Shadow inventory is a newly recognized and little understood concept in the US real estate industry. Like The Shadow of pulp fiction fame, this Shadow takes many shapes and is largely invisible to the general public. As explained in an industry video blog, Think Big Work Small, this shadow must be well managed on a super macro level to avoid yet further depression of the US residential real estate market. By way of discussing this section of the shadow inventory, let’s start with just a few of properties with which I am familiar: For lack of a better term, I call these properties the invisible shadow inventory.
However, this situation cannot be managed on a super macro level as there are individuals involved as owners in millions of underwater homes. Radar Logic points to this very real shadow market within the shadow market within the banks and US govenrments control.
Update – April 2014: Corelogic reports the value of Shadow Inventory Down $70 Billion From One Year Ago.
Property A is located in Monument, CO. It is mortgaged to about one million two hundred thousand dollars. The last mortgage payment was made in February 2009. The property has not been foreclosed as of this publication and it is still occupied by the mortgagees. One must observe that this is a great deal of “free” housing expense for the occupants. This property was finally foreclosed in February 2014. How many more like this? Read on to the final paragraph.
Property B is located in Arvada, CO. It was mortgaged to almost six hundred thousand dollars. The last mortgage payment was made in October 2008. The mortgagee declared bankruptcy in April 2009 and offered to surrender the property to the banks. As of the original publication, the property had not been foreclosed, is unoccupied and has been unoccupied since August 2010. This property is now under contract to sell. The second contract worked. The new owners paid $415,000.
Property C is located in Cherry Hills Village, CO. The property was first listed for sale in March 2009. In April of 2012 the property had been listed for sale by a third Realtor finally received a valid purchase offer that was within the present market value parameters of the mortgage lender. The mortgage company initially indicated they would accept this short sale offer then reneged. The property was appraised at almost two million dollars in mid-2007 and had a loan of about seven hundred thousand dollars. The foreclosure process was initiated in December 2011. The property has been vacant since mid-2011. As of this publication, the mortgage company continues to postpone the foreclosure sale on a month to month basis. UPDATE August 24, 2012 this property went to foreclosure sale this week. Watch this blog to see when this property comes on the open market. UPDATE November 9, 2012 for $750k. Finally this property sold for $597,392.83 in December of 2012.
Property D is located in Highlands Ranch, CO. This property was surrendered in a Chapter 7 bankruptcy on December 3, 2010. The Debtors, being honorable folks, abandoned the property as part and parcel of their bankruptcy. As of February 19, 2014 the property has not been foreclosed by the mortgage servicer which owns both the 1st and 2nd mortgage liens. As a result, these Debtors remain locked out of the mortgage market as they are still on title to the property. There is no happy ending yet as they will remain locked out of the mortgage market until this property has been disposed of for three years or early 2018, whichever comes first. Is this not special? What say you, readers?
Rather than listing yet other examples, let’s leave it with this comment. I am aware of many more properties, many with a value of less than one hundred thousand dollars located in Monte Vista, Aurora, Colorado Springs and more. This is not to slight the multi-hundred thousand dollar value properties in this same situation. These shadow inventory properties exist in the mountains as well as on the plains and in the resort communities, too. As you see, there is no way to get a tally on the number of properties in this sector of the shadow inventory.
These examples may lead the reader to wonder why these financial institutions are not bringing these properties to current value on their books by foreclosing them and offering them for sale in the open market. Is is beneficial to these financial institutions to carry these non-performing assets on their balance sheets at highly inflated and unrealistic values? Is this practice beneficial to the neighborhood in which these abandoned properties are located? Are these non-performing assets simply values the market will not support? Is this just practice of kicking the financial can down the road beneficial to the overall economy? Are these financial institutions simply taking advantage of the investors of these loans? Perhaps these are owners such as Freddie Mac, Fannie Mae or numerous other investors such as pension funds?
The Almost Visible
The almost visible form the shadow inventory takes is the entire distressed real estate inventory owned by the banks and mortgage companies that is not being released for sale. AOL Real Estate estimates that 90% of the distressed real estate inventory is being held off the market thus far in 2012. The San Diego Reader reports that national shadow inventory totals about one million six hundred thousand homes. Another way to look at such numbers is by how many years it will take to clear the backlog of residential properties from the shadow market. According to an Inman News estimate of the marketing time for properties in the shadow inventory, it may take over ten years to clear in the greater metro New York area while only about two years in Phoenix.
The Shadow Inventory Problem
Many real estate professionals believe we have a mini-bubble going on right now. Interest rates are at an all-time low and home prices are very attractive. Banks are holding back inventory reducing supply which provides a false demand. Kenneth R. Harney recently posted a great article in The Real Deal discussing the “shrinking inventory” that is having potentially undesirable side effects on the market – namely artificially raising prices. There is somewhat of a market check on these bidding wars and that is the appraisal. When a property is bid too high for an appraiser to justify the contract price, there must be a compromise on pricing or the buyer needs to bring more money to the table or the contract fails.
This just in from DS News – Report: Shadow Inventory Looms Large for GSEs, HUD
“Meanwhile, the GSEs held 966,649 properties in their shadow inventory, while HUD was found to have 741,384 homes still in the shadows, for a total of 1.7 million properties. For the GSEs, the ratio of shadow inventory to REO inventory was about 6-to-1, while shadow inventory for HUD was 19.9 times greater than REO inventory.”
Banks nationwide — along with the federal government — are sitting on hundreds of thousands of unlisted distressed properties at a time when housing inventory
is at an all-time low. Roughly 80 percent of all real estate owned (REO) properties — some 515,000 homes nationwide — are not listed by banks on local multiple listing services. Another 803,000 homes are in the foreclosure process but have not yet been repossessed. Of those, some 167,000 are vacant — sometimes called “zombie” foreclosures, where a bank starts the foreclosure process, but then cancels the foreclosure sale. Real agents, brokers and investors are starting to target these must-sell properties.
In January 2014 the Woodstock Institute released its study examining the Shadow Inventory in Cook County, IL – “Unresolved Foreclosures: Patterns of Zombie Properties in Cook County“. following report examines the extent to which servicers are walking away from foreclosures in Cook County, which the property is located. The report defines a zombie property as a property for which a foreclosure case has been filed but not resolved for more than three years. Because neither the borrower nor the servicer has clear control of the property, neither has a strong incentive to assume responsibility for the property. Zombie properties, therefore, are likely to be poorly maintained or blighted, which threatens the stability of surrounding communities”. The entire report can be found here.James Spray, MLO, CNE, FICO Pro CO LMO 100008715 | NMLS 257365 |August 12, 2012 | Updated April 7, 2014
Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.