Shadow Inventory

Asked by Dreamhome, Citrus Heights, CA Mon Aug 6, 2012

Recently, a friend of mine was telling me about "shadow inventory" and that the banks are still holding on to quite a few foreclosed homes. I'm been in the real estate market since the bubble burst and I think the banks are reaching the end of their foreclosed inventory. Does anyone else have any insight? I'm in the Sacramento, CA area.

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James Tan, Agent, elk grove, CA
Tue Aug 7, 2012
Yes, shadow inventory is real. Because the rate in which REO's are being sold is less than the rate in which home were being taken back by the banks.
You can probably research how much inventory is held by FNMA, Freddie & hud, not to mention the private banks/investors . Some of them are being disposed through bulk sales, REO to rentals, etc.

The root problem needs to be tackled before we have a real housing recovery. That is, how to help the millions of people who are upside down. Harp3 has been proposed. Other ideas include shared appreciation mortgages, etc. Until we have a large scale loan modification or refinance for upside down borrowers, I am afraid the recovery will be painfully slow. Especially in areas like Sacramento.
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Bruce Slaton, , Elk Grove, CA
Tue Aug 7, 2012
Just to clarify my statements below, I dont think we'll be back to a "normal" market in 2014/2015, I believe we'll be out of the "mess". I term the "mess" as all of the politics, delay and pray tactics shielded as loan modifications and the unclear foreclosure process. What I believe will happen is we will see 2-3 years of banks offering incentives for homeowners to do short sales and once we get a defined foreclosure process back and homeowners start seeing action on the banks parts instead of waiting for the knock on the door, homeowners will seek out qualified REALTORS to pursue short sales and they will not enter the foreclosure numbers.

I believe you will see in 2013/2014, the continued increase of short sales and the increase of bulk sales in the loan process to 3rd party investors (your seeing that now with FHA "loans" not the assets themselves).

The unfortunate part is the banks have created a false Sellers market and what we really need is some inventory for homeowners to take advantage of the great rates.

The crazy part is I've heard over and over again, the last few years of the recovery may be the worst for homeowners to get things like short sale approvals etc as once foreclosures move out of the media and we focus on a recovery of the economy (anyone's guess on this one), there will be less incentive for the banks.

But inventory wise, any "shadow inventory" will be altered greatly by purchases from hedge funds and 3rd party investors converting assets to rentals in a buy and hold strategy

Let's timeline this one and wait and see, its anyone guess

Bruce Slaton
Realty World eCurb REALTORS
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Ted Greene, Agent, Sacramento, CA
Tue Aug 7, 2012
The "shadow inventory" does consist of homes already owned by the banks but the bigger picture are all the upsidedown loans that currently aren't paying on time. The number that gets reported and talked about consists of the ones that are in foreclosure or the bank has alreay foreclosed and now owns.

Have ever heard of someone who has stopped making their payments and the bank hasn't started foreclosure for a long time? I am an attorney and a real estate broker who specializes in short sales and I talk to people everyday who are not able to continue making their payments. In the central valley of California there are a lot of upsidedown mortgages and there is still a lot of pain to come.

As more and more people realize they can't hang on they realize that a short sale is the best way to go. As more foreclosures and short sale happen it continues to lower home prices. Of course every market is different and even within a certain market there are differences within the different price points. Especially in Sacramento since cash investors are buying the homes with rental potential. This even has caused us within our office to see some up bidding with multiple cash offers on some of our lower priced homes. That's also combined with the recent shortage in supply.

Your question asks about the Sacramento area so I will give you my opinion of that specific market - I think it will continue to drop. I think the higher the current home value the more likely there will be bigger reductions in value moving forward.

I was at a recent seminar in which a very knowledgable representative from BofA was asked a question about Equator and FHA loans. She was very excited to say that money is now being spent to create programs so that BofA can use Equator for FHA loans. The program is expected to be operational at the end of 2013. So if you think about that for a minute - BofA is spending serious money on a short sale program that won't even begin for a year and a half. They have A LOT of loans and certainly have as clear a picture as anyone on where the market is going...

I don't have a crystal ball but I really don't see the end of short sales and foreclosures for quite some time...

Ted Greene
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Angel Lynn, Agent, Sacramento, CA
Tue Aug 7, 2012
The number of forclosures will not be dwindling any time soon. The number of people deafulting on their mortgages is still very high. Even though there are options to Short sell or modify, people do not always take advantage of the help available, and they subsequently end up in forclosure.
I believe that yes, Shadow Inventory is a real thing. The banks hold onto properties to give the impression of lower supply and in turn they boost demand. This is what created the bubble of 2006 and it is why we are on the verge of another one.
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Bruce Slaton, , Elk Grove, CA
Mon Aug 6, 2012
Shadow inventory has been in the media lately as a sign that a tsunami of bank owned homes will eventually hit the market and flood the inventory further driving down home prices and leading to homes being left vacant on the market for lack of buyers. Its created buyers who remain on the fence thinking we have not reached the bottom of the market and our region in Sacramento could see further price decreases upwards of 25%. Let’s delve into the reality of the situation.

This is a recent blog post I did on this subject, too long to repost here but here is the link:…

I dont think we'll be out of the foreclosure mess until 2014/2015 and that can be altered by the results of the elections in November. The lack of inventory right now is strictly political. So is the false Sellers market but in the background that "shadow inventory" is being sold to Hedge Funds in the form of hard assets and even the loans themselves.

I've seen hedge tapes go from assets last year to pre foreclosure non performing loans recently.

In a nutshell, I don't believe there is or will be a shadow inventory that will affect the market. You should also check out some recent opinions from Foreclosure Radar and other data companies as well.

Bruce Slaton
Realty World eCurb REALTORS
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