The reports of declining shadow inventory are wrong. Since lenders slowed their processing of REO inventory, shadow inventory stopped getting any smaller. As CoreLogic noted in their recent report, “the flow of new seriously delinquent (90 days or more) loans into the shadow inventory has been approximately offset by the equal volume of distressed (short and real estate owned) sales.” In other words, lenders are only treading water, and shadow inventory will be around indefinitely.
Shadow inventory liquidation will prevent any meaningful and sustained house price appreciation. Either through short sale or REO, these properties must be sold, and potential buyers know this. Back during the housing bubble, people believed if they didn’t buy then, they would be priced out forever. Most buyers today realize that is not the case because an ample future supply of homes is waiting in limbo for lenders to boot out the delinquent mortgage squatters.
If you look at the decline in CoreLogic’s reported shadow inventory in 2012, it’s almost entirely due to a sharp reduction in pending REO inventory, something I described at length in the post Banks cut standing REO inventories by reducing new acquisitions by 50%. 
CoreLogic has a very poor definition of shadow inventory because they include properties that have been served notice. Those properties are visible. The true shadow inventory is the total number of delinquent mortgage squatters waiting until the banks get around to foreclosing on them, and even this number is under-reported by CoreLogic.
Stories like this one are very misleading. To read this story without a better understanding of market realities, a reader might conclude the problems are over for US housing. That simply isn’t true.
Shrinking ‘Shadow Inventory’ Eases Threat to U.S. Housing
By Prashant Gopal – Jun 14, 2012 2:06 PM PT
The overhang of pending foreclosures that threatened to flood the U.S. housing market and depress prices is dissipating as banks sell off distressed properties and let borrowers sell homes for less than they owe.
The so-called shadow inventory of homes that are seriously delinquent, in the foreclosure process or owned by banks and not listed for sale tumbled in April to the lowest level in more than three years, CoreLogic Inc. said today. Home seizures plunged 18 percent from a year earlier even as initial notices of foreclosure increased, a sign that banks are turning to repossession alternatives, RealtyTrac Inc. said today.
A surge in foreclosed properties, which typically sell at a discount, may have driven down home prices, hurting a market that’s showing signs of bottoming. Transactions involving homes in the pre-foreclosure process rose 25 percent from a year earlier in the first quarter to a three-year high, Irvine, California-based RealtyTrac said on May 31.
Banks are trying to complete more short sales to resolve their bad loans. As I have pointed out, this is a problem because it requires the borrower to participate. Since delinquent mortgage squatters get free housing until they either sell or get booted after a foreclosure, their incentive is to drag out the process as long as possible. It’s generally better for them to wait until foreclosure than complete a short sale.
“In some ways, the shadow inventory was aptly named because shadows can sometimes appear larger than the actual problem,” Daren Blomquist, a RealtyTrac vice president, said in an interview.
What? Shadow inventory is a future problem. Current inventory is today’s problem. If a property is in shadow inventory, it’s there because the current inventory is too large to absorb it. In other words, the current problem is so large, shadow inventory is required to keep the current MLS supply manageable. Any amount of shadow inventory is a huge problem. Millions of houses in shadow inventory is a very serious problem overhanging the market.
“The uncertainty of how much distressed inventory would end up on the market was more of a problem than what the actual numbers are turning out to be.”
So if banks withhold inventory and keep it in the shadows, that means it’s not a problem? The reasoning here eludes me. Shadow inventory always has been a future problem, and it’s still there.
The shadow inventory fell 15 percent from a year earlier to about 1.5 million homes and is at the lowest since October 2008, the Santa Ana, California-based real estate information company CoreLogic said in a statement today. That represents a supply of about four months, down from six months in April 2011.
