inventory should go down.

But we're not in a 100% REO market. There are lots of short sales, which take much longer to sell, and may end up withdrawing and foreclosing. There are also lots of defiant sellers listing at bubble prices.

Every day on my way to work I drive past a house that my wife and I toured last summer. (We felt that it was a decent house but overpriced) It's still listed. MLS shows 245 days of inventory, but I know that it's been listed for a year, if not more. In all this time, they've lowered the asking price once, from 635 to 589.

Bottom line is, months of inventory don't tell us much in this market.

Submitted by Arraya on June 16, 2009 - 6:58pm.

Bottom line is, months of inventory don't tell us much in this market.

This does:

California lenders held back 84% of the foreclosure inventory in May

In May, a record 111,824 California homes were scheduled for
foreclosure sales, but just 16% were auctioned. By comparison, last
May, sales were held for 49% of homes slated for foreclosure.

Of last month's postponed foreclosures, 40% were delayed at the
request of the lender; an additional 33% were postponed by agreement
between the lender and borrower.
http://latimesblogs.latimes.com/laland/2...

Submitted by sdrealtor on June 16, 2009 - 7:39pm.

Do you want to venture a guess as to why they were postponed? I cant speak for all of them but I had 4 postponed myself last week for short sales that were in process. Many of these postponements are short sales that are on the market and will sell or loan modifications that are in process. The lenders are actively looking to mitigate their losses which is what they should be doing.

Submitted by pepsi on June 17, 2009 - 2:28am.

DWCAP wrote:
AN wrote:
What we have right now is not normal, just like 2005 wasn't normal. Unless you truly believe this "distorted" market will continue forever and the only sale in foreseeable future is REO. Sooner or later, we have to revert back to long term mean, which is ~6 months of supply.

I deleated the section I wrote about how things will return to normal becuase it was a hard read. I totally agree that things will return to a 'normal' state eventually, though I dont know when.

Basically I think it depends on what happens in the economy.

1)If things get better, we'll see months of inventory fall until we see strong price increases, which will lure back 'normal' sellers and things will level out.

2) If things get worse, we'll see NOD/NOT sales attempts increase and demand for housing decrease which will lead to increasing months of inventory and a decrease in prices.
-This is a temporary effect which will not last more than a few years. Eventually we will have to go through #1.

There are some fundamental questions about how we get back to normal:

1. Are the current mortage market/lending standard "normal" ? Or do you think the 2005 condition is normal ?

2. If the current condition is actually better than normal (which is what I believe), then how come we only have bargan hunter in the market for short sales ?

3. Let's say the bargan hunters and the must-sell inventory cancel out each other in the next couple years, and interest rate / lending standard get back to the historical normal ( 6- 8% interest rate with 20% down payment).
How will these regular sellers sell their houses at higher price, when they can not even sell their houses to the regular/normal buyers, in today's "better than normal" credit environment ?

And what is stopping "normal" buyers from buying their houses ? (Especially after months of frustration for losing out to cash buyers)

Will 1100sqf SFH in Mira Mesa sell for half million in the next 10 years again ?

Why haven't we driven the price up for Oceanside and many low price areas that have only 2-3 months inventory ? (Or even Penasquitos/92129 ?)

Submitted by jpinpb on June 17, 2009 - 6:45am.

pepsi - that is a good point. Places like Temecula, Oceanside, Chula Vista have had substantial declines from peak, still continue to show NODs and though there may be bidding wars, this I attribute to the human nature and auction scenario. Though the prices sometimes sell higher than asking, still a far cry from peak. And still only distressed sales for the most part occurring, not "normal" sales. B/c of course the "normal" sales would have to mean close to peak prices.

FWIW, I've been extremely busy and haven't had a chance to post my NODs and foreclosures on SDL as regularly as I have, but the ones that I posted last week, there were some that had NODs re-filed and when I looked at previous posts on the property, there were NODs posted LAST YEAR and foreclosure dates scheduled. So kicking the can has only seemed to have come full circle. This was even after attempts to sell.

