Scary Shadow Inventory Numbers

OK, this factoid is just San Diego, one of the epicenters of the housing implosion. But the flip side is conventional wisdom is that the worst hit locales are bottoming first….right?

Maybe not. Again, generalizing based on one data point is not advisable, but this one is so striking that I can’t help but think that even a much lesser version of this pattern elsewhere would mean housing has a ways to go on the downside. That would be consistent with historic norms, since per Carmen Reinhart and Kenneth Rogoff, in severe financial crises, real estate takes over five years from its peak (which in our case was 2Q 2006) to hit the trough.

And this is the year when Option ARMs hit the wall in a big way too…

From Rich Toscano:

….there were 19,453 San Diego homes that were in foreclosure but that were not yet listed for sale….

There are currently 11,976 homes listed for sale in San Diego. If all the shadow inventory were to hit the market, inventory would increase by 162 percent to 31,429.

The 11,976 figure in the prior bullet includes active inventory as well as inventory that is marked “contingent,” meaning that the property is a short sale or the like that has an accepted offer that is awaiting lender approval (thus, the property is not really available for sale). Using only the active inventory of 7,964 homes, shadow inventory would swell the number of homes for sale by 244 percent.

Using the average number of sales over the past year, releasing the shadow inventory into the wild would add 7.3 months’ worth of inventory. By comparison, in November there were 4.6 months of inventory if you count both active and contingent homes, and only 3.0 months if you count just active listings. So adding all that shadow inventory would increase the number of homes actively for sale from 3 months’ worth to 10.3 months’ worth — more than a three-fold increase.

Yves here. So it may be that the working of the excesses in the worst hit markets is considerably overstated.

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  1. Uncle Billy Cunctator

    Good grief!

    5 years peak to trough, historically. Can they stand before us, and their gods, and tell us without blinking that they think this is like those?

    Aaaaaaaaaaaaaaaaaaaaaaaaaargh. Make them stop.

    1. Anonymous

      the google reference is not seasonally adjusted, but if searches represent potential demand, and follow trend, then the glut of inventory & shadow inventories might be incrementally reeled in during Q1 after the slack from seasonally slower Q4

  2. DoctoRx

    Perhaps even more important is the large number of truly “shadow” homes for sale–those where the owner hasn’t yet bothered to list because the price will be too low. Those can’t be measured but are large in all bubble areas IMO.

  3. bubble info

    The San Diego market has been warned of this gusher of inventory for a long while. Instead, the banks are dribbling out low steady flow of foreclosed properties which are eagerly absorbed by the current market.

    The low end, especially north county, is on fire with bidding wars last summer.

    If this long prophesied tidal wave of foreclosure finally appears, San Diego will be the canary in the coal mine.

    So far though no gusher and mounting skepticism that it will ever appear.

  4. Bill

    I bought a condo in the city of DC in early 1989, at the height of the bubble then.

    Within 1 1/3 years, it had plunged 30% in value, from the $63K I paid, to a value of $40K.

    It didn’t hit the original price again until about 2002, 10 years later.

    But then I sold it for almost triple what I paid in 2004.

    That RE bubble was nothing compared to this one. Already, in the outlying DC suburbs (e.g., Woodbridge, a blue collar area), little ranchers that used to sell for at least 300-350KK are being listed for just under 200K, unheard of in the past few years.

    This RE collapse has a good ways to go yet.

      1. DownSouth

        Yep. What a roller coaster ride for the gal in the slide show, no?

        1997–Purchased her house for $97,000
        2006–Her house appraised for $267,000
        2007–Her house worth below $60,000

        House foreclosed. She says she owed $260,000.