These months of supply figures CoreLogic puts out are a joke. If we only had six months supply of shadow inventory a year ago, why do we still have shadow inventory twelve months later? The months-of-supply metric is completely inappropriate to apply to shadow inventory.
realtors use months of supply to measure the strength of current sales relative to the existing supply. It’s not an indicator I put much faith in because it’s often wrong, but as used in the context of a market with constant additions and subtractions from supply, it has its place. Shadow inventory is fundamentally different. Shadow inventory should be zero. Prior to the deflation of the housing bubble, there was no shadow inventory because banks didn’t allow borrowers who were delinquent on their mortgages to squat in the properties.
A much more accurate method of examining shadow inventory is to take the total inventory and divide it by the actual rate of liquidation. Of course, CoreLogic won’t do that because it would reveal shadow inventory is infinite. S&P uses a superior methodology, and they conclude it will take 46 months to dispose of shadow inventory. Of course, they said it would take 45 months late last year, so even their math shows we are not making any progress and the problem may be getting worse.
‘Positive Development’
“The decline in the shadow inventory is a positive development because it removes some of the downward pressure on house prices,” Mark Fleming, chief economist for CoreLogic, said in a statement today. “This is one of the reasons why some markets that were formerly identified as deeply distressed, like Arizona, California and Nevada, are now experiencing price increases.”
The firming of pricing in the Southwestern United States has nothing whatsoever to do with any reductions in shadow inventory. Lenders are withholding product from the MLS which is adding to shadow inventory. It’s the withholding of inventory from the MLS that is causing prices to temporarily firm up.
Serious mortgage delinquencies also are down, with the share of payments 90 days late dropping to a three-year low of 6.86 percent in April, according to data compiled by Bloomberg. Arizona had a 37 percent decline in serious delinquencies, more than any other state, followed by California, Nevada, Michigan and Minnesota, CoreLogic said today.
Those numbers sound and look great.
Until you see where we are in context from where we should be.
Take a good look at the chart above. It speaks volumes about the problems the market faces. Does anyone really think house prices can begin a sustained rally until the delinquency rate gets back to normal? I don’t. Besides the problem of overhead supply, much of the potential future demand is caught up in these properties. The delinquent mortgage squatters currently living in these properties need to move into a rental for a few years to recover their credit before they can buy again. The increased supply and diminished demand will be a problem for several more years.
Foreclosure starts rose in May from a year earlier for the first time in more than two years after the largest U.S. loan servicers settled with states over faulty documentation. An increasing share of those distressed homes are being disposed of through short sales, in which owners sell their properties for less than they owe to avoid repossession, Blomquist said.
Distressed houses that come up for sale are likely to be quickly absorbed as demand rises in some cities where property inventory is low. Rising buyer interest is spurring banks to approve more short sales, said Doug Duncan, chief economist for Washington-based mortgage financier Fannie Mae. (FNMA)
“The sense is now is the time to move and clear inventory,” Duncan said today in a telephone interview. “If you see house prices continue to stabilize, you’re not selling into a falling price market.”
And in the process of clearing out the inventory, lenders will stifle any market rally. That’s the essence of the problem with overhead supply.
Every lender and many loan owners are sitting on the sidelines waiting for an opportunity to sell. There is no pent-up demand, but there is plenty of pent-up supply.
The restaurant business didn’t make him enough
The former owner of today’s featured property shares a name with the owner of a restaurant in Laguna Hills. Coincidence? Perhaps. If it is him, he supplemented his restaurant income with a fair amount of Ponzi mortgage money.
- This house was purchased on 3/27/2002 for $715,000. The former owner used a $572,000 first mortgage, a $71,500 second mortgage, and a $71,500 down payment.
- On 7/23/2003 he obtained a $136,000 HELOC.
- On 7/23/2003 the opened a $100,000 HELOC.
- On 3/23/2004 he refinanced with a $790,000 first mortgage.
- On 10/11/2005 they opened a $147,800 HELOC.
- On 10/13/2005 the opened a $115,000 HELOC.
- On 8/14/2006 he obtained a $250,000 stand-alone second.
