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The Myth called “The Shadow Inventory” of foreclosed properties.

By
Real Estate Agent with Realty ONE Group Calif BRE # 00581357

The Myth called "The Shadow Inventory" of foreclosed properties. ( aka, "The alleged forthcoming Tsunami of foreclosures". )

For the past year or longer, there has been a veritable Tsunami of articles, warning us of a gigantic wave of foreclosures heading our way - destined to give us yet a further "crash" of real estate prices, both locally, here in Orange County, and Nationally.  The catalyst for this forthcoming wave is an alleged "Shadow Inventory" of properties, already foreclosed, but being warehoused by the lenders who took them back, in order to not flood the current real estate market with a doubling or tripling of properties, which would theoretically drive prices down even further than they've already gone.

These articles were almost all based upon charts and graphs that had been formulated by various financial institutions, and were designed to provide a peek at the potential future of many types of mortgages which had been originated 3, 5, or more years ago, giving financial "experts" facts to base their opinions of the market that would exist when the loans adjusted, at some future point.

It is easy to look at some of these charts from a year or two ago and conclude that there are a whole lot of troublesome mortgages that could be coming due at the worst possible time. Frankly, going back four or five years, and looking at similar charts then, one could easily foresee the financial woes that came upon us a couple of years ago, which have brought us to our present dismal condition - as a local economy, and as a Nation.

The problem, that people writing the warning articles mentioned above, is this. They are reading last year's charts the same way they read similar charts 4 or 5 years ago, and coming to the same conclusions, not considering that there have been a multitude of changes implemented over the past year and a half, that have wrought corresponding changes in the results forecasted.  Many of the troubled homes forecasted a year ago to hit the market early this year never really did. Sure, there are a lot more foreclosures on the market than there were 3 years ago, but not nearly the huge wave that had been forecasted.

So then, this spring, the pundits who created the charts of a year or two ago, told us that they were revising their projections - pushing them off for 6 months or a year. They hadn't been wrong in their forecasts - the Government had merely intervened, postponing the inevitable. That wasn't an entirely correct assessment of the situation, as it was more complicated than just that simple conclusion.

Yes, there was a foreclosure moratorium or two, both National, and locally, but there were many additional factors, simultaneously affecting the future of the mortgages portrayed on the charts. Many of the troubled loans had already been refinanced into ones more friendly to the borrowers. Many of the properties involved had already been sold, eliminating their mortgages. Many of the properties were now becoming short sales. And still more loans were starting to be modified. These factors, acting in concert, have had a serious impact upon the properties and mortgages that had been forecasted years or even months earlier.

Changes have happened, and the data of even just a year ago is obsolete. That is why there wasn't a wave of foreclosures earlier this year that had been forecast, and why the coming wave being forecast for now or early 2010 is NOT going to materialize, in my humble opinion. I fully expect that 2010 will be a virtual duplicate of 2009 - with a lot of foreclosure properties coming onto the market in the spring, and just like this year, for them to be swallowed up quickly by a huge wave of pent-up buyers - eager to take advantage of low prices, and low interest rates - just like this year.  And, just like this year, prices will continue to nudge upward - not "crash" further downward - at least here in Orange County, California.  By the way, those buyers, from earlier this year, and those expected next year, are the REAL Tsunami in both our current, and our forthcoming, real estate markets.

A recent report from ForeclosureRadar.com:  No Shadow Inventory of Bank Owned Homes

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