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(English) What Exactly Is Shadow Inventory?

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17 comentarios
  1. Bob Phillips
    Bob Phillips Dice:

    “Do banks have a backlog of properties that they currently own?

    Yes. In an article in Housing Wire, RealtyTrac Senior Vice President Rick Sharga said:

    “…major banks currently hold roughly 1 million REO, or homes repossessed through foreclosure, but only 30% have actually made it onto the market.”

    WRONG! This is one man, and one theory. Rick, who I know personally, is offering an opinion, based on his company’s statistics. Those stats do NOT include properties which have already been mitigated by (1) shorts sales, (2) refinances/loan modifications, or (3) straight cancellations.

    Rick has also stated – on RealtyTrac’s blog, that only about half of all the properties which suffer an NOD, ever make it to the courthouse steps.

    For a more balanced viewpoint – especially for a real estate company – here is an excellent “counter”-explanation, from last May:


    There are many of us, out here in the field who think that the alleged “Shadow Inventory” is largely a myth, originated by Doom & Gloom Bubble Bloggers, and falsely perpetuated by misinterpreted theories like Mr. Sharga’s, and articles like this, which only serve to fan the flames of fear.

    I’m one of those. Just a counter opinion.

  2. Steve Harney
    Steve Harney Dice:


    I appreciate your opinion and the fact you shared it. However, to say that shadow inventory is the opinion of one man (“This is one man, and one theory.”) or that it is “largely a myth, originated by Doom & Gloom Bubble Bloggers, and falsely perpetuated by misinterpreted theories like Mr. Sharga’s, and articles like this” is rather naïve.

    CoreLogic recently published a report based on probably the best set of data available in the market. That report determined shadow inventory by “calculating the number of properties that are seriously delinquent (90 days or more), in foreclosure and real estate owned (REO) by lenders and that are not currently listed on multiple listing services (MLSs).”

    Mark Fleming, chief economist for CoreLogic commented:

    “The weak demand for housing is significantly increasing the risk of further price declines in the housing market. This is being exacerbated by a significant and growing shadow inventory that is likely to persist for some time due to the highly extended time-to-liquidation that servicers are currently experiencing.”

    If you also don’t trust CoreLogic, let’s jump over to the Standard & Poors Shadow Inventory Report. In it they claim:

    “The volume of troubled residential properties has been growing in nearly every U.S. state since 2005, and borrowers nationwide are now defaulting on their mortgages faster than existing defaults are being resolved through liquidation, according to Standard & Poor’s Ratings Services. These trends have given rise to a large “shadow inventory” of distressed properties—which we define as outstanding properties that are (or were recently) 90 days or more delinquent on mortgage payments, in foreclosure, or real estate owned (REO)—that haven’t yet hit the market.”

    S&P claims there is over 40 months supply of this shadow inventory.

    If you also don’t believe Standard and Poors, let’s go directly to the horse’s mouth. Wells Fargo, one of the organizations that have acknowledged they in fact own this shadow inventory, have predicted in the Wall Street Journal that “prices will drop 8% more by mid-2011” as the release of this inventory speeds up.

    I can appreciate that we should not “fan the flames of fear”. However, I believe that all fear comes from a lack of understanding of an issue. It is for this reason, I have tried to shed light on the issue of shadow inventory. The much greater danger to the marketplace are agents trying to give advice on an issue that they themselves don’t fully understand.

  3. TR
    TR Dice:

    What seems interesting in the housing wire article is the number of banks and not agencies holding the “late” notes. Given the massively higher % of prime loans as compared to sub prime – you would think Fannie etc would have gobbled them up. Could it be these are “investor loans” that were so easily available at the peak of the bubble ? I know banks have a lot of those on their books and at the time wanted them. Not sure why there were not sold on to the “agencies”

    There is a lot of unknown and unpredictable market behavior that in part keeps any of us from knowing exactly what the banks are doing. Unfortunately despite the nearly 2 1/2 years of unprecedented help (via low cost of doing business), there is no standard the banks must adhere to clear up what is where and when or to whom it will be made available.

