Shadow inventory finds a new hiding place

Shadow inventory seems to be decreasing rapidly, but is it really?

CoreLogic defines shadow inventory as real estate owned (REO) properties in foreclosure. The definition also includes “seriously delinquent” (90 days or more) properties not listed on the MLS.

Based on CoreLogic’s July 2012 national data, banks’ shadow inventory nationally decreased from:

  • 2.6 million units in July 2011; to
  • 2.3 million units in July 2012.

The July 2012 shadow inventory comprises approximately six months of inventory. This means with the current rate of buyer demand, it would take six months to sell the number of properties involved.

The nation’s 2.3 million July 2012 inventory includes:

  • 1 million seriously delinquent properties;
  • 900,000 properties in foreclosure; and
  • 345,000 REOs.

CoreLogic suggests the 300,000 reduction in the nation’s supply of shadow inventory was due to increased short sales and other foreclosure alternatives.

first tuesday insight

Lenders’ stash of vacant properties is selling faster than it is being replenished by newly-acquired REOs. Might this be an indication that supply and demand will soon be more evenly matched? If so, won’t this cause sales volume and prices to rise, giving the recovery some momentum?

If only.

Shadow inventory, in the form of foreclosure sales and REOs, is not disappearing.  It is simply being shuffled to another temporary holder — speculators who will soon resell the properties.

Unfortunately, end user (homeowner) demand has not swallowed up lender REOs or imminent foreclosures.  Employment is still too weak to allow end users to make more than a dent in inventory.

Investors currently represent roughly one-third of all buyers of single family homes in California, and one-third of all buyers at trustee’s sales. This activity is the driving force behind the 2012 rise in sales volume and prices.

Investor-bought homes are off the market, but only temporarily. As soon as speculators have a chance to profit from a flip, they will do so. Then these properties will immediately resurface on the MLS for sale to end users.

The return to the MLS of speculator-held inventory will shock those who thought these properties were gone for good. Thus, these speculator-purchased properties are still “shadow” inventory – shadow inventory once removed and soon to return, likely with a vengeance.

Credit given to the first tuesday Journal Online — P.O. Box 5707, Riverside, CA 92517.

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