- Total property debt was $1,040,000.
- Total mortgage equity withdrawal was $396,500.
When the bank issued a NOD, they didn’t waste much time moving to foreclosure. He didn’t get to squat long.
Rancho Santa Margarita Overview
Median home price is $352,000. Based on a rental parity value of $552,000, this market is under valued.
Monthly payment affordability has been improving over the last 7 month(s). Momentum suggests improving affordability.
Resale prices on a $/SF basis increased from $226/SF to $226/SF.
Resale prices have been falling for 12 month(s). Price momentum suggests falling prices over the next three months.
Median rental rates declined $8 last month from $2,299 to $2,290.
Rents have been rising for 12 month(s). Price momentum suggests rising rents over the next three months.
Market rating = 7
Proprietary OC Housing News home purchase analysis 
35 CRESTVIEW Dr Rancho Santa Margarita, CA 92688
$824,900 …….. Asking Price
$715,000 ………. Purchase Price
5/27/2002 ………. Purchase Date
$109,900 ………. Gross Gain (Loss)
($57,200) ………… Commissions and Costs at 8%
============================================
$52,700 ………. Net Gain (Loss)
============================================
15.4% ………. Gross Percent Change
7.4% ………. Net Percent Change
1.4% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$824,900 …….. Asking Price
$164,980 ………… 20% Down Conventional
3.67% …………. Mortgage Interest Rate
30 ……………… Number of Years
$659,920 …….. Mortgage
$165,824 ………. Income Requirement
$3,026 ………… Monthly Mortgage Payment
$715 ………… Property Tax at 1.04%
$233 ………… Mello Roos & Special Taxes
$206 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$103 ………… Homeowners Association Fees
============================================
$4,284 ………. Monthly Cash Outlays
($683) ………. Tax Savings
($1,008) ………. Equity Hidden in Payment
$199 ………….. Lost Income to Down Payment
$123 ………….. Maintenance and Replacement Reserves
============================================
$2,914 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$9,749 ………… Furnishing and Move In at 1% + $1,500
$9,749 ………… Closing Costs at 1% + $1,500
$6,599 ………… Interest Points
$164,980 ………… Down Payment
============================================
$191,077 ………. Total Cash Costs
$44,600 ………. Emergency Cash Reserves
============================================
$235,677 ………. Total Savings Needed
——————————————————————————————————————————————-
We're sorry, but we couldn't find MLS # S701129 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
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$789,000 12 LEDGEWOOD Dr |
0.18 miles 5 bd / 2.75 ba 3,055 Sq. Ft. |
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$759,000 40 LEDGEWOOD Dr |
0.25 miles 5 bd / 3 ba 3,438 Sq. Ft. |
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$1,099,000 35 WYNDHAM |
1.41 miles 5 bd / 5.5 ba 4,145 Sq. Ft. |
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$785,000 26 KEMPTON |
1.61 miles 4 bd / 2.75 ba 3,100 Sq. Ft. |
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$1,999,000 24 PANORAMA |
1.61 miles 4 bd / 4.5 ba 4,800 Sq. Ft. |
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$1,849,000 45 PANORAMA |
1.65 miles 5 bd / 4.5 ba 4,459 Sq. Ft. |
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$865,000 27471 APPARI Dr |
1.69 miles 5 bd / 3 ba 3,105 Sq. Ft. |
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$1,089,000 24009 SKYLINE |
1.7 miles 5 bd / 3.75 ba 3,600 Sq. Ft. |
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$975,000 3 LUSITANO |
1.85 miles 4 bd / 4.5 ba 4,223 Sq. Ft. |
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CoreLogic says delinquency rates are dropping. Lender Processing Services says they are not.
Delinquency Rate Increases Again, Overdue Mortgages=5,569,000: LPS
Lender Processing Services, Inc. (LPS) offered a peak into mortgage performance in May 2012 and revealed the delinquency rate increased for the second month in a row after declines.
