Shadow Inventory and Summer Real Estate



shadow inventory and summer sales

Beware the shadow inventory. It sounds like B-reel for a Harry Potter movie, but it’s a very well documented, very unpredictable issue facing national real estate’s recovery. As we’ve reported before, shadow inventory refers to bank held properties. It’s difficult to predict how many of these properties will be released onto the market, as well as when they’ll be released. But most difficult of all is predicting their impact.

How Many Homes Should We Expect?

Standard and Poor’s (S&P), attempting to measure this phenomenon, include all outstanding properties on which mortgage payments at least 90 days delinquent, as well as foreclosures and REOs. But that’s not all the agency counts. It also factors in 70% of loans upon which the mortgage became current after a previous 90-day delinquency—these loans, to S&P’s thinking, are most likely to default again.

Meanwhile, CoreLogic’s April, 2012 report estimates that approximately 1.4 million homes, or 3.4% of all homes with a mortgage, were in the national foreclosure inventory. (A number, incidentally, that’s down from 1.5 million-- or 3.5% a year-- in 2011). From this figure, experts calculate that the country’s “current back log of ‘shadow foreclosure inventory’ at its current level represents about 39% of the 3.6 million foreclosures completed across the country since the start of the financial crisis in September 2008.”

Where Will Shadow Inventories Have the Most Impact?

Obviously, shadow inventory isn’t uniformly distributed around the country. Those states hardest hit by foreclosure will also be those hardest hit by the releasing of too many of these devalued properties on the market.

Another variation is how fast cities and states can clear foreclosures. Some areas handle the procedure through judicial processes; some don’t. No one should be surprised that those regions with judicial procedures can’t clear the backlog of nonperforming loans  as quickly as those that don’t have as much red tape to cut through. In the first quarter of 2012, S&P estimates it took judicial states more than 2 times as long to clear one case than their non-judicial peers. This means that in judicial states, the inventory of homes in foreclosure continued to climb in 2012’s first quarter, but in non-judicial states, has declined. posted recently that four of the five states with the highest foreclosure inventory among all mortgaged homes were judicial states:

  • Florida (12.0%)
  • New Jersey (6.7%)
  • Illinois (5.3%)
  • New York (5.0%)

More strikingly, the five states with the highest number of completed foreclosures for the 12 months ending in April 2012 also accounted for 48.8% of all completed foreclosures nationally. Here's the breakdown:

  • California (142,000)
  • Florida (92,000)
  • Michigan (60,000)
  • Texas (58,000)
  • Georgia (57,000).

What Does Shadow Inventory Mean for Buyers and Sellers?

In the short-term, nothing. Today’s biggest real estate news is a shortage of inventory, bidding wars, and slowly but steadily rising prices. In the long-term though, the release of millions of low priced properties change the game—though of course, how much the game changes will depend on where a person hopes to buy or sell. Local Realtors® are well poised to explain the possible impact of shadow inventory on your plans to buy or sell a house in the near (or more distant) future, so talk to one.

Investment Opportunity Knocking?

Real estate “flipping” has long been a get-rich-quick scheme of the industry, always to varying degrees of success. Now though, with so many bank-owned properties in need of buyers, some investors are calling on the federal government to offer tax breaks on the capital gains such a flip would generate, or on the expense of buying a distressed property in the first place.

Meanwhile, others are offering seminars in “How to Make Money with Shadow Inventory.” For instance, today, June 18, at the CT REIA’s June conference, you could learn, and we quote:

* How to buy real estate below market value.
* Why the bank's loss is your gain.
* How to locate distressed properties.
* How to research and evaluate foreclosure properties.
* How to calculate your profits.

We’re interested in reader reaction to this kind of investing. Some people would argue that investors are key to making sure REOs and foreclosures don’t devalue the national market. Others would argue that buying and flipping for profit only helps those who already have money make more, robbing lower income people from the once in a lifetime chance to buy a home for less than its normal market-value.  Which group is more key in the nation’s successful absorption of shadow inventory?

More Resources:

Anna Marie Erwert writes from both the renter and new buyer perspective, having (finally) achieved both statuses. She focuses on national real estate trends, specializing in the San Francisco Bay Area and Pacific Northwest. Follow Anna on Twitter: @AnnaMarieErwert.