Shadow Inventory?

Shadow inventory has become a new and mysterious term in the world of Real Estate. What is shadow inventory exactly? It is the unknown volume of foreclosure inventory that banks don’t really feel like talking about. It hides in the banks shadow and leaves most of the common world to wonder…..Just how much inventory is there? How many people are sitting in their homes, not paying their mortgages, hiding in the shadow inventory?

So let me tell you if it is real and how much there really might be based on credible sources.

First off, yes it is real. When Bank of America started getting questioned for wrongfully foreclosing on homes as a result of “Robo-Signing”, the process of working through the inventory yielded. Let me take a minute to say that this accusation against B of A was an absolute joke. Maybe the paperwork wasn’t processed correctly, but these individuals weren’t paying their mortgage! This is a trustee state! Anyway it slowed things down. Since then inventory has been building. Try to imagine a toll booth on a major interstate. All of a sudden, they start only letting one person through every 15 minutes instead of every 15 seconds. The booths are the banks and the cars are individuals not paying their mortgage.

What is happening with inventory right now in today’s market? Here is one example. On Thursday approximately 300 homes were scheduled to be sold at the court house steps (Auction, Trustee Sale, Sheriff’s Sale, whatever you want to call it). Out of those, 26 actually made it to bid and only a handful, maybe 7 sold. Do the math, that means that 274 people are still at the toll booth, not paying their mortgage and hiding in the shadow inventory. That is one day people!!!!

So, how many cars are backed up at the toll booth, when will the traffic jam break, how fast will it go and what will be the end result? Here is the view point from two of my best anonymous resources for inside information.

REO Asset manager for Wells Fargo: Right now there are 6 million people who have a Notice of Default filed against their properties. Basically, 6 million people are facing foreclosure and are backed up at the toll booth. This manager who moved 4300 foreclosures last year, who has been in the business for decades feels that a day will come when the wheel barrel dumps and all of the properties hit the market at one time. This would hypothetically drop the market by 25% overnight. I am not so sure that I agree with his wheel barrel dumping theory, but I do trust his inventory assessment.

Asset Manager for 182 banking institutions: Before 2013, there will be 25 million more foreclosures. This inventory is in the projected shadows should unemployment stay high and asset values depreciate. Basically, if we stay in the same slumped economy with little improvement, we are going to get body slammed. Let’s multiply each home by 2 people. That is 50 million people without homes who can’t buy again for 3-7 years depending on the product they choose to purchase. That is almost 17 times the amount of people living today in Orange County, which has more people than the entire state of Ohio.

I don’t believe, even though it is hard not to based on credibility that the shadow inventory will dump like a wheel barrel. I feel the banks will continue to balance their check books absorbing liability at a sustainable rate and selling it at a sustainable rate. This will keep the market pretty flat to mild softening for several years (maybe 5?).

The given here is inventory. The unknown variables are: Government rescue programs, jobs and interest rates.

My advice is that you buy when you find a house you really love and can afford. It may not be the bottom, but it will be a great deal. In the long haul you will make money. Watch the 10 year bond which is an inverse of the stock market. The 10 year bond parallels interest rates. If the stock market gets bullish, the 10 year bond rates go up. If the 10 year goes up so do rates. Last week’s bullish stock market hiked interest rates in the short term. The fact is, even if you wait for lower prices, which is likely, you may miss interest rates. Overall, rates will affect your affordability index and home price index options the most. If you can lock up a 4% give or take on a 30 year fixed today, do it. You will make money. You will only know when the market hits bottom when you are looking back.

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