The total delinquency rate, which includes all loans 30 days or more past due but not yet in foreclosure, was 7.20 percent, a 1.1 percent increase from the month before in April. Compared to May 2011, the delinquency rate is still down significantly by 9.6 percent.
In April 2012, the delinquency rate increased slightly by 0.4 percent from the month before after 9 months of declines.
Overall, the number of properties that are 30 or more days delinquent or in foreclosure totaled 5,569,000.
The total number of properties 30 days or more days past but not yet in foreclosure was about 3,542,000 while the number of properties in foreclosure inventory totaled 2,027,000.
The number of properties that are seriously delinquent, or 90 or more days past due, but not yet in foreclosure was approximately 1,575,000.
The rate of properties in foreclosure inventory was 4.12 percent, a 0.5 percent monthly decline and a 0.2 percent increase year-over-year.
The states with the highest percentage of non-current loans were Florida, Mississippi, New Jersey, Nevada, and Illinois.
The states with the lowest percentage of non-current loans were Montana, Alaska, South Dakota, Wyoming, and North Dakota.
The statistics are derived from LPS’ loan-level database of nearly 40 million mortgage loans.
LPS is a provider of integrated technology, data and analytics to the mortgage and real estate industries,
I heard the value of real estate only goes up and the number of delinquencies only decreases.
Optimism bordering on delusion and stupidity…
Slowing Economy Not Expected to Stall Market Recovery
The recent softening of economic activity will not stop the country’s housing market recovery, Capital Economics said in a report Wednesday.
The US Housing Market Analyst for Q2 2012 speculated that modest recovery in the housing market will not only continue for the rest of the year, it will spread and cause an increase in house prices. The recovery will spring from positive valuations and investor activity, the report said.
“Extremely favourable valuations are the foundations on which the housing recovery will be built. But with credit conditions remaining exceptionally tight, it will be cash-buyers and investors who will be able to take advantage and drive a gradual improvement in housing market demand,” said the report.
With the modest upturn in home sales going on, Capital Economics revised its house price forecast to show gains of 2 percent in 2012 and 5 percent in 2013.
The report pointed to the commercial real estate recovery in the 1990s, which was driven by new sources of investor capital following earlier price falls. This example suggests that institutional and private-equity investors could play the same role in the current housing upturn.
For the time being, Capital Economics said it does not expect the recent slowing of economic growth to develop into a more serious issue. However, the report noted that current forecasts are made under the assumption that the United States would shrug off the economic crisis occurring in the euro zone.
A cold dose of reality for the optimists.
Optimism Can Be Bad for Recovery, Rental Market is Bubble-Proof: Trulia
Optimism is good for the recovery, but too much optimism can lead us back on the path to the next housing bubble, said Trulia Chief Economist Jed Kolko during a conference call Wednesday.
Although home prices are rising, renters might be overconfident, with 58 percent of respondents expecting home prices to return to peak in the next 10 years, according to Trulia’s American Dream survey.
Kolko explained that in healthy markets where prices didn’t fall much from their peak after the bubble, the projection makes sense. But, in markets such as Detroit, Las Vegas, and Sacramento – where there was weak housing demand, job declines, or oversupply due to excess construction – prices fell by half or more from their peaks. In those cases, Kolko said optimism is outpacing reality, and it is very unlikely that prices in those hardest hit markets will return to the peaks in the next 10 years.
One area where renters had a more realistic outlook is the expectation for local prices.
Overall, 61 percent of respondents thought local prices would rise in the next 12 months, which Kolko said is totally reasonable given that data from Trulia shows prices are up quarter-over-quarter in 86 out of 100 metros.
As for the rental market, Kolko said there is no danger of a bubble and if anything, we are in danger of the rental market becoming extremely tight in some markets.