  5. Mark

    The shadow inventory is very large — probably in the ball park of $1.3T worth of residential real estate if we include seriously delinquent mortgages not yet being foreclosed — and this will grow unless mortgages in the foreclosure pipeline are liquidated more rapidly. The likely impact of this on the broader economy is troubling. Overly indebted people who are trying (and being encouraged by the Obama administrations’s programs) to remain in homes they cannot afford will leave many with crippled finances when compared with the rest of us. The debt burdens will wreak havoc on these people’s lives. This will hurt their efficiency, because they will focus a great deal of energy and financial resources toward solving an unsolvable problem, and this will hurt the overall economy.

  6. DaveInDenver

    I wrote about this issue back in August. This is not a new phenomenon. Back in February a good friend of mine informed me that his CPA client client told that he has several high income clients who lost their Wall St. jobs and hadnt’ been paying their mortgage for many months and had not even been contacted by their banks about being delinquent. This allows the bank to keep the home classified as “current.”

    The shadow inventory problem is much more massive than any of us realize:

    1. Alex

      I don’t think this is exactly correct. Banks classified their loans based on payments. If three payments are missed (90+ days delinquent), this usually puts a long into a non-performing category regardless of the foreclosure progress.

      What not foreclosing can do for banks is to keep house prices higher than they otherwise would (temporarily of course) thus keeping their OTHER borrowers from defaulting due to being underwater.

  7. Charlie Lefaux

    Can someone comment on why home builder stocks are doing well? Broadly speaking they are doing even better than most financials. Is this just another example of market inefficiency?

  8. David

    How do we know what the shadow inventory is?

    The article cited by Yves gets the number from another site:

    which contains the following assertion:
    “As of Tuesday, there are a combined 19,453 active foreclosures that haven’t hit the market yet.”

    The author says she discussed these numbers in some other story, but I clicked on the link and found no such discussion.

    There are more active foreclosures than houses listed for sale? Is that right? The whole assertion here is that there’s a ton of shadow inventory, but I am having trouble finding the source of the number.

  9. David

    I don’t know much about homebuilder stocks, but from what I do know:
    (1) They must have already declined a lot. How are they compared to say 2007?
    (2) The major homebuilders own a lot of raw land. It’s partially a longterm bet on the value of that land.

  10. joebek

    Seems likely though that the Feds will end up owning nearly every residential (and eventually commercial) mortgage in the country at artificially high values. Subsidizing property values will be the backdoor bailout of states and municipalities by preventing dramatic falls in property taxes. The downside is that once the housing market stabilizes those states with artificially high property values will rapidly lose population to those states with relatively less artificially high property values. So the fiscal crisis will just continue to get worse in CA and other high property value states. And as the quality of life deteriorates, as Las Zetas and their equivalents make their presence felt more and more, property values will continue to decline (albeit more slowly) in CA and the others until the values there are below the national average. Is anyone ready for that?

  11. Mike in Fairfax

    For the life of me, I can’t understand the big desire to “keep people in their homes”. Many (most?) of these no-doc/NINJA/sub-prime (and even prime) loan holders were first time buyers. They finally saw their opportunity to get into a mortgage that in a sane world would never ever be given to them and they took it, thinking they were “lucky”. They thought they got something for nothing. What they got was a real estate tar baby. How’s that working out for you?

    My point is that they were renters just a short time ago. For 2 years or so, they thought they were homeowners. Instead of a rent payment they made a mortgage payment. But it was a lie, just like their stated incomes to get the loan. They were really paying rent (because they were never going to be able to keep the house), they just didn’t know it.

    So what’s the big problem with a short sale for someone who put nothing down on a home? They had a cheaper “rent” for 2 years, they put nothing down, they take nothing out when they walk away from the home and they owe nothing. Just like an apartment!

    Obama needs to stop trying to “help” people by sparing thm pain. He’s really torturing them. How many sleepless nights has he caused for people wondering if the sheriff will toss their belongings onto the sidewalk tomorrow? Or wondering how they will escape the upcoming ARM adjustment?

    The real way to help them is to make them officially renters once again. They were home owners in name only. It’s midnight Cinderella. That pumpkin’s your ride home. Don’t dilly dally.

