Bank sees huge "shadow inventory" of foreclosed houses

An update to my earlier post about inventory issues, which briefly discussed the concept of "shadow inventory." In that post, I wrote of "a theory floating around various blogs that listed inventory is deceptive because banks and lenders are quietly sitting on large and growing piles of foreclosed houses -- so-called shadow inventory."

It's a bit more than a theory floating around a few blogs, as Sacramento Real Estate Statistics reports in this excellent post, which quotes extensively from a Deutsche Bank report on the subject of shadow inventory. Highlights of the Deutsche Bank report:    

"MLS listings are missing large amounts of distressed inventory 

... Based on our analysis, MLS based listing inventory is significantly understating the extent of foreclosure inventory in many markets."

The Deutsche Bank report is the source of a shocking number you may have seen in the comment section. Based on the bank's research and estimates, the inventory of foreclosed homes in Greater Los Angeles stands at 88,843 units; that is far higher than the entire MLS-listed inventory for the metro area, 62,379. The bank's estimates are based on various sources that include pre-foreclosure filings as tabulated by RealtyTrac. My analysis is that it is likely the 88,843 estimate is higher than the actual number of foreclosed houses in Los Angeles, but it still a staggeringly high estimate.

--Peter Viles

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com

Hat tip: Patrick.net

Comments

[Nelcisco]

We're seeing the start of alt-A problems and the new wave of option A.R.Ms foreclosure floodgates are about to open which will take us into probably 2101

[Nelcisco]

Did I say 2100?, my bad. Lord help us if it goes that longk, I meant 2011!!

[Laker]

Peter, I listened today on KNX and enjoyed hearing your voice there.
Your idea of people buying foreclosures because it seems like good deal might be true.
I'm still amazed every time i see ignorant and uninformed buyers paying top dollar for slums/foreclosed houses.
Some fall for the auction trap, some are simply thinking that the fact that the bank is selling it, means they just getting rid of it, and the price is floor bottom.
Not correct in many cases.
However, the 88,843 number is probably closer to be correct than what you think. I like realty trac, but let me tell you that currently, I personally know of 10 REO houses that do not appear at all on realty trac lists or maps...not at all. From this i infer that there might be even more than the 88,843 properties in REO status....
Wait and see, eventually, they will be put for sale...I think that as soon as the banks discover their next ALT A/ Option ARM wave, they will try to unload as fast as they can. the fastest banks will survive, and slowest will go belly up.

[Cal]

I'd love to be able to define this issue better, specifically I'm wondering how many homes have been taken back by the bank but not listed. Adding preforeclosures into the mix is a bit "optimistic" (or pessimistic depending on your POV), a lot of those are on the MLS as short sales and so you'd get some double counting. I'm wondering about true, current, shadow inventory. Vacant, foreclosed homes that aren't being offered for sale by any avenue.

So far the data has failed me, I basically can't get a comprehensive enough list of trustee sales to check it against other data sources. If any has a good source let me know (specifically, in some sort of friendly format that would allow querying, a simple CSV would do).

[Inland Empire]

I am not sure about the concept of "shadow inventory" but I think things can be mishandled in general. I think a factor in this is that many times the listing agents do not return calls or emails. There is an agent in the IE who works for a name brand real estate firm. The agents name is on more than 300 properties that are foreclosed. We tried to contact him on about four different homes to no avail. We were able to get info on one house because we found someone who knows him personally and went thru her. He isn't the only one doing this - there are several other agents who are equally ineffective.

[mike]

i saw a one acre property in paso robles that was listed by a bank for 179,000 and it had a 3 plus 2 house on it. it came on the m l s and i offered top price for it the first hour it came on. the agent said it already had offers over asking price and the next day it was off the m l s . the agent said it sold within a few hours(he wouldn't say for how much) so i dont understand why all the banks aren't trying to do this with all their properties??? they could unload if they wanted to and get back to liquidity and lending if they had the incentive. any thoughts or answers on this point????

