Shadow Inventory is For Real

Submitted by Rich Toscano on January 2, 2010 - 3:09pm

It feels like I've been writing about "shadow inventory" -- homes that are in foreclosure but haven't hit the market yet -- forever.  Yet no flood of foreclosures has yet inundated the market, and as a matter of fact, inventory has been quite scarce lately.  Is there anything to this shadow inventory concept?

As Kelly Bennett documented in a recent blog entry, the answer is yes.  Kelly noted as of Tuesday, there were 19,453 San Diego homes that were in foreclosure but that were not yet listed for sale.  That, my friends, is your shadow inventory.

For purely illustrative purposes, let's try to understand what the effect would be if all these homes in foreclosure were to suddenly hit the market. 

continue reading at voiceofsandiego.org

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Submitted by LesBaer45 on January 2, 2010 - 6:44pm.

So how much of this "shadow" inventory is being held by bank "subsidiary" companies? I've seen several stories recently about banks 'pushing' bad RE loans to other entities owned by the banks. It supposedly lets them clean up their books and gives them an out to unload RE later if it gets worse. Gives them a boost if the prices start to creep back up.

Maybe most of this "shadow" inventory can be accounted for in this fashion?

Submitted by temeculaguy on January 2, 2010 - 8:41pm.

Another question would be how much of the contingent and short sale inventory is being counted twice. Kelly's article says near the bottom that it is counting nods and nots, most short sales also have one of those and can only do one thing, close escrow as a short or default and hit the market, not both.

I hate to be a doubter but it's now 2010, how many years have we been waiting for bigfoot and hearing supposed insider information about the tsuinami that is right around the corner. If it happened all at once, I'm not sure it would even be all that catastrophic, 10 months supply isn't the end of the world.

Submitted by waiting for bottom on January 2, 2010 - 9:49pm.

Would a widespread principal write-down by Fannie and Freddie even have an impact in SD? It seems that the low end has worked through a good percentage of it's issues and the high end has a low percentage of GSE loans.

Submitted by peterb on January 2, 2010 - 11:04pm.

Not having to mark-to-market has got to be pretty appealing to many lenders. Foreclosure and the ensuing sale would be a defacto market value realization. Why even issue an NOD? There's more to this story.

Submitted by SD Realtor on January 3, 2010 - 10:08am.

The shadow inventory issue is really complex. As most people have pointed we have been discussing shadow inventory and the emergence of the inventory tsunami for so many years it has achieved urban legend status. Lots of contradictions right? How many of us have seen those empty homes? We all have! Yet the inventory levels are pathetic and have been for quite awhile. Speculators, investors, and flippers are back in full force. Prices have bounced in certain areas by 10% and mores. Low end homes have made a strong run, even middle end places have run hard. Many present buyers are kicking themselves for not buying in 2008 when conditions were much better with regard to inventory and pricing was better.

Similarly the government/treasury/wall st conglomerate have twisted up accounting rules so much that if any of us applied this sort of accounting to our lives we would all be behind bars. TARP, PPIP, the GSEs, and a varied assortment of backroom deals have all served their purpose quite well. Not to generate a healthy market but moreover to prevent what should have been, a clean spanking of the old f'd up market.

As was pointed out above, I would not presume that all 19k+ homes that have been identified as "shadow" inventory will hit the market. Nowhere even close. Peel the onion a little more... how many of these homes are actually in a place where any of you want to buy? Also how many of us see the vacant homes we have posted about in the areas we want to live in? I don't see many in Scripps or 4S or even PQ.

What I have come to grips with is that this government/wall st complex will not let inventory crater the market. They have the gold and they make the rules. Period. I believe that the only hopes for a substantial leg down shall be 100% driven by interest rates. It would not surprise me at all to see more radical steps taken to keep people in homes. 50 year mtgs, letting the homeowners rent out the homes, GSEs turned to landlords. Government subsidies of losses to investors. No the washout that needs to occur can and will only occur when our creditors have had enough.

