What's up -- or down -- with inventory?

Recent MLS listings, as analyzed by Housing Tracker, indicate that inventory of for-sale homes in Los Angeles has been declining slightly in recent weeks. This trend -- if accurate -- raises a number of questions and possibilities, and I'd like to throw a few out there and then ask for your input.

First off, because we're in an unprecedented real estate market in Southern California, it's somewhat meaningless to argue that the apparent drop in inventory is "unexpected" or "unusual" -- we've never been in a market like this, so no one knows what to expect, or what is usual.

The most obvious interpretation is that homeowners believe it's not a great time to sell, so those who have a choice are deciding not to list their homes. Taken a step further, this would mean the economy, though weakening, is not so weak that it is forcing people to sell their homes.

That said, there's 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. The theory continues that banks fear that putting all the inventory on the market at once would put even more downward pressure on prices.

Lastly, there's this, from Manhattan Beach Confidential, a less conspiratorial observation: In many cases sellers are giving up on the market because they can't get their price. MB lists 10 "recent dropouts" -- listings that were removed from the market without selling.

All of this said, to quote Bill O'Reilly, what say you? What's going on with inventory?
-- Peter Viles
Photo credit: Associated Press

Comments

[intheknow]

shadow inventory --a lot!!!

Just wait!

Expired listings are not resigning --they want to wait.

[Mike P.]

Check out this blog concerning the shadow inventory here in California with actual numbers.

http://sacrealstats.blogspot.com/2008/08/insight-into-
shadow-inventory.html

For example, in Los Angeles:
MLS listings = 62,379
Foreclosures = 88,843

[Michhar1994]

Dear Mr. Viles,

I think that both of the mentioned scenarios are happening. I am sure that certain homes are being pulled off of the market because sellers are reluctant to accept that the bubble has burst and that their "$3 million" home may not really be worth that much (reference the MB Confidential site). Those that can wait will try to wait this "slump" out, but unless they can wait 5-7 years, waiting is futile.
The "shadow inventory" does exist, but not for the sinister reasons that might be contemplated. Lenders/Banks are currently unable to process all of the short-sale/foreclosure clients out there right now (as referred to in this blog and elsewhere). Thus there are foreclosures waiting in the wings that are not hitting the market and won't hit the market for some time. This problem with increase with the resets of the Alt-A loans in the remainder of this year and 2009. Some banker- friends of mine say this is already happening, and it is affecting the higher end zip codes.

The buyer's market is just getting started, and as much as people try, artificially propping up home prices will not be effective in the long run. It just delays the pain.

Michhar1994

[Cal]

I think you'd be hard pressed to match last years peak inventory for 3 reasons.

The second part of the "credit crunch" (some would call it a return to rational lending) hit starting in July/August last year. That caused sales to slow beyond even their previous historic lows. This drove inventory up as the sellers and their agents were still in denial and didn't understand what was going on. Now, foreclosure inventory make up a bigger part of inventory and they move much quicker because the banks are experts at finding the price that sells (turns out it isnt very hard). And finally trustee sales are higher eating away at inventory, removing inventory now that will be back some time in the next 1-5 months or longer.

I saw a stat last night that was pending REO versus active REO inventory it was something like 1.5 for my local area (active/pending = ~1.5) . That part of the market is going like gangbusters, you've got motivated buyers and sellers who are willing to negotiate. Even though we are at/near historic low for sales in LA County (should be second worst July in history for LA County), you wouldn't know it if you watched the banks pushing inventory through.

[Laker]

Peter,
Shadow inventory is NOT a theory but a FACT. Don't trust me or others that argue that, simply check realtytrac, foreclosureradar and other good sources.
Track all NTS and what happened to them and especially all NTS the reverted back to grantee aka the bank. Then plug the addresses into any site that uses MLS like Realtor or Redfin. You will see how vast majority is simply not listed there. On some small occasions, you will see old listings that expired from back when the houses where listed as short sells by the previous owners.

I totally agree that there are many that give away from selling and are letting the listings expire. Some can actually wait the market let it be 2, 5 or 15 years....
Some can't and will ultimately get foreclosed. Coz if you can't sell for X, in a year or two, it will be worth even less, and then you'll have to reduce. But your mortgage is still higher.
I actually found that some of the properties foreclosed months ago, were finally listed last week.
Banks ARE sitting on inventory, and my 60,000 number is very optimistic as according to those foreclosure sites, there are about 85,000 REO properties (NOT LISTED) and only 60,000 MLS listings for the greater LA area.
Even if their number is 20-30% off, there are still more than 100,000 properties in the inventory want it or not.

[David Raether]

I subscribe to the "shadow inventory" theory.

Banks have been refusing (for the most part) to accept below minimum bids at courthouse steps auctions for some time now. And, since maybe only 1% or 2% of foreclosed houses are selling at these auctions, what happens to the rest?

I don't have any data, but I can tell you that houses that I've followed through the foreclosure process go to auction, become REO... and then don't appear on the MLS.

The smart thing for banks to do now is to start taking below minimum bids at sheriff sales. Stop piling up that inventory.