    I agree partially w/ both Steve and Bob but not completely with either.

    Run from anyone who says they KNOW it all on this topic.

  4. Tom Horn
    Tom Horn Dice:

    Great post on a much misunderstood topic. I see first hand what the shandow inventory, as well as the existing inventory or foreclosure properties, is doing to property values. I am an appraiser in the Birmingham, Alabama metro area and have witnessed the gradual decline of values because of the sale of foreclosure properties. I have not done an appraisal assignment this year where I did not see foreclosure sales. People ask me all the time why I have to use these in my appraisal reports and I tell them that they make up a larger part of the market in todays economy than they did 5 years ago, so they cannot be ignored. This will not stop until the inventory of these foreclosures properties has been sold off.

  5. Bob Phillips
    Bob Phillips Dice:

    @Steve, Rather than argue over semantics, may I suggest that we are talking about two different scenarios – but calling them the same thing.

    Mr. Sharga’s implication, in stating that “major banks currently hold roughly 1 million REO”, is that those banks have already foreclosed on all those properties, and are now “holding them”, presumably waiting for the market to get better, so they can get a better price. THAT is the interpretation of “Shadow Inventory” that I strongly disagree with.

    If that concept was even remotely accurate ( it isn’t.) those lenders would have reaped the benefits of the tax credit windows, when, at least here in Southern California, where I practice, ( for 34+ years.) there were multiple offers on virtually every listing priced under $600k, and would have been leaping over one another to get rid of excess inventory.

    THAT, did not happen here in South Orange County, where we seldom had enough properties to satisfy the Tsunami of buyers who swallowed up all the distressed inventory of that tax credit window.

    There IS no backlog of properties sitting on a used house lot somewhere in Barstow, waiting for prices to come back up so they can be unleashed on the buying public.

    What there IS, is a lot of houses which will eventually be sold, either by short sales ( A higher number.) or as REOs, over the next 2 or 3 years. THOSE properties are not presently “owned” by the banks – they’re wending their way through the system.

    If that is also YOUR idea of a “Shadow Inventory”, then we are in agreement.

  6. Steve Harney
    Steve Harney Dice:


    I find it difficult to accept that our differences are a matter of ‘semantics’ when you’re original comment was:

    “Shadow Inventory is largely a myth, originated by Doom & Gloom Bubble Bloggers, and falsely perpetuated by misinterpreted theories like Mr. Sharga’s, and articles like this, which only serve to fan the flames of fear.”

    Shadow inventory is NOT a myth. I believe I clarified that in my response to your original comment.

    Now let’s look at what you postulate in your second comment:

    “…that those banks have already foreclosed on all those properties, and are now “holding them”, presumably waiting for the market to get better, so they can get a better price. THAT is the interpretation of “Shadow Inventory” that I strongly disagree with.”

    You continue to want to attack Mr. Sharga’s comments. CoreLogic, in a separate study, puts the number of homes that banks either have already repossessed or in the process of repossessing at over 1 million properties.

    Secondly, who put that definition (REOs only) on shadow inventory? In our blog post, we clearly stated:

    “Most definitions include properties already foreclosed on and owned by the banks (REOs), those houses in the foreclosure process and those homes where the homeowner is seriously delinquent on their mortgage payment (at least 90 days behind).”

    Also, I know of no person who thinks that banks are holding them to “get a better price”. The reasons they have been slow to come to market are state foreclosure moratoriums (I believe your state had at least two), the mandated trial modification programs and the delays caused by the robo-signing mess.

    As far as all real estate being local, I couldn’t agree more. As a matter of fact, in the original post, our Bottom Line comment was:

    “Make sure you ask a local real estate expert to find out how it may impact your market.”

    That being said, let’s look at your market. With just a little research, we found:

    1. CoreLogic in their last report (November 2010) says there is 21.6 months of shadow inventory in the Riverside-San Bernardino-Ontario MSA. (I believe San Bernardino is the county in which Barstow, which you mentioned, is located).