[Lou]

This is so true. I drive around the Valley and see obviously vacant homes with unkept lawns and no for sale signs. They are everywhere. It's a conspiracy between the banks and the real estate industry to keep prices from falling as fast as they should be if you ask me.

[sfvrealestate]

Although I think the data is suspect to begin with, the reason that the mls stats differ from the Realtytrac stats is simple. The banks -- or their asset managers -- just simply haven't placed the houses on the market/mls for sale yet. And the mls only lists active properties that are currently for sale. Perhaps they're doing maintenance, perhaps they are just overwhelmed, etc.

Short sales should not be included in any data about pre-foreclosures unless an NOD has been filed.

[lamoneyguy]

This is what they call "pent up supply."

There's another form of pent up supply that nobody is talking about. I know of at least a few people who are not underwater because they put a respectable down payment, but their house is worth substantially less than their purchase price. They would like to sell, but hesitate to do so for less than they paid. As a result they have become an "accidendal landlord" waiting for a better time to sell.

I think this form of pent up supply is more common in the higher end neighborhoods.

[Ace]

I don't believe that shadow inventory is intentional, rather a result of banks being unprepared. It takes the banks a really long time to get the foreclosures on the market and they do not have nearly enough employees to handle the foreclosures and short sales that they have.

Two new trends have emerged. First, some banks are listing houses for a really low price to turn them quickly. I have seen a bunch of foreclosures sell for over $100k above listing price. Banks are able to move properties within a week this way. They seem to do this with the least desireable properties.

Second, the banks just refuse to foreclose. I have talked to many homeowners who are trying to work short sales and have not paid their mortgages in many, many months yet are still not facing any threat of foreclosure.

[patient renter]

i dont understand why all the banks aren't trying to do this with all their properties???

Even though the banks are able to unload some of these houses quickly, if they want to, they're still generally taking big losses on them. So the theory is that they can't unload them all at the same time simply because they don't have the cash reserves built up to offset the losses. Thus, the banks are building up massive inventories of unsold homes.

[E]

Come on Alt-A, Come on.

Let's Go Alt-A, Let's Go.

R-E-S-E-T

R-E-S-E-T

R-E-S-E-T

R-E-RESET!!

Thanks for playing.

Whether or not shadow inventory gets "larger" or not is a moot point.

It' *will* get better.

As Ace points out, the banks are dumping their less desirable properties.

The Alt-A resets will put the foreclosures out there that some of us may actually want to purchase.

[anony]

Could be that some REO's have to go through the UD process to be listed on market. Also, could be that some borrowers are fighting banks for predatory lending. This could have some effect on "shadow inventory".

[perks]

Lou, none of the three houses actively for sale on my block have signs in front. Sometimes I wonder if there are so many houses on the market that the realtors have run out of signs.

(Now that my dream of being a house flipper has come to an end, maybe I'll go into the "for sale" sign manufacturing business instead!)

With that said, however, Deutsche Bank's estimate doesn't sound unrealistic at all. I know of several houses within 2-3 blocks of me that were foreclosed on as far back as last December that have never hit the MLS. And my neighborhood hasn't even been slammed all that hard by the foreclosure wave compared to other parts of the city.

[Laker]

Cal,
Would you call a house that got foreclosed 5 months ago an REO and count in in the shadow inventory if the previous owners (not deadbeats) are still occupying it and refusing to leave....
What I'm saying is that is a house that the bank want to list on MLS and sell but simply can't do that because they can't evict the loan owner....
I personally know 3 houses like this in the SFV area (2 blocks from each other)

[JenniferK]

Yes, there definitely is shadow inventory. My daughter is trying to buy a house in a particular tract. She has a list of the foreclosed houses developed by review of the assessor's and county recorder's records. She has driven the tract and prepared a list of every vacant house. Slightly more than 1/3 of the vacant, foreclosed houses are not listed for sale. The vast majority of them are foreclosures by Countrywide, which was the developer's lender of choice for this tract. Countrywide was, and now BofA is are actively manipulating the market, in this particular housing tract, in order to keep value up, both on houses they have foreclosed on and on houses they have loans on which are not in default.

