Where's the Shadow Inventory? Seattle Area Real Estate Inventory Down 13%

There have been countless stories in the past year about the impending shadow inventory that will soak the market soon.  The shadow inventory is said to include a glut of bank-owned/REO homes that haven't been released on the market yet, as well as home sellers who are ready to sell, but are waiting for the market to get better.

During that same time, the current inventory of homes for sale in the Seattle area has actually been decreasing.  NWMLS active listings are at 36,261 currently, with more than 10,000 of those listings being added during May.  Still, that total inventory is 13% less than the real estate inventory at the same time last year.  Multiple offer situations on homes in the Seattle metro are up more than 50% by many accounts, with well-priced homes moving quickly.


What's behind this divergence between expectations and reality?  There has certainly been some delay in bank-owned homes being released on the market because of goverment regulation and changes in the foreclosure reporting process.  I wouldn't be particularly surprised if the REO inventory opened up soon and we saw some increase in those home listings.

However, the other half of the "shadow inventory" is, in my opinion, just a poorly-analyzed statistic.  Companies like Zillow have concluded from polls that a large group of potential home sellers who are waiting for the market to get better are also a part of the shadow inventory.  The problem is that this group has always existed, during every real estate downturn.  It's not an impending collection of homes getting ready to flood the market at the bottom.  These people will only potentially sell when the market has already started appreciating again, and therefore will only affect that appreciating market.  It could slow appreciation a bit, but it's nothing so ominous as to deserve the shadow inventory label.

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June 08 2011 - Belltown
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Profile picture for Dunes....
You haven't found that Shadow Inventory yet?
Did you check the Pike Place Market they have a lot of cool shops with a variety of Inventory?...

Hope all is well with the "Most Excellent" Seattle RE Agent Sam DeBord
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June 08 2011
I agree.  Someone asked me this question about shadown inventory on my blog last month.  I might also add that homes in desirable neighborhoods such as Queen Anne, North Capitol Hill and Ballard that are short sales typically get snatched up before they get taken over by the bank.  While it's true many homes are not listed for sale before the foreclosure process, the Seattle market isn't as depressed as other areas of the country and we just don't have the huge glut of foreclosures bringing the market down.  For example, a foreclosed house in Madison Park recently sold for over $225K its list price!  It was not on the market before the bank took it over.  However, the location was so desirable, buyers bid the price up significantly!
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June 08 2011
Profile picture for Pasadenan
I do not believe the owners waiting to sell is what is referred to as "shadow inventory", but specifically the distressed properties not on the market yet for one of 4 reasons:
1) Paperwork processes are not in place to process the foreclosures properly yet.
2) Financial Institutions cannot take the book "mark down" on the property yet due to insufficient reserves and risk of becoming insolvent.
3) Owners are still struggling to pay and though they may have received a 90 day notice, are still not at the point where the foreclosure can nor would be processed, but the finances indicate it is probably eventually inevitable.
4) Financial institutions don't have the staff to process so many liquidations so quickly or are holding some back to try to maintain market value on what they are liquidating.

There also is the issue of the "resets" on ARMS.  Of course, with rates presently so low, the ARM resets won't put many borrowers in an unmanageable situation.  And some of them can refinance while the fixed rates are not much higher than their present ARM rates.  But not all can refinance due to the upside down equity.  So, when eventually the rates do rise (about 5 years from now), some of these ARM loans will become unmanageable, and some of these will have to be liquidated by the financial institutions.

And the issue is not how many units are on the market, but
1) % of the market that is "distressed properties.  (It should not be more than 3% for a "normal" market)
and
2) % of total housing inventory that is on the market at any point in time.  (in other words how quickly the housing stock is changing hands on average.  7 to 20 years average is probably reasonable, but if it is 30+ years, the neighborhoods are substantially more stable).
No one wants a "flip this house" neighborhood.
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June 08 2011
Profile picture for Craig1976
It is not just regulations and reporting holding back foreclosures.  Go to your local courthouse auction and observe.  They are held every month in pretty much every county.  I doubt even 1% of agents have ever been to one.  The banks end up buying 90% of the properties they posted for foreclosure because they can't afford the loan losses right now.  Private buyers don't even bother bidding on them. 

