The shadow market is coming out of the shadows, and the numbers are staggering. According to a report released yesterday by LPS (Lender Processing Services), “foreclosure inventory levels [stand] at 30 times monthly foreclosure sales volume.” As a result of this massive backlog, real estate analysts expect more downward pressure on U.S. home values as most of these homes are likely to reenter the market as REO properties rather than being sold in another more profitable manner[1]. The statistics on the foreclosure backlog are also staggering, with LPS reporting that the average U.S. loan currently in foreclosure has been delinquent for 537 days, and 30 percent of loans in foreclosure have not made payments in more than two years.
Thanks to slower processing times on foreclosures, it is unlikely that this backlog will disperse any time soon. In fact, although total U.S. loan delinquency has fallen nearly two percentage points over last year and foreclosure starts are down 14 percent from last year, the actual foreclosure rate is up as banks struggle to keep their books in order and intact[2]. With the “non-current inventory” logging in at nearly 7 million, the backlog is likely here to stay.
Many analysts have been predicting that 2011 will be the beginning of a recovery for many sectors of the real estate market, though most agree that the residential market has a long way to go. With this foreclosure backlog, however, do you think that home prices are likely to start a recovery by 2012?
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[1] http://www.dsnews.com/articles/lps-foreclosure-backlog-stands-at-30x-sales-volume-2011-03-28
[2] http://www.upi.com/Real-Estate/2011/03/29/Massive-Foreclosure-Inventory-Overwhelms-Sales/2471301400380/
For years in (Sarasota) Florida, I have followed closely this important issue of shadow inventory. In fact, in my own (once very nice) neighborhood, we have FIVE of these shadow inventory – all 5 have been abandoned for (more than) 3 years…no air conditioning in Florida’s intense sauna (i.e. high humidity).
On 1, the bank’s “home preservation” subcontractors drained the pool and threw one of those monstrous wire/wood cages over the top of the pool to minimize liability. Any pool contractor will warn you against draining (and leaving) a pool. In fact, the sides can cave in…that is, the gunite pool can be damaged not to mention the pool finish.
Mold, deferred maintenance, pool collapse…..
Now comes the really serious part of this. When these properties begin hitting the market, their L-O-W prices severely will drop neighborhood values.
Why?
Distressed (and now SUPER distressed) properties are the only properties selling!
Shadow inventory’s gloom extends beyond unbelievable numbers – the doom hammers the seriousness all the way into my neighborhood.
Hearing 7,000,000 doesn’t record reality until you’re a couple doors down from 1 of 5. Hear what I’m saying?
Mike
Bryan, the recovery will not happen until the jobs come back and the “real economy” ie; Capitalism is embraced by our government and reality sets in that
with out help from sound pro growth policy from Washington nothing will happen. The moniker for the ‘Shadow Inventory’ should be… the “Black Cloud” that will soon rain down on us.
Thanks for you consistent and credible content.
Steve Lazaras
Said it before here and will say it again, the shadow inventory will not allow a recovery of prices or the market in general!
As long as the government continues to meddle in the housing market, things will stay a mess. Fuel prices are going up, with no change or end in sight, because we have no energy policy except do nothing or talk about technologies which have between a 30 to 50 year time frame to implement, not to mention even longer to payback the investors. Not going to happen, not now, not tomorrow.
With higher and higher energy prices, we will have lower and lower real growth in the United States. We are so not close to any kind of a recovery it does not even make sense to talk about it! Those analysts need to get off their couches and walk around the neighborhoods, does not take a genius to see things are not getting better.
People are more frustrated, becoming more desperate and drawing back into themselves. We see a small blip in some market and people are falling all over themselves to claim we are in a recovery. Well it is only compared to some of the dismal numbers we have been experiencing and then only for a week or two.
Look around the world, look at how Obama has taken our country down several notches, look at how we are now involved in Libya, one more war with no prospect of it going well for us. Look at how the national debt is piling up, with no change in sight. The local governments, city, county, and state are all financially failing. They only see one option most of the time, higher taxes, more fees, more money from your pocket to their pocket. Look at foreign creditors and how they are becoming nervous about lending the United States money.
If anyone can see any kind of recovery with all of this facing us in the face, then those are the people to sell to and run like hell. Oh, did I mention, you best sell to them for cash! They will not be making payments for very long.
Brian,
Thanks for the update as always. I think that the shadow inventory will continue to be a protracted erosion of the market, but generalities about price and sales volume must be a local conversation. These big numbers don’t tell the homeowner or buyer or their agents how to interpret their own neighborhood. The lousy markets will stay bad longer, but the stable markets are already calm. All this continued bad news lets people continue to not pay their loan.