Another twist on shadow inventory is FNMA's practice of listing houses for sale way above the price at which a licensed appraiser would value them for a home loan purchase. I am taking about prices $30,000 to $100,000 above the market on FNMA listings. These over price houses we have been watching have been sitting unsold after foreclosure for 4 to 12 months. As to FNMA, I believe they don't want to mark their REO inventory down to current fair market value and sell it at that price, because they would have to recognize more losses. So, the houses sit vacant, a blight on their neighborhoods, so that FNMA can commit securities fraud by overvaluing their REO inventory. And, of course the idiots in our Congress have agreed to bail out FNMA if necessary.

[Cal]

There are definitely houses in the eviction process (just check out Leo Nordines site) or not on the market yet. The quantity and quality of those holdings are the question. I don't think anyone has accurately defined the answer yet and I don't you or Nishu Sood has done so now.

[dan]

I agree with Laker. I live in a very small community and there are 5 foreclosed and late stage preforclosures that do not show up on RealtyTrac or any source. One was listed on RealtyTrac but after being listed for a year and then failing to sell at auction (bogus auction) it simply vanished from the listings.

[gomedohree]

The DB report makes total sense if you realize other factors at play that are allowing banks to hide the actual hard asset values they really hold. The FASB has been delaying changed in accounting standards that would effectively force banks to carry these these REOs on their balance sheets, instead of the current off-sheet valuations (Asset 3) that they're trying to get away with.

If they were, they'd get killed because it would effectively demolish their actual assets to available assets ratio. I don't know if anyone's noticed, but banks have been making a crazy comeback in the stock market, not because they've been making money but for the stupid reason that they haven't lost as much as "analysts" expected. Of course their losses are not as big as expected because they haven't been forced to value the actual market value of these REOs that they own but are off the books so to speak.

What they're probably hoping is to "amortize" the loss in value of these properties as long as possible until the market recovers. To the banks, covering the costs of holding these properties is a far lesser of 2 evils, whose alternative is to declare these losses upfront. It's a gamble that they're making that they can hold out longer than the RE market.

Of course many of these assertions are based off of another article which kind of ties into this article. (Which was absolutely brilliant).
http://www.thecuttingedgenews.com/index.php?article=
685

[Tim]

I have a list of 40 foreclosed homes I have been watching and have followed on and off the Mls over the last 4 months here in central florida. 13 have sold and have been updated showing sold. 11 are still listed on the MLS. 16 are still bank owned and have been removed from the MLS. 3 of the last ten were relisted with a new MLS numbers as new listings. Let me remind you this is only 40 REO's that I have followed. Of all my offers made at what I am willing to pay the selling realtor always magically has another offer and I walk away from there game. I will buy when banks arel really be cleaning the inventory.

[TODD]

BANKS ARE INTENIONALLY ..NOT..TAKING POSSION OF THE HOME....HOME -OWNERS ARE FREE SECUITRY GARDS.. AND BANK CAN AFFORD CITIES FROM AROUND THE COUNTRY , FINING THEM FOR NOT MAINTANING ALL THESE HOMES......ALSO PAYING RECORDING FEES....EVERY YEAR BANKS BEAT CITIES OUT OF BILLIONS OF DOLLARS BY NOT RECORDING THE NOTES IN THERE NAMES, WHEN THEY BUY THE NOTES OR THEY ARE TRANSFERED....THEY LEAVE IN THE NAME OF THE PAST BANK...TRY TO FORECLOSE IN
"TRUST" OR AS "TRUSTEE" THE IRS AND CITIES ARE ALREADY LOOKING IN PAST UN-PAID TAXES....BANKERS ARE SOME OF THE WORST BUSINESS PEOPLE,,,NO DOUBT....MORE LIKE USED CAR SALESMEN...WE ARE GOING TO SEE MANY...MANY MORE BANKS FALL...