For every two homes available for sale, there is another in lender shadow inventory, according to a report by CoreLogic. Nationally in October 2011, 1.6 million residential units were shadow inventory comprising property delinquent 90 days or more, in foreclosure or real estate owned (REO) and thus were not yet listed with a multiple listing service (MLS).
This volume of homes kept off the market, tucked quietly away in lender portfolios is currently four times higher than in 2006 — the last year of the Millennium Boom — when a mere 380,000 properties constituted nationwide shadow inventory. California, Florida and Illinois account for one third of the current volume.
Although there have been three million sales of distressed property from January 2009 to October 2011, the current volume of shadow inventory remains unchanged since 2009.
first tuesday take: Here’s what lenders aren’t telling us about why the shadow inventory remains off the market: when they eventually agree to a short payoff on a property with a seriously delinquent mortgage, or sell an REO, that is the moment they must report the loss and damage their balance sheets.
The reporting of these mortgage losses on payoff severely affects a lender’s declared solvency, potentially spooking shareholders (if not the Federal Deposit Insurance Corporation (FDIC)). Thus, lenders will only move the shadow inventory into shortsale or REO resale listing status once sufficient profits are generated to cover the losses these sales generate. [For more information shadow inventory, see the October 2011 first tuesday Market Chart, REO resales in CA.]
In order to diminish shadow inventory (which properly must include vacant properties in the hands of speculators, renovators and builders), lender shadow inventory must be sold to owner-occupants or buy-to-let investors. However, this jobless Lesser Depression has left a huge swath of potential owner-occupants with no ability to pay their bills let alone make a 20% down payment on another property. [For the most recent statistics on personal savings, see the first tuesday Market Chart, The 20% solution: personal savings rates and homeownership.]
Buy-to-let investors, on the other hand, have the resources to purchase REOs at 20% to 30% down (or in many cases buy them outright with cash) and put an end to the backlog. Income property investors understand the risks involved in single family residence (SFR) ownership, and they are ready and willing to buy up REOs in bulk. They’re simply waiting for Fannie Mae, Freddie Mac and other lenders to name the right price for these REO properties now listed in the MLS. Formula: Lower prices deliver higher sales volume. [For more information about buy-to-let investors, see the December 2011 first tuesday article, Frannie’s REOs lying around with nowhere to go.]
If we really want to see shadow inventory flushed out of the market, California and federal lawmakers must focus their efforts on job creation by enacting proper stimulus programs that employ lots more people. Infrastructure needs replacement and maintenance. With all the human resources standing ready to work, this is the time for government to invest (and borrow from Americans at 2% rates to do it).
Jobs increase income and consumer confidence, which translates into spending by potential homeowners and renters. California job growth is currently stationed around 200,000 annually, and must climb to 350,000 or 400,000 for home sales volume to significantly rise to normal long-term levels. [For more information about California employment, see the December 2011 first tuesday Market Chart, Jobs move real estate.]
To prevent the creation of even more shadow inventory, authority to force lenders to reduce the principal owed on underwater homes owned by insolvent families must be given back to the judiciary. If mortgage lenders cram down loan balances across the board on underwater homes to at least 94% of their currently appraised value and reset fully amortized fixed rate mortgage (FRM) payments at 31% of the family’s income, homeowners will have a better chance of maintaining (or returning to) solvency. This without government interaction would stimulate the economy by — you guessed it — creating jobs. [For more information regarding cramdowns, see the December 2011 first tuesday article, Cramdowns get Fed endorsement.]
Re: “CoreLogic Reports Shadow Inventory as of October 2011 Still at January 2009 Levels” from CoreLogic
What will happen to the inventory when Interest Rates rise and inflation Rate accelerates?