The newest buzz word thrown around by many real estate agents and media is Shadow Inventory. This is in reference to a vast inventory of bank owned homes (REO) that are being withheld from the real estate market for sinister reasons. Some agents have chosen to use low inventory to generate “Buy now before it’s too late” while others threaten another market downturn or crash with the shadow inventory suddenly flooding the market and softening prices further.
The latest Foreclosure Radar report hit the streets today and as usual here at San Diego Lifestyle we like to look at the facts rather than stick our head in the sand, or come up with a fancy guess – Read Full Report Here.
This month’s report features not only a new look, but an important new statistic – Bank Owned (REO) Inventory. By looking at the number of foreclosures the banks have taken back and subtracting those that have since resold, we are able to show the number of foreclosures the banks have held as inventory over time. That inventory steadily increased through September 2008, at which point the number of properties banks resold regularly exceeded the number they took back at trustee sale. With 90,365 properties in inventory, banks currently carry about 4.77 months of supply, however, it takes the banks on average 7.33 months to dispose of a bank owned home, thus current inventory is less than should be expected from normal operations given current foreclosure volumes. Bottom line – there is no “shadow” inventory of bank owned homes being intentionally withheld from the market.
Here is an interesting fact regarding the discounting that is going on at Foreclosure Sales.
REO properties continue to be sold at the Trustee Sale at considerable discount to both the outstanding loan balance and also the current estimated fair market value. From a statewide perspective the average of a 20.5 percent discount to fair market value has dramatically increased the number of properties sold to 3rd party investors. It is not surprising that more properties are not purchased at auction with banks pricing the properties that they take back as an REO at an average of 23 percent more than current market value.
Here is an interesting statistic regarding when foreclosed loans were originated:
Nearly 91 percent of foreclosure sales in September were for loans that were made between January 2005 and December 2007. With property values now well below 2004 levels in many parts of the state, it remains surprising that relatively few loans made in 2004 have been foreclosed on. Also notable is the decline in foreclosures on loans that were made after the significant credit tightening that began in August 2007.
Foreclosure numbers for San Diego in September 2009 were 2,769 Notice of Defaults (NOD), 2,520 Notice of Sales (NTS), and 914 back to Bank (REO) and 290 sold to 3rd Parties (Investors).
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I also use foreclosure radar. The report you cite is correct that the banks are not holding onto inventory once they take them back on the courthouse steps. They assign them to a REO agent within 48 hours for sale. What the report fails to include are the hundreds of thousands of homes that the banks DO NOT TAKE BACK. Everyday in my county around 300 homes are scheduled for auction at trustee sale on the courthouse steps. Everyday about 15-20 sales are cancelled, 8-12 sold to third parties, 20-30 are taken back by the banks and 200-300 are postponed to a later date. These rolling postponements at the trustee sale have been going on all year. There is a huge shadow inventory that is being created by political pressure to do loan modificaitions. The foreclosures are being delayed at every stage of the process from the initial notice of default to notice of trustee sale to trustee sale. The term shadow inventory is incorrect only because the inventory doesn't belong to the bank yet.
James, thank you for your comments. I guess we are talking semantics, but in my mind it is not “Shadow Inventory” until the Bank have taken the property back on a Trustee Sale – then it becomes REO inventory. I guess your argument is all of the potential 'foreclosures” out there could be considered inventory.
Trying to guess what is going to happen to the thousands of homeowners that are trying to do refinances, loan modifications, short sales, or waiting for the market prices to improve is impossible and involves lots of moving pieces inside and outside the real estate markets.
In San Diego County for September 2009 there were a total of 10,430 active auctions and 732 cancelled auction sales. As noted above there 914 properties that went back to the bank while 290 were sold to 3rd parties. As Foreclosure Radar has noted the average time for a Bank REO is over 7 months in the process.
I also use foreclosure radar. The report you cite is correct that the banks are not holding onto inventory once they take them back on the courthouse steps. They assign them to a REO agent within 48 hours for sale. What the report fails to include are the hundreds of thousands of homes that the banks DO NOT TAKE BACK. Everyday in my county around 300 homes are scheduled for auction at trustee sale on the courthouse steps. Everyday about 15-20 sales are cancelled, 8-12 sold to third parties, 20-30 are taken back by the banks and 200-300 are postponed to a later date. These rolling postponements at the trustee sale have been going on all year. There is a huge shadow inventory that is being created by political pressure to do loan modificaitions. The foreclosures are being delayed at every stage of the process from the initial notice of default to notice of trustee sale to trustee sale. The term shadow inventory is incorrect only because the inventory doesn't belong to the bank yet.
James, thank you for your comments. I guess we are talking semantics, but in my mind it is not “Shadow Inventory” until the Bank have taken the property back on a Trustee Sale – then it becomes REO inventory. I guess your argument is all of the potential 'foreclosures” out there could be considered inventory.
Trying to guess what is going to happen to the thousands of homeowners that are trying to do refinances, loan modifications, short sales, or waiting for the market prices to improve is impossible and involves lots of moving pieces inside and outside the real estate markets.
In San Diego County for September 2009 there were a total of 10,430 active auctions and 732 cancelled auction sales. As noted above there 914 properties that went back to the bank while 290 were sold to 3rd parties. As Foreclosure Radar has noted the average time for a Bank REO is over 7 months in the process.