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.
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.”
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.
“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.
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
$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.
12 LEDGEWOOD Dr
5 bd / 2.75 ba
3,055 Sq. Ft.
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3,438 Sq. Ft.
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4,145 Sq. Ft.
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3,100 Sq. Ft.
4 bd / 4.5 ba
4,800 Sq. Ft.
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5 bd / 3 ba
3,105 Sq. Ft.
5 bd / 3.75 ba
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4,223 Sq. Ft.
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