That will happen someday. Rates will bring the market to reality that will bring pricing in line with where it should be. Whether that is affordable to people is orthogonal to where it ends up. This is, after all, San Diego.

Submitted by jcarter04 on January 3, 2010 - 10:20am.

Banks purposely withholding inventory from the market makes sense for an individual bank who doesn't want to recognize the loss yet. It seems reasonable to surmise that all this shadow inventory will help slow the rate of decent in housing prices or even temporarily flatten them while extending the time it takes for housing to reach a bottom. It took about 14 years for Japan's housing market to reach equilibrium so about 7 years seems reasonable for the U.S. as the Fed will attempt more monetary inflation in the midst of asset deflation and deleveraging than Japan. That would dictate a bottom around 2012 to 2014.

Submitted by 34f3f3f on January 3, 2010 - 10:49am.

I love the actress said to the bishop "extend and pretend" reference. That sums it up for me. No wonder we see so many ED ads on TV. The Ramsey comment about the timing of the release about the lifting of the cap is interesting, and ominous, but I'm struggling to make the connection between that and principal reductions. If there are principal reductions, what do the homes appraise for?

Submitted by SD Realtor on January 3, 2010 - 11:51am.

Qwerty that issue is conveniently sidestepped. It is tantamount to fraud. That is, all those receiving the rate/principal reductions will have no bearing on appraisals. It will be like two markets, the shadow subsidized market for the fbs and the market for new buyers. The new buyers get screwed because their appraisals and rates only are based on that market. While those receiving aid get that aid with no appraisals and none of the data is conveyed to the new buyer market. Talk about cryptic eh? It is not like this is "going" to happen. It is happening and has been happening for awhile now.

Submitted by waiting for bottom on January 3, 2010 - 12:26pm.

SD Realtor wrote:
Qwerty that issue is conveniently sidestepped. It is tantamount to fraud. That is, all those receiving the rate/principal reductions will have no bearing on appraisals. It will be like two markets, the shadow subsidized market for the fbs and the market for new buyers. The new buyers get screwed because their appraisals and rates only are based on that market. While those receiving aid get that aid with no appraisals and none of the data is conveyed to the new buyer market. Talk about cryptic eh? It is not like this is "going" to happen. It is happening and has been happening for awhile now.

Isn't a principal write down effectively dropping the mortgage to market price?

I've been thinking about this a lot lately. I bought in SEH in 2009. I was looking at all sales on redfin the other day and it is shocking to see most of my neighbors still paying their mortgages when they paid about $200k more than today's value.

If anyone deserves help, it is them. They just bought at the wrong time. I have no sympathy for flippers or idiots who bought beyond their means. If anyone should get relief it's the hard working people who bought within their means at the worst possible time.

Don't get me wrong, I'm not lobbying for them to get a write-down...I'm just saying if my taxpayer $$ are going somewhere, I'd rather it went to that group.

Submitted by outtamojo on January 3, 2010 - 1:12pm.

"I'm just saying if my taxpayer $$ are going somewhere, I'd rather it went to that group."

Ditto, nor to banker/Wall. St. bonuses.

Submitted by CA renter on January 3, 2010 - 4:43pm.

SDR,

Agree 100% with both of your posts.

They WILL "do more" for the housing market; whether it's the right thing or not does not matter.

The principal write-downs will NOT be included as comps, even though that's what they are.

I don't expect we'll see the elusive "bottom" for a good six years or so from now. Everything they're doing now to "help" the market will end up prolonging the pain and will cause even greater losses down the road. All on the taxpayers' dime.

Submitted by CA renter on January 3, 2010 - 4:47pm.

waiting for bottom wrote:

Isn't a principal write down effectively dropping the mortgage to market price?

I've been thinking about this a lot lately. I bought in SEH in 2009. I was looking at all sales on redfin the other day and it is shocking to see most of my neighbors still paying their mortgages when they paid about $200k more than today's value.

