By now thanks to recent articles in The Wall Street Journal, New York Times, Bloomberg, CNBC and other media, so called Shadow Inventory has come to the mainstream, but it is more elusive than Sasquatch. Real Estate Agents have been blogging about this for months. For those who may have missed it, Shadow Inventory is the defaulted loans that the lenders are allegedly not releasing for sale. According to Rick Sharga, VP of RealtyTrac "We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market" Lawrence Yun, NAR chief economist called it a business decision by the banks " I believe many banks including Fannie and Freddie, who are holding onto some properties, are releasing foreclosed properties in a measured way so as not to flood the market which they perceive then perhaps could lead them to even more drastic price cuts .So they are releasing properties on a measured pace as a business decision to minimize losses"
How big is this Shadow Inventory? Well that depends on what you're counting, and who is doing the calculations. Some statistics include foreclosures that have been completed, plus NOD (Notice of Defaults), NTS (Notice of Trustee Sales), Strategic Defaults (borrowers that are capable, but not willing to continue to pay on negative equity properties), possible Builder Bankruptcy's, Vacant lots, Zombie Subdivisions, Commercial Loans, Debt-Securitization Markets, Side-line Sellers, and future Option Arms set to re-set in 2010.
The problem here is that no two experts are counting the same. Just as followers of Sasquatch, Bigfoot and Yeti fantastic creatures can't agree on the details, neither can the forecasters of Shadow Inventory. A recent report from Amherst Securities Laurie Goodman, which took into consideration reports from Mortgage Banker's Association, Trulia, Core Logic and RealtyTrac led to the report that 7 million properties are in this inventory, and this was not including half of the items listed above. http://www.youtube.com/watch?v=stVgR0SeiQo She further concludes that 7 million understates the problem because it does not include borrowers that are currently 30- 90 days late in paying, only those which already have received NOD. According to Ms. Goodman's research, a borrower that misses 1 payment only has a 25% chance to recover, after 2 missed payments 5%, and after 3, only a 1% chance to recover.
That is only 2 experts, and quite the disparity between 600,000 and an understated 7 million. Atlanta Federal Reserve real estate expert Analyst K.C. Conway, who is part of the central bank's Rapid Response program to spread information about emerging problems to bank examiners focused on commercial real estate at a Sept 29, 2009 presentation "Banks will be slow to recognize the severity of the loss-just as they were in residential"
In my opinion let's take the monster out from under the bed, and really look at it. Lenders may have inventory of foreclosed homes that have not been released yet. It may be that the process is taking longer, and the REO departments cannot handle the volume, some may have title issues, some might be in a short sale process, or some may be occupied by tenants that just were granted a whole slew of rights through Protecting Tenants at Foreclosure Act in May 2009. Mistrust of Wall Street and Banks is leading some to a conspiracy theory. As someone who has been a Real Estate Broker for 18 years, and has lived through the Savings and Loan Meltdown, sold properties for the RTC and FDIC, I do not believe they are taking into consideration any of the positives in future-casting. Current foreclosed single family residential property inventory is down. Days on the market from list date to under contract is down. Multiple offers on foreclosed homes becoming the norm. What about sideline buyers pent up demand for these properties? Investment firms and private investors itching to buy bulk portfolios? Housing Affordability Index is at a 20 year high, which brings even more buyers into the market. It will take further stimulus, credit market liquidity, lower unemployment rates, and restored consumer confidence to beat the monster, but it can be done.