[TakeFive]

I've been watching a few foreclosures around the neighborhood. Seems to be about 30 days for the occupant to move out after the trustee sale. Fresh locks on the doors and gates seem to appear pretty quickly, then it's about 60 days before a sign goes up.

In some cases, the property was listed prior to the trustee sale in a last ditch effort to avoid foreclosure. After the sale, the sign comes down, and presumable comes off MLS, even though the property wasn't sold, but rather "reclaimed".

So it might also be cases of several hundred properties a day coming off MLS because of foreclosure.

[LA]

I've gone to www.realtytrac.com and mapped the bank-owned properties in my area, and then looked for those properties in the MLS. Can't find any of them listed. I'm convinced the "shadow inventory" is real and it's huge.

[amir]

Wait until the banks rush to the exits.

Banks are still in deep denial about how far and how long this will take. When reality hits they'll flood the market with their inventory.

Home sellers that waited on the sidelines will have to choose between waiting a full decade to see 2005 prices or sell now. Many will add their houses to the glut.

What we see now is the tip of the inventory iceberg.

[Nick]

There's either a large amount of shadow inventory, or property is changing ownership from banks to other people without being recorded in the public record (which would be illegal); I'm betting on shadow inventory. Of course, it makes sense: banks can't process fast enough, they have to make sure everything is "by the book" (to try to defray some of the upcoming wave of blame lawsuits), and there's no point in selling properties if you're deluded into thinking they will go up in value in six months or so (ie: if you have an analyst who buys into CAR/NAR BS, for whatever reason).

Banks, like homeowners, will be able to hold out for a while, hiding losses, living off their current resources, and making minimum payments of debt while they can. We have seen a wave of foreclosures, and another bigger wave is on the horizon, but we have yet to see the large wave of bank failures which we need to really get all the inventory back on the market. The bank failures are coming, though, like equity-addicted junkies with neg-am alt-A's who were making min payments, and are now living rent-free until they exhaust all the level 3 accounting tricks, sham number manipulations, and backdoor support from the Fed.

My guess is they are holding out until '09, to see if whatever massive bailout is enacted by the new administration at taxpayer expense is enough to keep them afloat. We shall see.

[David]

EARTH TO EVERYONE...are you all crazy ?! Read this story from Barron's:

http://tiny.cc/rA4FU

House prices are clearly nearing the bottom.

[E]

Agree with all the others.

I see foreclosures that have yet to make it to the MLS.

There are of course the people that pull their houses off the market thinking that when "stabilization" is synonymous with their ability to get their fantasy asking prices.

Won't they be surprised. :o)

Plenty of flippers still in the game also...plenty. So...many sales aren't even going to "end users" but come back on the market after 6 months and the obligatory kitchen & bath remodels and a coat of paint.

[E]

And has anybody else noticed that some "short sales" are listed FOREVER?

They should just get it over with and foreclose.

[AJ]

Hi,
There have been many articles recently about the "sovereign entitiies" that are poised to buy a major amount of discounted real estate. Could the REO's be positioned to be sold as "packages" to these entities and never make it to the MLS let alone the traditional auctions recently advertised? This would make it much easier for the lenders and more cost effective to just sell the "mess" to somebody else. Sort of a way of "outsourcing" the REO jobs...The biggest one is Dubai and also includes Norway.
Hey, they sold the mortgages these ways.. chop, dice and mix and sell the newly "printed" product to the highest bidder? Without the broker selling expense....
Highly attractive probably to these financial companies who want to get out and move on. IMHO

[Uncle Billy's Bloated]

Pete,

Maybe you could poll a bunch of foreclosure specialists and get their take on the shadow inventory? It's interesting that insiders at the lenders aren't speaking up about it. There must be a few that read the blog and have direct knowledge. Maybe appeal to them as well.

[Optimus Prime]

Pete! Just saw you on Fox. Nice job, buddy.

[1st time buyer]

EARTH TO DAVID... that Barron's article got slammed today by every economist who's opinion is worth anything

[RM]

It shouldn't be surprising to any one that some/many home sellers would not want to sell unless they absolutely had to. No only is this a bad time to be a seller but if you bought for a lot less and you turn around and simply repurchase a similar home in another area, your property taxes can double or triple. Some sellers may see themselves as not being able to cash out any substantial money or maybe see themselves as unable to qualify for a new mortgage on a new house. Still, others are maybe just happy with where they're at and don't really care too much about the fluctuations in the market.

As for the "shadow inventory", it may be so, but also remember that there is also a lot of investors waiting on the sidelines to get in and buy as much as they can, and some are already doing so. A while back I shared about some one I know who who recently has purchased 8 homes out of foreclosure in just the last six months, and he is not alone. An attorney neighbor next door was telling me the other day that he currently has clients with investment funds ranging from 2 to 5 million each ready to invest. So it may be so that more foreclosures will hit the market, but there will be a lot of money waiting for the right opportunities.

[mucker]

1st time buyer:

Not that I doubt your knowledge but can you cite some of these economists? Facts are just so good for reality their hard to dismiss.