I don’t usually post about new articles that I see, but this
one was very good and relevant to so many conversations that I’ve had recently.
The article is titled “Now You See It, Now You Don’t” and it
is about the “shadow inventory” and the market condition.
Anyone that works in the real estate industry knows that
right now we have very low inventory and lots of interested buyers. Sacramento currently has
0.8 months of inventory on the market.
The Months of Inventory is a
reflection of how many houses are for sale and how many are being purchased
each month and how long would it take for them all to sell at the current rate.
The lowest Month of Inventory durring the boom was April 2003 and the highest inventory in the bust was September 2007. 4 months of inventory is a very balanced
level with numbers lower than that being considered a sellers market and
anything above that being a buyers market. Now we have seen several months in a
row with inventory levels lower than 2.0 and even below 1.0!
What is the reason for this? Are the banks holding onto a
lot of shadow inventory, covering the carrying costs, keeping the
non-performing assets on their books (or just doctoring them so they don’t show
up) and waiting for/manipulating the market to improve before selling them? Do
they have hundreds of thousands of houses that they have foreclosed on and are
going to dump them on the market when prices come up?
While I love a good conspiracy theory, I also believe that
the simplest explanation with the least assumptions is often the best (a
version of Occam’s Razor).
This article went into several detailed aspects and included
that by all expert analysis there is only a minimal amount of bank owned
properties that aren’t put on the market quickly. I have often seen bank owned
listings that show only 1 day on market (DOM) but hundreds of combined days on
market (CDOM). I look at the history and see that this was a short sale that
sat on the market for months waiting for bank approval for the sale but finally
ended in foreclosure. The bank then had their asset manager arrange for the
clean out, new paint and carpet and listed the property for sale, all in less
than 30 days (otherwise, the CDOM would be the same as the DOM).
The big issue that this article pointed to is that there is
a different kind of shadow inventory and it’s not what I or most people
consider or refer to as shadow inventory. It is all the properties that are
delinquent on their payments and will most likely never become current. It is
the houses in pre-foreclosure, foreclosure or short sale status where no
payment is being made, the owners are getting further and further under water
and the most likely outcome for them is foreclosure.
The article then goes further to point out that all the
people that are living in a home in foreclosure, pre-foreclosure or a long,
drawn out short sale process aren’t selling, they aren’t buying (and won’t be
able to for a long time) and they aren’t even renting.
According to the reports, if all the properties that are currently
owned by banks but not on the market were listed tomorrow, we wouldn’t even
notice it. On the other hand, if all the delinquent properties were foreclosed
on in the next couple months and put on the market, that would make a huge
impact and we would definitely feel it.
Of course, this hypothetical blood bath of massive foreclosures
over a few months time isn’t going to happen for many reasons. The real reasons this wont happen and the conspiracy theory reasons include: foreclosure regulations, loan modification attempts,
banks being too slow and bogged down, banks wanting to hold off on foreclosures
until the properties are worth more, etc.
Many regular sellers don’t want to sell at the bottom of the
market if they don’t have to, so they are sitting on their property waiting for
the value to come back up. I’m pretty sure that the bottom of the market for
Sacramento was in
December 2011, but we still have a ways to go for many owners to have enough positive
equity in their homes to do a regular sale.
Whatever the real story is, there isn’t enough inventory on
the market and the banks are not sitting on vacant houses that they own but just
don’t want to sell. My buyers are scrambling over the few properties that are
on the market and competing with multiple offers. It is a brutal market and I
look forward to getting back to something that could pass as “normal”. Fortunately,
we live in a world of impermanence and this too shall pass.
You can read the full article
here starting
on page 14.
