'Shadow' backlog of foreclosures could thwart recovery
Banks are taking longer to foreclose and they're slow to sell reclaimed properties. Result: A housing market stuck in low gear.
This post comes from Marilyn Lewis of MSN Money.
The "shadow" inventory -- the backlog of homes lost or soon to be seized through foreclosure but not yet for sale -- has grown astronomically, to a 44-month backlog.
Here's what that means: At the current pace, it'll take at least three years to sell all those houses and condos when they eventually go on the market -- if buyers can be found and if the homes are still in saleable condition. Here's a CBS News report on the mounting danger and cost of neglected properties.
It also means three more years of uncertainty for all of us:
- Three years of suppressed -- and depressed -- housing prices.
- Three years more to wait before you can put your home on the market without competing with abandoned, run-down foreclosures. (These days foreclosures are a quarter of home sales, nationally.)
- Three years of limbo for defaulting homeowners whose banks start foreclosing, then fail to follow through. (This MarketWatch story illustrates the consequences for one homeowner.)
Shadow inventory, by definition, is being withheld from the market. Why don't the banks put it on the market right now? Theories abound. Banks rarely if ever explain their reasons. One theory that makes sense is that banks are leery of driving down prices for the homes they are selling now by dumping more product; they're waiting for more homes to sell, for the inventory to clear and demand to build.
When will it turn around?
Readers, when do you think this all is going to end? Will we see a "normal" housing market by this time in 2014? You'll catch a glimpse of the diversity of opinion at The Wall Street Journal, where readers commented last week on December's foreclosures:
Journal reader "Charles Blumenkehl" wrote:
I am absolutely certain, in the long run, the real estate market will survive. God stopped making dirt a long time ago, and hasn't stopped making people, especially those moving to major metropolitan markets. ...
Reader "Chuck" shot back:
You need to get your head out of the sand. The real estate market will never come back, and thank God for that. The last thing we need is more urban sprawl to destroy what is left of this country ....
This time last year, the shadow inventory was already big. And then it grew more -- by 25% in 2010, reports CNNMoney.com. Post continues after video.
The numbers of properties now dangling in housing purgatory boggles the imagination: 4 million homes. CNN quotes an estimate by the Mortgage Bankers Association: 2 million homes are now owned by banks, another 2 million are held by defaulting homeowners.
It's a massive total. Estimates vary. CoreLogic, a housing data analyst, estimates the shadow inventory at 2.1 million homes overall, and says it grew 10% last year.
Dragging down the economy
To get perspective on these numbers, consider that in all of Los Angeles, the 2000 census counted 1.3 million homes.
Statistics, statistics. We're all numb to statistics at this point. Really, do you and I care about this if we're not in foreclosure ourselves?
Sadly, we do. The swelling shadow inventory means that the excruciating housing bust could pull the entire economy back into recession, so soon after most analysts have agreed that recovery is under way (housing excepted, of course).
Inman.com columnist Tom Kelly says the growth of inventory has put the tentative housing recovery back in critical care. He calls the problem "the most important real estate story of 2010":
What has been frustrating is that recent positive indicators have turned south. Markets that showed signs of stabilization in previous quarters faltered, with home values flattening or becoming negative in cities like Boston and Denver. In five California markets, home values began to fall again in the third quarter after five consecutive quarters of increases.
Zillow.com, the online real estate marketplace, finds that one in five of American mortgages are underwater, Reuters reports. "Underwater" means the home is worth less than the loan.
Speculation has been rampant about what mistakes and fraud at mortgage-servicing companies will mean to consumers. Will bank errors mean banks must give back homes they've seized? Will banks turn to other means -- short sales and deed-in-lieu sales, for instance -- to get their hands on their money?
But it turns out that the most immediate reason for the backlog has been right under our noses: Banks are foreclosing more slowly. CNN said that, according to Diane Westerback, author of a report on the subject for Standard & Poor's, "the biggest contributor to the longer shadow inventory is that banks are taking far longer to foreclose on homes than they once did."
S&P, by the way, defines "shadow inventory" as properties whose borrowers are (or recently were) 90 days or more delinquent; also included are those currently or recently in foreclosure. Here's a graphic at The Wall Street Journal that illustrates the concept.
The slow, dark cloud
CNN explains the slowdown:
There are several reasons for that. One is that banks have struggled to keep up with the sheer volume. Last year there were nearly 2.9 million homes that received some kind of foreclosure notice.
Many foreclosures have also been delayed as banks make greater efforts to save homes by modifying mortgages. Gathering all the paperwork and working out a deal with all the parties takes time.
At the same time, banks also have been slowed down by foreclosure moratoriums -- some self-imposed and others imposed by government -- and by their own internal investigations into their foreclosure practices. Now, with the foreclosure-processing scandals, banks are being extra careful -- and slow -- to perform foreclosures correctly.
"Given this backlog, we believe that average home prices could fall again if demand doesn't rise in step with the potential influx of supply," Westerback wrote for S&P.
It's important to remember, though, that the inventory problem varies a lot from state to state and city to city. Just five states -- California, Florida, Arizona, Illinois and Michigan -- accounted for 51% of last year's foreclosures, according to RealtyTrac.
CNN reports that:
- The worst situation is not in Arizona or Nevada or Florida, as you might imagine. It's in New York City, where, although "foreclosures are relatively moderate," many are stuck in the pipeline. New York state has nearly 10 years' worth of shadow inventory.
- Miami -- despite a shadow supply of 60 months -- was the only one of the 20 large metros S&P studied where the shadow inventory didn't grow in the first three quarters of last year.
- Boston's shadow inventory is 62 months.
- In Minneapolis, it rose 61%, to a 35-month supply.
- In Las Vegas, it rose 48%, to a 30-month supply.
- In Portland, Ore., it rose 47% to 45 months.
When you’re talking about the shadow inventory, even good news has a dark underbelly: Nationally, foreclosure filings dropped in December, but that was just because banks were holding back over the holidays and investigating possible mistakes and fraud in their companies.
In all, RealtyTrac says, a record 2.9 million homes received foreclosure notices in 2010:
"Total properties receiving foreclosure filings would have easily exceeded 3 million in 2010 had it not been for the fourth quarter drop in foreclosure activity -- triggered primarily by the continuing controversy surrounding foreclosure documentation and procedures that prompted many major lenders to temporarily halt some foreclosure proceedings," said James J. Saccacio, chief executive officer of RealtyTrac.
Concludes Inman's Kelly, "So, we have a shadow inventory of foreclosures and a shadow inventory of pent-up sellers combining to make one large, dark cloud."
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