Wikinvest Wire

The shadow inventory of foreclosed homes

Thursday, April 09, 2009

If ever there were a "squishy" data set, one that is quite difficult to get a good handle on due to the paucity of reliable, publicly available data, it is the inventory of foreclosed homes that have yet to make it onto the resale market.

A report by Carolyn Said in the San Francisco Chronicle provided the first graphic on the subject that I've seen, an image that was splashed across the front page of yesterday's paper.
IMAGE With bank repossessions and notices of default set to pick up dramatically in some parts of the country as detailed by Mr. Mortgage the other day, all the prognosticators with rosy housing outlooks for 2009 may be in for a wake up call come summer time.

If the Alt-A and Option ARM loans begin to sour in large numbers (as many predict) at about the same time that banks look to unload some of their inventory after all the recent optimism, there could be another big leg down in home prices.

Some details from the SF Gate story:

A vast "shadow inventory" of foreclosed homes that banks are holding off the market could wreak havoc with the already battered real estate sector, industry observers say.

Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.

"We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You'd have further depreciation and carnage."

In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity - only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as "shadow inventory."
You have to wonder about a bank like BofA, after having acquired Countrywide and their stable of bank owned properties, as to exactly how these properties are being valued in light of changing mark-to-market rules and critical earnings announcements.

Everyone seems to be sooooo anxious for the banking sector to show some stability so we can all get on with our stock investing lives again but, if it is coming via the accounting "sleight of hand" that some believe is the real reason for holding back these properties (i.e., valuing them much high than today's market would), we may all be in for a big letdown.


ShortWoman said...

Ahh I see the problem with the data. We are comparing *county records of foreclosures* with *MLS records of those properties selling*. That leaves out the big auctions, it leaves out any sale privately arranged by the bank, it neglects those properties that NYT was reporting the bank decided not to actually take, it leaves out anything that bypassed the MLS.

I will grant that I'm not in California. Here in Vegas, the "For Sale" sign sometimes goes up as soon as the recorder's stamp touches the deed. I am willing to believe there are a few hundred REO homes not yet for sale, but I can't believe there are thousands, let alone tens of thousands. I keep hearing about shadow inventory, and not seeing any real evidence of it beyond clumsy comparisons of defaults to MLS data.

Tim said...

Is Rick Sharga of Realty Trac that dumb to continue saying this - he's been widely quoted on this subject in recent months.

me said...

Out of 4 houses 4-sale on my street, 2 pulled them until better times. There are still going to be for sale, just not listed now.

Anonymous said...

Tons of shadow inventory here in San Diego. One doesn't have to use MLS sales figures, and I'm surprised if they did; that can also be found through county records.


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