Maybe all of a sudden everyone's income will double and then prices will hit peak again. ;)

Submitted by sobmaz on June 17, 2009 - 7:43am.

It seems to me there was a sudden 4 or 5K inventory drop in San Diego County when sites like Zip Realty dropped short sales as soon as an offer came in.

Are we counting the same event twice?

Submitted by sdrealtor on June 17, 2009 - 8:57am.

Prices are increasing in low priced areas but arent being driven up quickly because lending standards are preventing that. Cash buyers only pay up to what makes sense for them. Buyers needing loans can only pay what a house can appraise for.

We do not not only have bargain hunters looking at short sales. We have dozens of normal buyers who qualify and for whom the prices make sense when comparing buy vs. rent.

Trying to simplify and understand this in rational terms will not work. We are not selling gallons of milk where everyone is buyer. We are selling a small number of high priced assets that are under great constraints (too many to list) and manipulation (also too many to list) in what has become a very inefficient marketplace. This is the most screwed up, dysfunctional marketplace one could ever imagine. Forget about trying to understand or make sense of all this madness......

Submitted by Rich Toscano on June 17, 2009 - 9:22am.

sdrealtor wrote:
This is the most screwed up, dysfunctional marketplace one could ever imagine. Forget about trying to understand or make sense of all this madness......

Sweet... this will leave me way more time for Xbox.

Shut it down, everybody!

;-)

Actually, I more or less agree. I think it's worthwhile to keep looking at whatever data is available and to try to make what sense of it we can (btw this thread is a good example of that -- lots of insightful comments and discussion). But at this point things are so whacked that the outcome is pretty unclear.

Rich

Submitted by peterb on June 17, 2009 - 10:01am.

There's an old saying that basically states,"If you know the game is fixed, but you're not the one doing the fixing, dont play."

Submitted by temeculaguy on June 17, 2009 - 10:27am.

Rich, I'm glad you addressed this anomaly, these are the riddles that may provide insight if we can figure it out. The last few months I've argued on the shadow inventory threads alongside others that this phenomenon should not be ignored. Sd and sd provided some news of the frustration from the frontline. Since I only track one zip code, I have seen an even worse trend, 2/3 of the inventory is not for sale. There are 496 listings, but after removing the shorts and the pendings, only 186 remain. Of those, many are pending or shorts and don't reflect that in the mls that redfin culls (redfin allows you to break out the shorts and pendings for us non realtor types). Last year there would have been 1,000 buyable properties on any given day, there's about a hundred today.

If by luck or design, this is causing the unwinding to be far more orderly than many had predicted and continue to predict. I'm beginning to doubt the shadow inventory theory and even if it comes to pass, the reverse shadow inventory theory you presented will cancel it out to some extent.

Submitted by sdrealtor on June 17, 2009 - 10:39am.

I'm not saying we should stop trying to figure this out just that we shouldnt expect it to make sense or be rational. It isnt....

Submitted by pepsi on June 17, 2009 - 12:17pm.

sdrealtor wrote:
Prices are increasing in low priced areas but arent being driven up quickly because lending standards are preventing that. Cash buyers only pay up to what makes sense for them. Buyers needing loans can only pay what a house can appraise for.

Let's apply that to Penasquitos 92129 (excellent high school) that has only 2 month inventory.

How good of the lending enviroment would you expect for some normal buyers to drive up the price in this particular good area ? We are in spring/summer season, and if we can not even drive up the price for Penasquitos then what are we going to have in fall/winter ?

I belive the problem is in the pricing, not the lending environment.

And even in the lower priced area, you said "Cash buyers only pay up to what makes sense for them."

What do you think what their "sense" is ? I can only assume most of them are investor and the "sense" they are using is ROI.

So, the question again is, why the cash buyers had not driven up the price a lot yet ? if the problem is not in price ?

Submitted by jpinpb on June 17, 2009 - 1:07pm.

pepsi wrote:

Let's apply that to Penasquitos 92129 (excellent high school) that has only 2 month inventory.

