And Best Supporting Cast Goes to... shadow inventory

Like Jaws swarming a fishing boat off the coast, our housing market has the latest UHO (unidentified housing object) to have us all shaking in our boats, err houses.  What in the creation of spoofism is “shadow inventory?”  Is it a hoax? Who knows, as you can’t find a single group of ‘experts‘ in our industry to agree on this new phenomenon.  Usually “shadow inventory” comes with a few buzz terms and theories, and lets explore all the items needed for the full shadow.

 

First, we need some bright light.  Can someone please turn on a light so we can see this inventory? Thank you.  Somewhere banks have tens of thousands of homes waiting for their release.  Well, yes and no.  Some homes are held back, because they have renters in them and the associated complications of showings with tenants and maintaining a property as a rental via many of the new laws in place to protect renters of foreclosed homes makes it difficult.  Yet, I’ve seen very few properties just sitting in waiting.  The easiest way to keep them waiting and out of their inventory is postponing the Trustee Sale (sometimes referred to as the foreclosure).  Postponements could be due to short sale consideration, loan remodification attempts, bankruptcy or the lender doesn’t have their ‘stuff’ together. Whatever the delay, many times it’s simply postponing the inevitable, foreclosure.  Other times they put off the sale, package up the non-performing loans in bulk, and sell them at a discount to a REIT (real estate investment trust).  Again, they’re not just simply sitting on their assets of currently declining value.

 

Next we need the obstruction by an object to cast the shadow.  Short sales? We already covered that and we also know short sales are becoming more streamlined, more prominent in volume and save banks a minimum of ten percent versus a full foreclosure when you factor in all the related costs.  Short sales will continue to build and thus should eliminate some of the “shadow inventory” on the horizon.

  

Finally, you need a surface where this shadow is projected.  When we look at this surface there are two looming factors of unaccountable magnitude, the next wave of resets on adjustable rate mortgages (ARMs) and strategic foreclosures.  

 

Adjustable rate mortgages have a very high rate of recast (option ARMs on which payments will be recalculated) in the timeframe of early 2010 to late 2011.  When these loans recast, those payments will typically soar from their current level to one they cannot afford and may inevitably force them into foreclosure.  To put into perspective, ARMS recasting during that period will have an average jump of 60-80% in their monthly payment.  

 

An even more unaccountable number is strategic of voluntary foreclosure.  These are homeowners who simply decide to let the property go back to the bank even when they can afford to make the payment.  Why you ask, because the negative equity position for many is insurmountable for their long term goals and psychological well being.  It’s hard to justify paying 2-3 times as much as your neighbor for the same home and be potentially more than six figures above them in acquisition price.  For some areas and scenarios they may effectively have to stay in the property for as many as 15-20 years to simply break even and sell while all the time paying 2-3 times as much as their new neighbors on a monthly basis.  The current unyielding trend of price erosion makes this a growing consideration and problem of an immeasurable number for the next 2-3 years.

 

In summary this lurking shadow is a menagerie of unmeasurable numbers and market segments.  It’s not one specific item that continues to fuel and grow the rate of foreclosure in the Valley or Nationally.  I would say Arizona, and the Phoenix Metropolitan area specifically, has a greater vulnerability to future issues due to our micro-economic issues and number of places purchased during the boom through exotic means.

 

The speculative nature of those times has led to further speculation about the road ahead whose darkness can only be expressed as a shadow.  by Lloyd Fox