    1. Mike in Fairfax


      It is A problem, but not the problem (hopefully HTML tags are working here!)

      Sure, if you boot the deadbeats and don’t re-sell the houses, you’ll have a crime problem. But booting out the current “owners” is only step one. The current occupants are evicted, the deed goes back to the bank, the bank figures out what it can get in the current market and unloads it to someone at a price that someone can afford. The bleeding is stopped. The bank takes the hit it was going to have to take all along, and we might just start a recovery.

      Either boot the current occupants or do what Wilbur Ross is doing/talking about and re-do the loan where both the bank and the “owner” take a haircut and get on with life. The problem with that though, is that the current “owner” probably can’t afford any haircut. You can’t get blood from a turnip. So if the haircut is all on the bank, I say get the current “owner” out of there.

      1. DownSouth


        Some argue it has not so much to do with helping out the “homeowners” facing eminent foreclosure as it does with “extend and pretend.”

        When the bank “takes a hit,” that necessitates a write-down that many banks can hardly afford.

        And what about housing prices? The NY Times story Frank links to above gives a case study as to what happens to housing prices when a market is flooded with foreclosures. I think TPTB want to avoid that sort of downward spiral on a national scale. Just imagine, from $267,000 to below $60,000 in just a couple of years! More foreclosures mean lower prices. Lower prices mean more foreclosures. More foreclosures mean lower prices. Lower prices mean more foreclosures. Can you imagine what is happening in Fort Meyers going viral?

        I’m not arguing that what you’re advocating is wrong. I’m just trying to point out that it’s a tangled web we’ve woven, and immediately booting all these people out of their houses has repercussions that extend far beyond what happens within the walls of their happy abodes.

        But it’s beginning to look like bailing wire and chewing gum is the only thing holding this old jalopy of an economy together. So extend and pretend may come crashing down. And that may be the best thing. Only time will tell.

        1. Mike in Fairfax


          I agree that’s part of it too. It’s many things and most of them are just broadly speaking, “avoiding pain”. The banks don’t want to write these down because the confirmation that a house is worth 1/2 what it was 2 yeas ago is harder on them than carrying a loss for a year or two. It’s the local version of why the big banks and others don’t want to do mark to market valuation of their CDO’s etc. The number on the book are artificially high but they haven’t been forced to find out just how high and frankly, they don’t want to know because it will force them to come up with some serious coin immediately. Everyone is finding it easier to keep their heads in the sand locally and nationally.

          I’m not necessarily arguing everyone write all of their empty homes down to zero tomorrow, but it seems like what we’re doing is just making the recession last longer. You’re still going to have the same # of people get booted from their homes. You’re still going to have the same number of unemployed. You just don’t get to the light at the end of the tunnel as soon.

  12. Blurtman

    The debate about allowing some folks (apparently not all) to renegotiate the terms of their mortgages, notwithstanding the pros or cons of the issue, reminds me of a once popular slogan.

    “From each according to his ability, to each according to his need.”

    Maybe Groucho was right after all.

  13. emca

    Here’s one link to the situation in O.C., not far from San Diego:

    We are converging on the triple whammy, the witching hour in the Housing market.

    The bulk of Alt-A loans are now coming up for readjustment this year and next.

    Indirect post funding of MBS products via TARP or other government interventions to limited contagion are due to wind down or terminated.

    Government aid to first-time buyers is do the expire this Spring. No incentives = fewer sales.

    In addition:

    Loan modifications, once temporary will end. As temporary modifications seem to be more of an act to extract whatever resources are left of the hapless borrower, then serious attempt at keeping people inside homes (without even considering whether this is wise or not), foreclosures last year can be expected to resurface this.

