In Reality, Housing Is Not Even Close to Stabilizing
Shadow inventory -- distressed residential properties that will almost certainly come onto the market in the not-too-distant future -- paints a more accurate and more dismal outlook than many claim.
Much has been written about the so-called "shadow inventory" since the term was first coined a few years ago. Some analysts and commentators have argued about whether it even exists. Let's take an in-depth look at this shadow inventory and see whether it really is a threat to housing markets around the country.
Shadow Inventory Defined
Rather than joining the dispute about what the term actually means, I'll simply define it in this way: The "Shadow Inventory" is comprised of all those distressed residential properties (other than MLS listings) which we know will almost certainly be coming onto the market in the not-too-distant future.
MLS Foreclosures -- Only the Tip of the Iceberg
The starting point in discussing the shadow inventory has to be homes actually on MLS listings around the country. With the plunge in home sales starting in July, the number of listings has risen substantially since the spring. For example, California listings are up 25% since April.
The percentage of total listings that are bank-owned properties has declined over the last year, while the percentage of short-sale listings has risen tremendously during the same period. For example, short sales comprised 40% of all active listings in Sacramento County in August. The following table from data supplied by ZipRealty shows this soaring number of short-sale listings.
Because of the sharp climb in short-sale listings, roughly 30% of all July home sales in California, Arizona, and Nevada were short sales according to Inside Mortgage Finance. It also reported that nationwide, closed short sales have climbed from roughly 45,000 in January to nearly 100,000 in June.
With regard to shadow inventory, the key question is how many foreclosed and repossessed properties are now either in the inventory of banks or held on behalf of residential mortgage-backed securities investors whose loans they service. Estimates start at about 500,000 and go up from there. One highly reputable data provider with a huge database of first mortgage liens has been reporting an REO inventory in excess of 1 million since last summer. Whatever the number is, it seems clear that the vast majority of these properties aren't currently on the market.
Defaulted Properties Heading for the Resale Market
In addition to repossessed properties held off the market, the shadow inventory includes all the homes that have been placed into default -- the first stage of foreclosure proceedings. According to Lender Processing Services' July Mortgage Monitor report, there are now 2.02 million properties in default. This number hasn't declined in the past year in spite of more than 1 million trial mortgage modifications.
In many of the worst bubble metros, the number of homes in default has been climbing in the last year. Take a look at the soaring number of defaults in the Las Vegas metro area in this graph from ForeclosureRadar.
In spite of the huge number of foreclosed homes that have been sold by the banks in the Las Vegas area, the volume of new foreclosure actions continues to rise.
While many of these defaulted properties throughout the nation will escape foreclosure by means of a short sale, the rest will move on to foreclosure proceedings and eventual trustee sale to a third party or repossession by the lender.
Overwhelmed by the number of defaulted properties, banks have stretched out the time between the beginning of mortgage delinquency and formal foreclosure to an incredible average of 469 days -- more than 15 months. Since these homeowners in default are living in their house without making mortgage payments, that's a way to build up a sizable pile of cash.
Delinquent Homeowners -- The Number Just Keeps Growing
You could argue that the shadow inventory is the total of repossessed homes not yet on the market and defaulted homes that will move into foreclosure. However, there's also the matter of homes which are seriously delinquent in mortgage payments. Why, you may ask. The homeowner can cure the delinquency by paying the arrears before the home goes into default.
The problem is that the cure rate for these seriously delinquent mortgages is almost zero.
If this were early 2005, one could claim that 40% of homeowners who were delinquent 90 days or longer would eventually bring the mortgage current. But the cure rate has plunged along with home prices. As early as one year ago, the cure rate had dropped to almost zero. A delinquency of 90+ days now means almost certain foreclosure or short sale.
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