    2. Standard and Poor’s in their report released this past Monday shows that the Los Angeles MSA (which includes Los Angeles County and Orange County) has seen its shadow inventory increase 38% since the same time last year.

    3. The New York Fed website shows 90 day delinquencies in Orange County to be at 6.9% which is 30% higher than the national average. (A point of information: According to studies, over 98% of those who fall 90 days behind will end up as a short sale or foreclosure)

    Shadow inventory is real and it will have an impact on the area where you practice real estate.

  7. Bob Phillips
    Bob Phillips Dice:

    @Steve, I still think that the difference we’re talking about is a matter of semantics. Above, your words are “or in the process of repossessing at over 1 million properties.” which suggests that it includes people who are behind, and who may not even have received a NOD, yet.

    I am in agreement with that concept, as a legitimate description of “Shadow Inventory”, although, in my humble opinion, verbiage such as “Eventual Inventory” would be more concise.

    What I initially disagreed with, and still do, are Mr. Sharga’s EXACT words, which are “major banks currently HOLD roughly 1 million REO, or homes repossessed through foreclosure, but only 30% have actually made it onto the market.”

    To ME, the word HOLD means that the banks have already foreclosed on all those properties, and that is definitely not the case. Quite frankly, not all of those properties wills suffer a completed foreclosure. As many as half of them will probably go the short sale route, and 10-20% will obtain a modification, allowing the homeowners to stay in their homes for as much as another 5 years – both, better alternatives than being foreclosed – wouldn’t you agree?

  8. John Brassner
    John Brassner Dice:

    Very peculiar. Well Fargo made a presentation to real estate agents on March 24,2011 where they said they are NOT holding any inventory back. I have an email into the honchos at WF to confirm this understanding.

    I do believe much of the “shadow inventory” numbers are double-counted. In Las Vegas, for example, roughly 56% of the homes listed on the MLS are short sales (FYI, short sales make up about 27% of the CLOSED sales). We can assume that much but not all of those short sales on the market are behind in their payments and thus are “at risk” loans and thus are counted as shadow inventory. However, they are not in the shadow–they are on the market already. CoreLogic claims they aren’t double-counting–I’m not so sure. If USA today has interpreted the report correctly, http://www.usatoday.com/money/economy/housing/2011-03-30-distressed-homes-shadow-inventory.htm, they say “CoreLogic expects all of the shadow inventory to eventually become foreclosed homes.” Well that is a terrible assumption since 27% of our closed sales are short sales.

    Further, and I’m speaking of the Las Vegas, NV market only, we have a huge demand for REO inventory but yet there isn’t much lately! REO inventory has declined significantly over the past 18 months. Why? Banks if you are listening, please release MORE lower-priced properties in your shadow inventory, I have buyers itching to invest!

    One other thing to take note of; Just because some banks have some inventory doesn’t mean they are going to come onto the market as REOs. There are investors buying these homes in bulk and renting them out for cash-flow. I understand Fannie and Freddie both are renting out some of their inventory.

    Now back to definitions. In CoreLogic’s case they are counting both foreclosed homes AND those loans that are seriously deliquent. So their shadow inventory number is only partially what is held by the banks. In fact, if you look at their press release, only about 25% of their 1.8M unit “shadow inventory” number are in the hands of the banks. They are making the assumption that 75% of the 1.8M number will come on the market as an REO. We know that won’t be the case because much of that inventory will be mitigated via short-sale and loan-modifications (not principle reduction, just change in terms, usually).

    Final notes, did it get lost in the CoreLogic report that the “shadow inventory” actually went down? Inventory, whether it is “shadow” or otherwise isn’t a negative thing. Sure “too much” inventory is bad but are we going to have too much? In February, our (Vegas market) months supply was 4.8 and our YTD sales are tracking higher than 2010. People are buying houses right now, lots of them. 5-6 months of inventory is considered by many to be a balanced market. And yet, locally we have less than that. Is there shadow inventory? Sure there is but not as much as we are led to believe. Is it going to overwhelm the market? I see no evidence of that.


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