If anyone deserves help, it is them. They just bought at the wrong time. I have no sympathy for flippers or idiots who bought beyond their means. If anyone should get relief it's the hard working people who bought within their means at the worst possible time.

Don't get me wrong, I'm not lobbying for them to get a write-down...I'm just saying if my taxpayer $$ are going somewhere, I'd rather it went to that group.

These buyers really didn't "buy at the wrong time." They willingly chose to overpay for an asset. There is no reason on God's green earth for anyone other than their lenders to take any losses on their behalf.

If the lenders were forced to take these losses, they might be more circumspect when making loans in the future. What we desperately need are much higher interest rates and much lower prices.

Submitted by CA renter on January 3, 2010 - 4:51pm.

Great post, Rich. And thanks to Kelly for her research on the shadow inventory.

One more thing to consider are the (not insignificant?) number of people who stopped making payments but for some reason (conspiracy theories notwithstanding), they have yet to receive a NOD.

Submitted by waiting for bottom on January 3, 2010 - 4:56pm.

I agree there is no reason for anyone other than the lenders to take the losses....but if taxpayer $$ are going somewhere, where else should it go?

You are very much overstating when you say they willingly overpaid for an asset. They willingly bought an asset, most of them oblivious to the bubble. It was just "life timing".

I work with many very very smart people who bought houses when they moved here in 2006-2008. That's what people do when they move...they buy a house. They're not in it to make a bunch of money quick...or lose it.

Had I not read this blog (after researching a A LOT), I would have been one of them.

Submitted by CA renter on January 3, 2010 - 6:30pm.

waiting for bottom wrote:
I agree there is no reason for anyone other than the lenders to take the losses....but if taxpayer $$ are going somewhere, where else should it go?

You are very much overstating when you say they willingly overpaid for an asset. They willingly bought an asset, most of them oblivious to the bubble. It was just "life timing".

I work with many very very smart people who bought houses when they moved here in 2006-2008. That's what people do when they move...they buy a house. They're not in it to make a bunch of money quick...or lose it.

Had I not read this blog (after researching a A LOT), I would have been one of them.

Okay, I'll grant you that people who were transplants might not have willingly overpaid.

One thing I've definitely noticed over these many years is that new residents provide fresh meat to the RE industry, as these new buyers have absolutely no historical context, nor have an appreciation for the tremendous volatility in the CA real estate market. In almost every case when a buyer is seen grossly overpaying for a house, it is almost always somebody from out-of-state. Realtors seem to prey upon these people.\
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WFB wrote:

I work with many very very smart people who bought houses when they moved here in 2006-2008. That's what people do when they move...they buy a house.

Just MHO, but if we were to move to another state, I would definitely rent before buying. It's always wise to be aware of what you're getting into **before** you take the leap. People don't know if they're going to like the new area, the job, being away from home, etc.; and they're buying houses... The fact that so many people buy when they move shows how brainwashed we all are by the REIC.

Submitted by jpinpb on January 3, 2010 - 6:46pm.

October REO chart

I saw this on So Cal Bubble
"Any thoughts as to why over the last 1.5 years, 90 day lates have doubled while bank owned halved?"

I wanted to relay one little story. Being the skeptical and suspicious person I am, I can't help but wonder how many other similar ones are out there.

In May of last year I made an offer on a short sale. From what I understand, there were anywhere from 3 to 5 other offers. No one's offer was accepted. It went off the radar blip.

Any time I drove by the house, it seems the owner is still living there, despite the NOD. Not surprising much to me.

I thought little of it b/c I continued my search, as always. But then eventually, I see it's scheduled for foreclosure beginning December. I do some more checking.

From what I was able to find out, it seems the owner was trying to bring current his payments, but the bank posted the foreclosure notice - - on the side door of his garage, which he never uses, so he had no idea it was scheduled for foreclosure. So from what I was told, the bank officially owns it and is trying to do cash for keys.