“The reason why I’m less concerned about a rental bubble is that bubbles often arise when expectations of price increases cause people to bid up homes or whatever it is around which the bubble is forming,” he explained, adding that since renters don’t benefit from price increases, they’re not going to bid up prices beyond demand.
You can only raise rents by what the local economy can support.
We’re entering the next economic downturn before re-taking the previous GDP, employment, cap utilization, industrial prod/manufact highs. The last time that happened was in the 1930′s. Demand destruction is coming.
Are you suggesting that we are in a rent bubble? I can see rents decreasing when vacant units are finally sold or rented. Or when squatters have to move in with other people. But for rents to really decrease the number of households need to also decrease. There has been some evidence that this is occurring. Is this process accelerating.
What I’m suggesting is the biggest bubble of all is in the money.
Armstrong’s latest…
How Do Empires Die
DEFLATION or INFLATION can kill an economy. Empires do not die by HYPERINFLATION – that is reserved for the fringe. When an empire dies, it historically has ALWAYS been by DEFLATION. How? Real wealth is driven from the ABOVEGROUND economy into the UNDERGROUND economy where it is hoarded and tucked away.
This is why we find hoards of Roman coins. This reduces the VELOCITY of money and commerce is reduced. This is ALWAYS AND WITHOUT EXCEPTION how empires die. This is why there was scrip issued in the United States during the Great Depression. The VELOCITY of money came to a halt.
http://www.inflateordie.com/files/How%20Do%20Empires%20Die%2006-17-2012.pdf
velocity Q1
http://confoundedinterest.files.wordpress.com/2012/06/m2velo1.gif?w=645&h=461
That velocity of money chart is pretty scary. It also explains why the economy is in such a sorry state while we are supposed to be officially out of recession.
Please ban el O. He gives me nightmares.
Just do what Kevin did in ‘Home Alone’
…. he finally confronted head-on, the scary monster furnace in the basement that he avoided his entire life. Then, it was no longer scary
Don’t encourage him.
Just leave him in his bomb shelter holding his shotgun and hoarding toilet paper.
I like the article. Rome has coin and its value was based in part by the metal content. Hyperinflation was limited by the metal content, while paper money can hyper-inflate due to the ease of using a printing press. Interesting point on wealth fleeing an empire or region due to taxation and the empire’s decline. The point of the US being a reserve currency that will bring the house down has been the US ace in the hole. The Brits was top dog with the reserve currency, but the change to US $ didn’t bring the world economy to a stand still.
Iraq advocated changing the oil prices from a US dollar bases to other currencies. PRC has started to price and trade regionally based on the regional currencies instead of the US$. We all know what happened to Iraq.
Yesterday’s LA Times had a big article on Toll Bros./Shea Homes building 2,000 homes in Lake Forest – in an area called Baker Ranch. They bought a 386-acre site that will have 40 acres of open space. The first homes are expected to hit the market in two years. It looks like they paid “over $100 Million” but the price is not public. Is this a sign the market is strengthening or a desperate bet that two years from now things will be a lot better?
“Is this a sign the market is strengthening or a desperate bet that two years from now things will be a lot better?”
Neither. Organic sellers aren’t listing right now and Banks are caught in a trap (I call it a trap because I don’t think they are intentionally withholding inventory, they just can’t proceed with foreclosures as long as they are trying to do a loan mod or short sell, both of which have incentives attached). With the currently constricted inventory, builders should be primed to take advantage of this sweet spot to make up for the lack of inventory.
Who knows what 2 years from now will look like, but my guess is that builders who can get product to the market in the short term will do very well.
Builders build. If they don’t do deals and build homes, they don’t have a business. Right now they see demand increasing, particularly due to the lack of MLS inventory, and they are taking a chance they will still have demand two years from now. It may work out. It may not.
Texas bank challenging Dodd-Frank, consumer bureau in court
By Peter Schroeder – 06/21/12 11:50 AM ET
A Texas community bank and two advocacy groups are filing suit in U.S. District Court to challenge the constitutionality of the Dodd-Frank financial reform law.