    The pool of qualified persons to absorb incoming inventory is limited. If prudent lending are to reintroduced, then buyers will be only be those whose income has kept up with inflation this last two decades, a shrinking pool of_actual_ demand (demand should be based on how many people purchase, or can purchase a product, not on how many people want it) in a market dependent on numbers.

    Credit of all sorts will tighten in 2010. By tightening I mean less access or access to funds at higher cost. This along with possible unforeseen contingencies, as a spike in energy prices, climate related impacts, the need to staunch state and local government debt and loss, CRE failures, etc, will sap monies available to servicing home ownership debt.

    Maybe I’m being overly pessimistic. The unforeseen is the rule, and events may transpire to make all our worries pointless. I have a feeling though, the federal government is considering just these possible adverse scenarios, and is more worried about their eventual resolution then they let on.

    1. Mike in Fairfax


      And we’ll also have about $2T of commercial real estate that has to refinance in the next year or so.

      I don’t believe incentives will end. I think the massive cash influx to FHA and the total removal of funding caps to Fannie and Freddie are the creation of government vehicles to become THE mortgage holder for most home loans and it will use the unlimited pool of money and lack of requirement to make a profit to refinance most of these people with loans based on the property’s current value while rates are still low.

      1. emca

        I might add HAMP itself is scheduled to be terminated in January, for what its been worth.

        This was more on an outline of potential trouble than prediction per se. The government will intervene to at least ameliorate the situations, as you have indicated, have already begun, but if HAMP is any indication, despite the efforts of Hercules we will see very little in the way of resolution come January of 2011.

  14. fresno dan

    My favorite for analysis of the shadow housing inventory in CA is:

    Realtors, bankers, the Fed, all have an interest in not being clear about the true housing inventory. This is a shame because having people buy houses that are 20 or 30 percent overpriced may be good for the banks, but it is not good for the citizenry. At least let some people get the benefit of low house prices, and they can spend all the money not going into the mortgage on other items in the economy (gasp!!! they might even save some…aw, that’s just crazy talk!!!)

  15. Blurtman

    What’s the commotion about? You have something to sell, you limit the supply to control the price, sounds like a smart move. It’s better than bulldozing the glut of homes, maybe?

    @fresnodan: I concur with your post in general, but a fair price is one agreed upon between a buyer and a seller. No one can see into the future and know that a price a buyer pays today is too high. We all have opinions on that, as does the buyer.

    Folks that bought at the height of the last RE bubble and stuck around probably did OK from an ROI POV, but for some folks, a home is the place where you live, not invest.

  16. Dominic

    One key data element missing: What is the ‘typical’ shadow inventory relative to the MLS inventory. Obviously, it is not usually this high but it is hard to gauge how ‘scary’ this is with knowing the baseline.

    – Dom

  17. jon battle

    All good news. Stock is priced right, and selling. I’m over the pond, where taxpayers’ money (and worse, bank account holders’ money – thru the fraud called “QE”) is propping up the housing bubble. In the states, the bubble is bursting, fast, and the healing will be fast – the only way to dig out of this hole.

  18. Income Taxes

    Don’t forget the IRS will open their e-filing system to individuals wanting to file 2009 income tax returns on Friday, January 15th. If you have your necessary tax documents by then, you can get an early jump on filing your taxes.

  19. Brian Ward

    In the California counties of Riverside and San Diego I am seeing 20 to 40 months of inventory in many areas from bank owned homes and homes in the foreclosure process (notice of default filed and sale dates set). I calculate the inventory based on the previous months total number of bank sales when I evaluate each market. Also, banks are keeping the bank owned homes off of the market. For example, last month in La Quinta CA there were 292 bank owned properties yet only 53 properties in the MLS that were bank listings. There were also 369 properties that had received a notice of default and 323 additional properties that had foreclosure sale dates set. Banks are also not filing notices of default on all properties so there may be many a tremendous number of additional properties with late mortgages. In my opinion, property values are steadying because of a reduction of these bank owned properties on the market which is skewing the median home sales prices.

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