Drove by there today. The owner is still living there.

Submitted by jpinpb on January 3, 2010 - 7:01pm.

peterb wrote:
Not having to mark-to-market has got to be pretty appealing to many lenders. Foreclosure and the ensuing sale would be a defacto market value realization. Why even issue an NOD? There's more to this story.

I am coming across many people who have been living in their homes and not paying and not receiving a NOD. Many are not bothering to even issue NODs. But still nothing is being done, besides letting people live for free and closing their eyes.

CA renter wrote:
I don't expect we'll see the elusive "bottom" for a good six years or so from now. Everything they're doing now to "help" the market will end up prolonging the pain and will cause even greater losses down the road. All on the taxpayers' dime.

I agree w/you on this. Everything so far has just succeeded in procrastinating a real resolution and recovery. All the money used so far has managed to somewhat stablize it temporarily, IMO.

Submitted by AN on January 3, 2010 - 6:59pm.

jpinpb, here are my anecdotal example. There are two houses near me that I noticed not NODs. One was around last March/April and one was around October/November. Both are still current on the taxes and neither have list it on the MLS. They both are still living there as if nothing has happened. Could it possibly be that they're missing payment to try and get a loan mod? I mean, why else would you still pay your taxes if you plan to walk?

Submitted by jpinpb on January 3, 2010 - 7:01pm.

Some people's taxes are impounded and paid for by the lender.

Submitted by AN on January 3, 2010 - 7:05pm.

CA renter wrote:
Everything they're doing now to "help" the market will end up prolonging the pain and will cause even greater losses down the road.

Greater losses for who? Are you predicting even w/ inflation, we'll still see greater nominal losses when compare to scenario where housing price will come back to fundamental today?

Submitted by AN on January 3, 2010 - 7:06pm.

jpinpb wrote:
Some people's taxes are impounded and paid for by the lender.

So if they stopped paying for over 6 months, where did the lender get money to pay for the taxes?

Submitted by jpinpb on January 3, 2010 - 7:09pm.

From what I understand, the lenders pay and send the homeowner the bill. I'm thinking you have to be a year behind for the bank to not automatically pay the taxes.

Come to think about it, could explain why reinstatement amounts are so high. Might not all be penalties and interest. Tacking on the taxes.

Submitted by SD Realtor on January 3, 2010 - 7:25pm.

waiting for bottom, I never said that the write downs were not valued at the current market. I said that those buying homes will not have those reworked properties as appraisal data points. I believe it can even be argued that this could be a material fact. I feel like if there were distressed homeowners in my neighborhood or even my condo complex that I would like to be aware of that fact. To go further, those that did get reworked, how do we know those were marked at market value? The entire process seems so opaque that it just... smells bad you know?

Why shouldn't people who are buying homes with good credit get the EXACT same terms and rates as those people getting reworked?

Like I said, it is two distinct markets. To me the disparities are getting worse and not better. I think it is a sheer fallacy that putting salve on malignacies resolves the problems. To me they should be cut out. I don't fall into the to big to fail camp nor do I believe that homeowners who lose homes to foreclosures get tossed on the streets. On the homes we have purchased at trustee sale, I have been the one to meet the homeowner and let them know we own the house. In every case all of them found apartments. They all started over living within their means and I believe are better off for it. All of those homes were sold to new owners who in some cases bought for cash or very large downpayments.

No taxpayer support needed.

To me their is a much better way and we are steering as far from it as possible.

Submitted by waiting for bottom on January 3, 2010 - 7:50pm.

CA renter wrote:

WFB wrote:

I work with many very very smart people who bought houses when they moved here in 2006-2008. That's what people do when they move...they buy a house.

Just MHO, but if we were to move to another state, I would definitely rent before buying. It's always wise to be aware of what you're getting into **before** you take the leap. People don't know if they're going to like the new area, the job, being away from home, etc.; and they're buying houses... The fact that so many people buy when they move shows how brainwashed we all are by the REIC.