Do these bank owned properties end up on MLS shortly after auction?  No.  They sit on the banks' books.  That is one segment of shadow inventory and it shows no signs of slowing down.  It is expected to pick up once the regulatory stuff is worked out.  Who knows when banks will start releasing these to the market but it's unlikely given the inventory situation and their thin capital bases.

MLS inventories are dropping in many parts of the country but sales are too, so it's not a great indicator of strength.
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June 08 2011
Zillow is one specific company that included "sellers wanting to sell" as part of their shadow inventory, so I thought it was appropriate to post it here.  It doesn't add credibility to their stats.

That being said, your points are all well taken about the upcoming distressed inventory.  There's certainly some coming, we're just not seeing the overwhelming numbers here. 

As for auctions, the banks set a minimum at the value of their lien, nothing more.  Many of them are getting paid back by the Feds (in effect, you and me) 70%-90% of any loss they take on the distressed properties, so they're not particularly hurt by the losses when they sell the home as REO later.
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June 09 2011
Profile picture for Craig1976

True, the banks usually bid near the value of their lien, but that amount includes 6-24 months of accrued (i.e. missed) mortgage payments plus penalties etc.  This leaves no room for profit so nobody bids against them.  In rare instances the banks will take a big haircut.  You never know when or why, just have to be prepared if it happens.  Sometimes the home owner had significant equity so there is a deal to be had in the first place (bizarre but happens more than you think), and private buyers will bid against each other. 

Most buyers at these auctions are what poker players would call "grinders".  They research hundreds of properties each month with the hope of picking up a small handful of decent deals.  Contrary to popular belief, you do not see $300k houses going for $100k unless they are hairy as Godzilla.

You are correct about bank losses if Fannie/Freddie backed the loan and the bank is simply a middleman.  F/F can't take gigantic losses either though nor can they micro manage each property.  So... the shadow inventory builds.

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June 09 2011
You only have to go to a big-city foreclosure auction once to realize you can't get rich on foreclosures without committing to it full-time.  There are corporate teams with deep pockets who will outbid the individual investor up to 80% of the perceived value every time.  Add in the risk involved for an individual at auction, and it's not necessarily a good option.
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June 09 2011
Profile picture for Craig1976
"Corporate teams with deep pockets"!!  Love the hyperbole.  Sounds like GE Capital sending in an acquisition team of MBAs equipped with iPads and headsets and $50 million bank lines.

Yes, there are teams of several people working together under a LLC so they can cover several counties at the same time.  The auctions all happen on the same day - it helps to team up and spread out since you never know if five good properties will come up in one county and zero in another.  And yes, they have cashier checks in hand, but they are working off their own bank accounts plus whatever investor money they raised.  It doesn't get more "mom & pop" than that.
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June 09 2011
I have no problem with it, it's good business.  The last guys I met had $3 million in cashier's checks on hand, and 10 guys at 2 locations with matching jackets, iPads, and on their bluetooths the whole time--pretty much what you described.  They said they hoped to spend it all $3 million that day, and I saw them spend most of it.  That doesn't fit my definition of "mom and pop", just a well-run organization.
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June 10 2011
Can we go back to the issue of how the lenders are setting their reserve bids and when they are going to release their inventory for a moment?

First of all, it hasn't been my experience that the reserve is a simple addition of the loan balance plus past due interest and penalties. Having followed the process a number of times with buyers it appears as though the reserve is more likely a combination of that and issues surrounding the cost of having to book the property as an asset. 

Secondly, who are we to predict how the lenders, now sellers, will release their inventory?  As financial decision makers I'm going to assume that they will play the market to the best of their ability.  That they will attempt to sell homes for as much money as they can in any given market.  I fail to understand how that attitude creates downward pressure.  In fact it should produce a stabilizing effect of business people doing business.  It simply isn't in their interest to flood the market;  though this does make the assumption that those guys in suits will make good business decisions.......
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June 10 2011
 
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