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Shadow Inventory: Luckily, Here It Comes

One of the biggest challenges to the housing industry throughout the rest of the year will be the increase in discounted properties coming unto the market. There is a glut of foreclosures that have been delayed by the court systems in many states while paperwork was corrected. The banks are rectifying their paperwork and processes. Now, more and more states are clearing the way for the banks to resume repossessing these properties.

As these properties find their way to the market, the prices of non-distressed properties in the region will be adversely impacted for two reasons.

  1. There are a finite number of homebuyers in any market. A portion of these buyers will purchase the distressed properties new to the market because they can get them at discounted prices.
  2. As these distressed properties sell, they will become comparable sales used by appraisers to establish value on all homes (both distressed and non-distressed) sold in the future. Since these properties are sold at a discount, they will have a negative impact on other valuations.

A Perfect Example: New Jersey

As an example, let’s look at New Jersey. According to the National Association of Realtors, New Jersey’s percentage of distressed properties to overall home sales (20%) has been less than that of many other states (30-70%). However, the reason for this is the New Jersey court system has prevented banks from foreclosing on many homes for over a year.  During that time, the months’ supply of ‘shadow inventory’ of distressed properties waiting to come to market in New Jersey has climbed to over 50 months, the largest number in the country.

Last week, New Jersey Superior Court Judge Mary Jacobson cleared the way for the top-four banks to resume foreclosures in the state. The impact this will have on the number of distressed properties can be clearly seen in these statistics reported by Housing Wire:

In October, New Jersey had the 24th highest foreclosure rate in the country, with servicers filing roughly 5,200 foreclosures that month, according to RealtyTrac. By July, the Garden State’s foreclosure rate dropped to 42nd with just 1,112 filings last month.

New Jersey serves as an example for many states that will see a dramatic increase in the number of distressed properties coming to the market in the fourth quarter of 2011 and the first quarter of 2012.

The Good News

The housing market will not recover until we clear this shadow inventory. The speed at which these properties come to market and are sold will determine the speed at which the housing market recovers. The latest S&P Shadow Inventory Report shows that the months of shadow inventory already is decreasing. The report explains that the number of families falling 90 days behind on their mortgages has decreased dramatically. That means that as we clear these distressed properties there will be much less of a backfill. The end to the housing crisis is finally within sight.

Bottom Line

If you are thinking of selling your home in the next twelve months, selling sooner rather than later will probably get you the higher price. However, in 18-24 months, the market will return to historic appreciation norms.

Attention KCM Subcribers: We have gathered some sensational local information on shadow inventory at both the state and county levels. We are preparing slides showing this information in simple visuals. Look for them in the September edition of Keeping Current Matters which will be available online by September 10th.

Not yet a subcriber? Click here.


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17 replies
  1. Paul Westendorf
    Paul Westendorf says:

    I think we are looking at 2 to 3 years before all of these properties clear and we see any type of normal market, if we can even determine what a normal market is !!

    Reply
  2. Joe
    Joe says:

    Home ownership will always be viewed by this generation as a goal to be achieved. I’m not convinced those 24-35 believe it’s the be-all-end-all safe investment their parents did. While I believe housing will always generate big numbers, I don’t see the US ever getting back to the levels seen in the early to mid 2000′s. Consider that in 2010 28% of all real estate transactions were distressed sales, what will that number be in 2011, what was it in 2009, 2008? My point is those former home owners will not be eligible for a mortgage for 5 years (generally speaking). Then include the folks around the country who are considerably upside-down in their mortgage (visit lps.com or corelogic.com for the sobering statistics) with not much hope for the requisite appreciation to allow them to move without taking a loss. The numbers are not pretty. So to say homeownership is something the majority wants is not enough to turn this market. Renters will make up 40% of the adult population before it’s all said-and-done, despite rising rents. A mix of rentals and sales should make up the business plan for those expecting to be successful in any real estate venture going forward.

    Reply
    • Steve Harney
      Steve Harney says:

      @Joe,
      Good points. One thing though. The most recent Fannie Mae National Housing Survey showed that the percentage in every age group that believed that ‘homeownership was a safe investment’ was very similar:

      Gen Y – 65%
      Gen X – 64%
      Boomer – 66%

      Reply
  3. Jesse Henderson
    Jesse Henderson says:

    This is great news for the housing market however one of the reason in my opionion that the rate is low is because of work outs with homeowners. The real recovery will take place when we see and up increase in quality employment. When the shawdow inventory hit the market be great for the investor community.

    Reply

Trackbacks & Pingbacks

  1. […] sale. In order to clear large amounts of inventory, prices come down. With more foreclosures now approved by banks to hit the market, it appears that inventory will stay high through year end, keeping prices down. Only when […]

  2. […] In yesterday’sblog post, we explained that the ‘shadow inventory’ of distressed properties which has hung over the housing market will soon be released for sale. The real estate market won’t recover until we work our way through this discounted inventory. […]

  3. […] yesterday’sblog post, we explained that the ‘shadow inventory’ of distressed properties which has hung over the […]

  4. […] yesterday’s blog post, we explained that the ‘shadow inventory’ of distressed properties which has hung over the […]

  5. […] In yesterday’s blog post, we explained that the ‘shadow inventory’ of distressed properties which has hung over the housing market will soon be released for sale. The real estate market won’t recover until we work our way through this discounted inventory. […]

  6. […] Dramaticallyby The KCM Crew on August 25, 2011 · 0 commentsin For Sellers,ForeclosuresIn yesterday’s blog post, we explained that the ‘shadow inventory’ of distressed properties which has hung over the […]

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