Brainwashed....or they have families that they don't want to move multiple times...

Submitted by waiting for bottom on January 3, 2010 - 7:55pm.

SDR - I get your point. All I am saying is that if the principal is written down to current market, it's not like recording it and counting as a comp would change the market. That's why I don't get your connection on "two markets".

I'll grant you it would solidify the market, but it wouldn't change it.

Submitted by CA renter on January 3, 2010 - 7:58pm.

SD Realtor wrote:
waiting for bottom, I never said that the write downs were not valued at the current market. I said that those buying homes will not have those reworked properties as appraisal data points. I believe it can even be argued that this could be a material fact. I feel like if there were distressed homeowners in my neighborhood or even my condo complex that I would like to be aware of that fact. To go further, those that did get reworked, how do we know those were marked at market value? The entire process seems so opaque that it just... smells bad you know?

Why shouldn't people who are buying homes with good credit get the EXACT same terms and rates as those people getting reworked?

Like I said, it is two distinct markets. To me the disparities are getting worse and not better. I think it is a sheer fallacy that putting salve on malignacies resolves the problems. To me they should be cut out. I don't fall into the to big to fail camp nor do I believe that homeowners who lose homes to foreclosures get tossed on the streets. On the homes we have purchased at trustee sale, I have been the one to meet the homeowner and let them know we own the house. In every case all of them found apartments. They all started over living within their means and I believe are better off for it. All of those homes were sold to new owners who in some cases bought for cash or very large downpayments.

No taxpayer support needed.

To me their is a much better way and we are steering as far from it as possible.

Amen, SDR.

Submitted by waiting for bottom on January 3, 2010 - 8:17pm.

You guys are in fantasy land or your own utopia. No taxpayer support is needed, granted.

Fact is, we all know taxpayer support will happen.

I've come around to accept that and to decide which partie(s) are most deserving. For me, that is the group that legitimately bought with unfortunate timing.

Submitted by outtamojo on January 3, 2010 - 8:50pm.

I have impound accounts, 2 of 'em. The bank collects 1/12 of my annual taxes every month.I have never heard of a lender paying taxes for you if you did not first give them the money. In fact, not paying your taxes gives the lender the right to foreclose you even if you are not late on your mortgage. When the bank does foreclose you, the lender is responsible for any back taxes you owed.

Submitted by peterb on January 3, 2010 - 9:08pm.

I think there's a good chance that principle write-downs would create a very strong dislocation of the RE market. If appraisers would be using sales as comps while true values were sliding down due to what is essentially an "in-house" devaluation. But again, the mortgage holder would now have a more accurate accounting of this devalued asset. Something I dont think many may want nor afford.

But lenders would probably understand this was taking place and become far more stringent with what kind of appraisals they'd accept in order to approve a purchase loan. And thus, the dislocation that locks-up the market.

Of course, the GSE's could step in and just start buying all these over valued loans and the world would be all good again.

Submitted by SD Realtor on January 3, 2010 - 9:31pm.

I guess I am not sure that taxpayer support is needed. Somehow we all made it through the previous market downturn with an RTC. The world did not turn upside down.

Also I believe that there are definitely two markets. Look we all know write downs occur correct? This site generally has a pretty high IQ quotient as a group yet NONE of us can come up with any hard numbers, hard amounts, hard statistics about reductions.

It does not sit well with me at all. I guess we agree to disagree on that one.

****************

Peter I am not sure that the dislocation you mentioned would occur. Remember an appraisal is a CONTINGENCY of sale, NOT a condition. Some of the homes we have flipped have indeed not appraised and the buyers had to come in with more cash.

Now I think that this would indeed negatively impact pricing but not to such an extent as to lock the market up.

A little transparency couldn't hurt.

***************

Also agreed on the above statement about taxes.

JP I have never heard of a lender paying taxes. However for most mortgages your lender can put you into default if you miss paying your taxes since mortgages are subordinate to taxes.

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