Little Can Stop the Inventory From Growing
-by the Mysterious Flying Miser
From Boston Real Estate Now:
“Want to know one of the scariest things out there right now when it comes to the precarious state of the housing market? It’s the huge amount of shadow inventory banks and other lenders are sitting on, ready to dump on the market as prices start to move upward again.
“… shadow inventory is the fancy name for foreclosed homes and condos that banks have taken back, but have yet to put on the market.
“The numbers are staggering - 1.7 million homes across the country - owned by banks which eventually plan to dump them back on the market. That’s compares to about 3.7 million homes already for sale from Boston to San Francisco.
“Check this story out from Las Vegas:
“In Nevada, Bank of America has announced plans to put 500 foreclosed homes a month on the market. And given the massive inventory Bank of America and other big lenders are sitting on, this pattern is likely to be repeated across the country. Bank of America alone took title to tens of thousands of homes each month towards the end of 2009.
“Conveniently, at least one bank executive is blaming the backlog on the Obama Administration’s loan modification campaign, reports the Las Vegas Journal Review, citing comments made at an industry conference. Banks are holding off on foreclosures as they attempt to work things out with struggling homeowners, which along with a myriad of temporary foreclosure moratoriums imposed by different states, has helped create the giant overhang, John Ciresi, a vice president and portfolio manager for Bank of America, is quoted as telling fellow industry executives.”
From the Arizona Republic:
“Phoenix area home prices could experience another drop in value because of tens of thousands of properties that could flood the market in 2010. This shadow inventory, located across metropolitan Phoenix, is threatening the recovery of the real estate market and overall Arizona economy.
“‘Phoenix’s shadow inventory is very real and very scary when you think about all the homes that could flood the market,’Arizona housing analyst RL Brown said. ‘Some people are in denial about the area’s shadow inventory, but by being informed on what could impact the market, we can all make better real-estate decisions.’”
…
“So far, lenders are opting for foreclosure over loan modifications in most cases. Recent federal figures showed only 15 percent of the homeowners eligible for loan modifications have received one. Lenders know they can take back Phoenix homes through foreclosures and get them off their books quickly by slashing prices and reselling them to investors. They have been doing this for the past 15 months.
“Uncertainty about what those investors will do with the more than 50,000 foreclosure homes they already have bought also stokes fears about a shadow inventory. Most foreclosure homes bought by investors have been turned into rentals. Now, there are so many rental properties competing for tenants, rents are falling. If new investors find they can’t make money off rentals, some are likely to try to resell those homes to try to make a quick profit.”
“As of March, banks had an inventory of about 1.1 million foreclosed homes, up 20% from a year earlier, according to estimates from LPS Applied Analytics. Another 4.8 million mortgage holders were at least 60 days behind on their payments or in the foreclosure process, meaning their homes were well on their way to the inventory pile. That ‘shadow inventory’ was up 30% from a year earlier.
“Based on the rate at which banks have been selling those foreclosed homes over the past few months, all that inventory, real and shadow, would take 103 months to unload. That’s nearly nine years. Of course, banks could pick up the pace of sales, but the added supply of distressed homes would weigh heavily on prices - and thus boost their losses.
“According to Goldman Sachs, the government Home Affordable Modification Program started less than 80,000 trial modifications in March, less than half the number in the peak month of October 2009. At the same time, a growing number of modifications are being canceled as borrowers prove unable to pay. By Goldman’s count, about 68,000 were canceled in March.
“All this means that little can stop banks’ inventory of distressed homes from growing. Too many people owe too much more on their homes than they can afford. For the housing market, that could mean a long-lasting hangover.”
From Bigger Pockets:
by Ryan Hinricher
“Some believe the shadow inventory isn’t a big concern. Steve Cook of Real Estate Economy Watch points out that total housing inventory is at a 7.8-month supply, slightly up, but overall way down over 1 year ago. ‘The huge shadow inventory of 1.7 to 7 million properties first forecast more than a year ago has yet to materialize-and may be a myth,’ said Cook recently in a blog post challenging the shadow inventory concerns. I tend to agree. Although my credentials aren’t as serious as Standard & Poor’s rating system, there is great pressure on the banks to work with owners to work out, modify, short sell, or salvage these loans in some way. Side note; a friend of mine recently modified his loan from 7% to 2% for the next 5 years and had his payment sliced in half. The odds of him paying this back are good. Market absorption is continuing to happen as well. In my market, Memphis, inventories are down 30% from the peak, so it’s hard to comprehend prices dropping much further.”
From the Mysterious Flying Miser:
Ben Jones of the Housing Bubble Blog will be in Washington, DC late June 2010. He plans on making a visit to his elected representative while there. To help his case, he is asking that HBB readers write letters describing how the shadow inventory is hurting them. Letters can be e-mailed to Mr. Jones, and he will deliver them in person. He also seeks input from HBB readers on possible ways to communicate this issue most effectively.