How good of the lending enviroment would you expect for some normal buyers to drive up the price in this particular good area ? We are in spring/summer season, and if we can not even drive up the price for Penasquitos then what are we going to have in fall/winter ?

I belive the problem is in the pricing, not the lending environment.

And even in the lower priced area, you said "Cash buyers only pay up to what makes sense for them."

What do you think what their "sense" is ? I can only assume most of them are investor and the "sense" they are using is ROI.

So, the question again is, why the cash buyers had not driven up the price a lot yet ? if the problem is not in price ?

Exactly. Unless banks start lending half a mil to someone selling lemonade again or incomes double, then I don't see how prices can go back to their highs any time soon. If people don't qualify, then there won't be anyone to buy the house, regardless of how many people want to. I see many pendings come back on market. Sometimes the appraisal doesn't come back to justify the overbidding. Long gone are the days of free money and rigged appraisals. Now the loans have to make sense.

Perhaps some of the homes will get reworked. I'm not a gambling person, or I would've bought during the up-cycle, but I'd bet that a good many places will not get loan moded and eventually the banks will have to sell. But that's not to say the can won't be kicked as long as possible.

Submitted by SD Realtor on June 17, 2009 - 2:10pm.

Pepsi please read more carefully what sdr wrote.

Pricing can go up but it is constrained by the lending (moreover) the appraisal process. This is true for areas that have a high percentage of homes purchased through financing. Also most (but not all) buyers seeking financing will not be able to buy if the appraisal doesn't come in at asking price. So that would help push pricing up.

Also PQ has gone up in price. I have clients who purchased in PQ in February and the pricing in that same neighborhoods for similar floorplans is almost 5% higher then it was then.

Cash buyers haven't pushed the prices up yet in given areas but in others they have. I have a listing where the seller bought the home for 435k in January and we are in escrow now at 480k. That is not a bad push the price up example is it not?

sdr did not say pricing cannot go up, he said it cannot go up quickly. It all depends on the profile of the neighborhood with regards to how the sales are done. However once you get a few months of sales then even those neighborhoods will have price increases as the new comps form a higher base.

Submitted by pepsi on June 17, 2009 - 2:31pm.

SD Realtor wrote:
Pepsi please read more carefully what sdr wrote.

Pricing can go up but it is constrained by the lending (moreover) the appraisal process.

So the appraisal coming back with below loan amount is a credit market problem ?

How's that so ?

Submitted by propertysearcha... on June 17, 2009 - 6:38pm.

I think it would be interesting to follow what percentage of short sales marked "contingent" actually get sold versus how many end up foreclosing and coming back onto the market.

That would give us a better idea of what real inventory is out there.

About 18 months ago when we were looking at some short sales I was surprised to see almost the exact same inventory on the market 10-16 months later as foreclosures.

Are more short sales going through or are they all just tied up with the moratoriums as shadow inventory?

Submitted by temeculaguy on June 17, 2009 - 9:59pm.

property, I saw similar things a year/year and a half ago. One short that I bid on, the bank opted to just foreclose and in the end they got less than I was offering. At that point I had not seen any shorts I was interested in actually close escrow, I gave up hope. But oh what a difference a year makes. It seems the banks have figured out it saves them from more losses, they seem to be going through now, I got a new next door neighbor in the past few weeks, he bought it through a short, I've also seen nearby shorts get new occupants, since I haven't met them I am only guessing it went through. It seems that it took a little time for the lenders to realize they were going to lose, that time was against them, now they seem to be mitigating their losses. It's a very small sample, but the development I moved into was featured on the news two years ago because half the lawns were brown, last year it was about every 10th house, right now I know of only a couple. At least with the shorts, the lawns stay green. Time will tell if it actually has a sizable impact.

Submitted by peterb on June 18, 2009 - 11:18am.

Mortgage negotiation is not something the lenders were probably ready to handle. I think they have to train/staff-up in order to hande the volume and complexity of this transaction type. The volume may well still overwhelm their ability to do this. But they'll probably pick and choose the properties that they can salvage the most money from rather than let them foreclose. If they can.

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