In particular, the suit will contend that the Consumer Financial Protection Bureau (CFPB), created by the law, lacks sufficient checks and balances and, in the words of the CEO of State National Bank, is “simply unconstitutional.”
“No other federal agency or commission operates in such a way that one person can essentially determine who gets a home loan, who can get a credit card and who can get a loan for college,” said bank head Jim Purcell. “Dodd-Frank effectively gives unlimited regulatory power to this so-called Consumer Financial Protection Board, also known as CFPB, with a director who is not accountable to Congress, the President or the Courts.”
Two conservative groups, the Competitive Enterprise Institute and the 60 Plus Association, have also signed on to the suit, which will be filed against the nation’s financial regulators.
C. Boyden Gray, who served as White House Counsel under President George H.W. Bush, will represent the plaintiffs in court.
Gray told reporters that the lawsuit was not a challenge to Dodd-Frank as a whole, but rather two specific sections that create the CFPB and a new regulatory group, the Financial Stability Oversight Council (FSOC). The FSOC gathers the nation’s top regulators to oversee the financial system as a whole, and charges it with identifying what financial institutions pose unique risks to that system and merit heightened oversight.
The FSOC is being challenged on the grounds that once it begins designating systemically significant institutions, it will create a two-tiered financial system where smaller banks will put at a disadvantage, according to Gray.
Many expected the CFPB would face legal challenges after President Obama’s January decision to recess appoint Richard Cordray to be its first director. The move came after Republicans in Congress had shot down the nomination of the Ohio Attorney General, and despite the fact that the GOP had been holding regular, brief “pro forma” sessions of Congress in an effort to prevent recess appointments.
The White House justified its decision, arguing that the sessions, which last minutes, do not constitute substantial work and can be ignored for appointment purposes.
Gray called that analysis “flawed,” and said the suit will focus on the appointment in part.
“We think there was no recess. We think only Congress can decide when it was in recess,” he said.
The CFPB has been a major hot-button issue surrounding the contentious Dodd-Frank law, as Republicans maintain the bureau is unaccountable and too powerful. Numerous bills have been introduced to bring its budget under the control of appropriators — currently it receives its funding directly from the Federal Reserve, and to alter its structure so that it is run by a bipartisan board instead of a single director.
House Financial Services Committee Chairman Spencer Bachus (R-Ala.) used the court challenge to renew the push for a board of directors.
“There is no question the Consumer Financial Protection Bureau – by the design of Dodd-Frank Act supporters – lacks accountability and transparency,” he said in a statement. “A bipartisan commission would help ensure that CFPB rules are balanced, fair and reasonable…This is a structure that has worked well for nearly every other regulatory body in this country and will work for the CFPB.”
Backers of the CFPB have maintained that such moves are merely attempts to defang the agency, which has broad power over the financial products marketed to consumers by banks, payday lenders, and others.
The CFPB was dismissive of the lawsuit, calling it a distraction.
“This lawsuit appears to dredge up old arguments that have already been discredited,” said bureau spokesperson Jennifer Howard. “We’re going to keep our focus on the important work Congress created us to do – making markets work for consumers and responsible providers.”
Dodd-Frank has been huge for law firms that practice consumer financial services!
And I doubt it will get overturned. Modified perhaps, but not overturned.
“Take a good look at the chart above. It speaks volumes about the problems the market faces. Does anyone really think house prices can begin a sustained rally until the delinquency rate gets back to normal? ”
On the charts, CA is no where near normal (2%), but the lower of the % delinquent is headed in the right direction (12% high down to 6.5%). What is causing the lower trend? FC’s, refinancing, selling, or just walking away? Is this really a sign of a market turn around?
[...] Yes, perpetual shadow inventory extends the housing downturn and creates uncertainty. [...]