Freddie Mac: Shadow Inventory Lightens As the Rate of Excess Housing Is Absorbed, as confirmed by data from Morgan Stanley and CoreLogic. Minneapolis real estate is showing better than average national levels of positive shadow inventory reductions, making it more challenging for some home buyers to find distressed properties to buy.
U.S. Shadow Inventory Levels Are Better
Fannie Mac just released it's acclaimed Economic and Housing Market Outlook for August 2012 about negating real estate "shadows". Somewhere the term “shadow inventory” was created casting a gloom of uncertainty by name over increases in home values and the certainty of the housing recovery. A good look into the shadows might dispel some of it murkiness. The Minnesota Mortgage Program has successful helped reduce the number of MN foreclosed homes.
Freddie Mac says, "House-price news has been decidedly good over the past quarter. The Freddie Mac House Price Index for the U.S. showed a brisk 4.8 percent gain from March to June 2012, the largest quarterly pickup in eight years; the national index posted a June-to-June rise of 1 percent, the largest annual appreciation since November 2006. Further, the improvement was relatively broad-based. In fact, 34 states and the District of Columbia posted higher home values during the 12 months through June 2012, the largest number of states registering positive annual appreciation since April 2007".
Homes Turned Into Rental - Shadows of the Shadow Inventory
High demand in the rental market has pushed some homeowners into converting their homes into rental properties for homes for lease since they are unable to sell their homes, or determine that they can not sell these homes without enormous loss. Since these homes are not officially part of the shadow inventory, their impact remains questionable. No one knows quite for sure what what happen if a high enough number of homeowners wait until the right moment and then place their properties for sale en masse, thereby diluting the housing market.
Home Defaults That Become Neighborhood Blights
Distressed properties are not only afflicted by their default status or their underwater negative equity status. They additionally add concern due to their frequent state of disrepair. Too often they become the blight of otherwise exceptional real estate neighborhoods, effecting the value of near properties.
According to a writing for BusinessWeek, Peter Coy says, "These are the most dangerous assets in the massive shadow inventory portfolio of properties. Most banks have not put these wrecked homes on the market for a variety of reasons, or at least not yet. There is no question that many real estate investors and flippers would love to purchase these homes, but in doing so they will manage to depress the price recovery currently underway. There is enough evidence to worry about the shadow inventory potentially wrecking the positive gains experienced by the housing sector in part of 2011 and all of 2012.
Factors Lurking Under The Surface Of Shadow Inventory
The housing market remains fragile to a certain degree. While it is the smile in the economy in 2012, the housing recovery is highly dependent on other macroeconomic factors such as unemployment, builder optimism, and consumer optimism. These are factors which are subject to volatility, which the housing market depends on to thrive, in the same manner it influences the economy. Should many properties in the shadow inventory come on the market at the same time deep periods of unemployment or low consumer optimism are widespread, it could bring a tumble on the housing recovery.
Mortgage Bankers Association’s National Delinquency Survey
“Shadow inventory” has not been formally defined across the real estate industry. However, most would agree it refers to the stock of single-family loans that are seriously delinquent; meaning, 90 days past due or more, or in foreclosure time line proceedings. The fear, or reality, depending on whose perspective, is subsequent sale of an REO property often occurs at a discounted price and can weaken surrounding property values, which is central to the concern that any current home-value gains may be fleeting. The Mortgage Bankers Association’s National Delinquency Survey places the stock of seriously delinquent loans around 3.6 million (after adjusting for an estimated 88 percent survey coverage) as of March 31, 2012. While down about 1.4 million from its peak at year-end 2009, it remains substantially above the pre-2008 levels and casts along shadow across the market.
Housing Recovery Coming Out From The Shadows
"While the shadow inventory persists, there is an important difference in today's market compared with those of recent years and that's the substantially reduced amount of excess vacant housing," said Frank Nothaft, Freddie Mac 's vice president and chief economist. "The housing recovery may finally be coming out from the shadows."
Ending the month of July's report, RealtyTrac quotes Morgan Stanley researchers as saying, "Shadow inventory sheared 35% from peak. The shadow inventory of homes likely to be sold after foreclosure declined by 35% since the peak reached two years ago".
Morgan Stanley also said, "It is clear that disposition of the shadow inventory impedes future home price growth and can also increase the magnitude of home price declines. But the effect may not be as calamitous as some have suggested. A slowly improving economy and a collection of government programs have intervened to provide alternatives to foreclosure, slow the pace of new delinquencies, and reduce the shadow inventory".
CoreLogic - Provider of Information And Analytics
On June 14, 2012, CoreLogic reported that the current residential shadow inventory as of April 2012 fell to 1.5 million units, representing a supply of four months. This was a 14.8 percent drop from April 2011, when shadow inventory stood at 1.8 million units, or a six-months’ supply, which is approximately the same level as the country was experiencing in October 2008. Currently, the flow of new seriously delinquent (90 days or more) loans into the shadow inventory has been approximately offset by the equal volume of distressed (short and real estate owned) sales.
The decline in the shadow inventory is a positive development because it removessome of the downward pressure on house prices,” said Mark Fleming, chief economist for CoreLogic. Serious delinquencies, clearly where the main root of the shadow inventory, declined the most in Arizona (-37.0 percent), California (-28.0 percent), Nevada (-27.4 percent), Michigan (-23.7 percent) and Minnesota (-18.1 percent).
Factors Contributing To The Decline In Shadow Inventory
It’s always nice when you learn things aren’t so bad! Jenna Thuening, owner of Home Destination, believes that the decline in the shadow inventory is due in part to a number of factors:
The National Mortgage Settlement cleared up some of the legal uncertainty hanging over banks
Banks finally selling off distressed properties
Banks may be utilizing alternatives besides repossession more often
Servicers are getting better at modifying troubled home loans
Fewer Homes Become Shadow Inventory
An interesting comment by Marty Boardman on June 28, 2012, may indicate the shadow inventory looming gloom is really better than economist thought. He states, "It’s easy to see why some would say that REO houses owned by the bank but not for sale on the multiple listing service are in the shadows. But the definition should stop there. Only a tiny, miniscule percentage of those homes in the foreclosure process and delinquent mortgages not yet in foreclosure will ever make it to auction. Most will be modified, brought current or paid off long before the foreclosure takes place".
One wonders just how real estate professionals can estimate or factually know the number of homes in shadow inventory. Professor Michael Orr of the ASU Real Estate Studies Department said, "I actually keep a file of exactly what houses the banks own and what they're doing with them," he said. "When you actually count them out, it's a relatively trivial amount that they actually own that they haven't already listed for sale."
Download CoreLogic's Shadow Inventory Report from June 2012
Download Shadow Inventory's Influence on Mortgage Modifications by CoreLogic
Download the press release from Freddie Mac on Shadow Inventory
Jenna Thuening, a Certified Distressed Property Expert can be reached for help understanding show inventory and it's reach in Minneapolis and St. Paul communities
Eden Prairie MN 55344
Jenna's home page: homedestination.com
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