Hello Bryan, I do not believe home prices will start a recovery in 2012 for two reasons. First our political parties will not allow any meaningful legislation to pass until after the 2012 Presidential Election. The new President or may the current one will use two more years to implement any progressive legislation. The second reason is about jobs and wages. The American people have asked Washington to bring quality middle class jobs back to America. To do this requires a shift in the mindset of the people as to what defines a “good paying job.” which now means for middle class America $12-$16/hour. What that being the new standard, home prices “must” remain low to provide housing for Middle Class America who represents the American Dream. It will more than a decade before pay wages, professional salaries equal to pay at its peak in 2003
Great article! We do have a staggering amount of homes in some
Stage of foreclosure.
As a short sale specialist here in Bradenton FL I have actually seen a decrease in the amount of short sale inventory here in Bradenton fl.
We have the lowest level of short sales in over three years! Hopefully the banks can work on loan modifications to keep less of those shadow inventory coming on the market.
I have been telling people for the last few years that residential home prices are going to continue to go down because of simple economics, supply and demand. The Banks have kept these properties off the market(at the gov’t request I might add) to show the country that there is some sort of recovery going on. We know their is no recovery going on. The reality is that people are still waiting for the market to come back, but what is back? The way the market was in 05-08? that was a false market, or the way the market was traditionally? if the latter is the case, then we have a long way to go, because the traditional way of doing real estate has changed because the mortgage industry has changed the way they do business, which has left a lot of people, buyers and investors confused as to what is going on. Also, values have not gotten down to the levels that will allow people to buy houses using their actual income, and until that happens, you will not see a big recovery in the housing market.
WOW!! Well, maybe when my teenage daughter finally decides to buy she may actually
see some appreciation! This is probably a 5-10 year-old issue, though, of course,
real estate markets remain local and regional for the most part.
If you have some money saved up the next year or two will be the opportunity of a lifetime to purchase good rental real estate properties. Paid for rental property that will appreciate rapidly in the next 5 years will make you a millionaire by default probably many times over……looks like a huge sale is in the works lets go spend some cash!
Homes price will be under pressure for some time to come. In New Jersey, home prices average 300-600K, banks now demand min 20 percnet down pulus a very good credit score. So to buy a home for $300K required $60K down, plus the buyer needs to have another $20+K for closing costs to cover 2 quarters of taxes, plus all the rest. $80K cash will keep a lot of people out of the market.
Pro-growth policies? Sounds like the Republican de-regulation that caused all these problems in the first place. That’s all we need again.
Bryan,
As usual your posts are valuable and insightful. I have been talking and posting regarding the “Shadow Inventory” for some time. Some out there prefer to see more positive posts. I applaud you for being a realist and providing your readers with a clear picture of reality. This is a good investor market for quick flips; but buy and hold opportunities are further down the road, as price pressure will likely continue in most markets for some time.
As A Real Estate Broker in Ft Myers Fl and an active investor buying at the court house.I can tell you there is going to be a continued downturn in the market here as we are number 2 in the country for foreclosures.The median price has gone up but the market dropped another 6% last year for houses under $200,000.00 . THE BANKS ARE BIDDING FULL JUDGEMENT AMOUNTS AS THEY NOW HAVE WALL STREET BUYING THE DEFICENTCY AMOUNTS FOR 15-20 CENTS ON THE DOLLAR.Guess what is going to happen later after some body has a knock on the door telling them they owe the new owner money.MORE BANKRUPTCIES being filed.
The banks should be made to complete the forclosures promptly. The banks and the foreclosure mills have been caught falsifing paper work and foreclosing illeagly.All which is making the back log worse as the cases are now in limbo.We currently have over 14,000 cases going back as far as 2006 in our court system not including new filings
Mike Payne said it perfectly. I am a Realtor in the Sarasota area, The rise in real estate had been phenomenal in the days leading up to 2007. Now the drop is also phenomenal in many areas. In general: Too much real estate is chasing too few buyers. We have about 12% official unemployment in this area. Combine that with the shadow inventory and global uncertainties and you have uncertainty. I don’t see the market turn around save hyperinflation and then we got a whole different problem that may turn out to be worse by historical standards.
Having said that we all need a roof over our heads. if you find an investment property that leaves you a cash flow after a decent down payment then go ahead and buy. In some areas you can buy a home now and your monthly mortgage may be cheaper than if you were to rent. Just keep a cool head when you make these decisions.
I frankly don’t know whom to believe. This article and others say that foreclosures are growing especially in Florida.
Other statistics show that the number of foreclosures has gone down substantially between 6/2010 and 6/2011 in most counties of florida.
Fairfax county, VA where I live has raised our taxes this year saying that foreclosures have gone down and houses no longer take a long time to sell.