Just recently, theÂ National Association of RealtorsÂ®Â (NAR) released its state-by-state shadow inventory report. Florida has the highest number of bank-owned property at an estimated 441,000 units. California comes in second with 228,000 units. Illinois has around 124,000 bank-owned properties and New York is holding about 107,000 REO units according to the NAR report. These are the only states holding shadow inventory in six figures.
What does this shadow inventory situation mean for Southwest Florida? Is it truly the catastrophe on the horizon or is it just the nature of our marketâ€™s recovery? The point is before we makeÂ thatÂ decision, letâ€™s examine the facts.
First, regarding the recent report from NARâ€¦on theÂ report, they divided the inventory in each state by the monthly number of distressed sales with a discrepancy in the length of time it would take to clear the inventory. Most of the shadow inventory is expected to clear in 24 months or less at the current rate of absorption. However, the growth in the shadow inventory is attributed to the slow-down in REO sales last fall because of the robo-signing scandal.
It is worthy to note that the shadow inventory seems to be depleting quicker in the hardest hit states, such as Florida, Arizona, Nevada, and California. These four states represent 42% of all the foreclosures in the country. Florida, according to the NAR, will take 21-30 months to clear the backlog of REO property. The term â€œshadow inventoryâ€ hangs over the real estate market, suggesting a catastrophe looming in the near future.
However, a recent white paper written by Florida Realtors Chief Economist, Dr. John Tuccillo, suggests that weâ€™re overreacting about shadow inventory. Dr. John Tuccillo was the former chief economist for the National Association of RealtorsÂ®Â (NAR) and a highly respected business and planning consultant. He has since joined Florida RealtorsÂ®Â as chief economist and head of its new Industry Data and Analysis department.
In his recent whitepaper, he states â€œthe fear is that the inventory of delinquent and foreclosed loans will be released onto an already weakened market. But, the reality, even in Florida where distressed properties make up a significant portion of the market, appears to be different.â€
Tuccillo says lenders have no reason to flood the real estate market with more homes if doing so would drive prices down and impact the lenderâ€™s profit. Some think that lenders were holding back on purpose, but Tuccillo says thatâ€™s not the case. In fact, he states that the large number of distressed properties on hold was â€œlargely the result of confusion over the rules of the game, and thus missteps by the lenders.â€
In conducting an analysis, Florida RealtorsÂ®Â Research looked at data from MLSs around the state and data provided by CoreLogic, a statistical analysis company. They looked at the recent history of distressed property listings and transactions relative to normal market data, as well as estimates for the shadow inventory, and came to some conclusions about the likely course moving forward.
Here is an overview of their findings:
Â· Florida remains one of the nationâ€™s hardest hit states for distressed property sales.
Â· Distressed property sales and listings have declined since late 2010, except for single-family-home short sales.
Â· Average prices for distressed and normal property sales have been stabilizing.
Â· In general, Realtors and lenders have learned how to cope with distressed properties in a way that stabilizes the market.
Â· Floridaâ€™s highest percentage of distressed property (compared to total listings) occurs in the I-4 corridor and Southeast Florida; the lowest percentages occur in Northwest Florida.
Â· Currently, Floridaâ€™s shadow inventory was 550,000 units at the end of 2011, a decline of about 9 percent from its peak in the first quarter of 2010.
Â· Currently, the flow of new seriously delinquent (90 days or more) loans moving into the shadow inventory is offset by the roughly equal flow of distressed sales (short sales and REOs).
Â· The number of foreclosures and REOs was significantly lower in February of 2012 than one year earlier, suggesting slower shadow inventory growth.
Tuccillo also predicts that distressed properties will be a significant feature of the Florida real estate market over the next ten years, but it will be considered just one property type a buyer can consider â€“ one that has its own unique sales techniques and documentation.
So, what about the shadow inventory of distressed properties that are coming down the pike?
There is a backlog of distressed properties coming to the table for sale, but based on our marketâ€™s recovery and Tuccilloâ€™s findings, there is less guessing about how these sales will affect our market.
Some other facts to consider are the number of units going back to lenders in 2012 has been much lower than a year ago suggesting that shadow inventory is slowing. And, lenders know that a loss taken on a short sale is typically less than that of foreclosing on the property. Thus, lenders are working with agents as never before to expedite short sales, thus helping to better stabilize prices.
So, is shadow inventory really the black cloud hanging over us or just another piece of the real estate recovery process? It seems to be just another type of transaction available to home buyers. These days, buyers are focused on finding good properties at a fair price as opposed to picking up distressed properties as cheap as possible. And, with inventory declining, home buyers are searching for properties in every price point.
In Southwest Florida, buyers areÂ eagerÂ to buy and shadow inventory will not deter them.
Sellers who know this will sell their properties quickly; now isÂ notÂ the time to postpone putting your home of the market! Donâ€™t let the talk of shadow inventory keep you from making a solid real estate purchase or from getting your home on the market. As always, get a great agent who understands the facts and not the myths â€“ if you do, youâ€™ll get what youâ€™re after in the Southwest Florida real estate market!
By D. Michael Burke, P.A. Keller Williams Elite Realty