Orange County

[Equityseller]

Hello,

          There are a couple of markets I have been keeping an eye on over the past year or so and inventory of homes are very low-not just there I've noticed, but in most places.  

          As long as I have been reading articles about RE there have been predictions of a "shadow" inventory of homes that will hit the market and create a buyers market, lower prices,etc.

           I hope I am not opening a can of worms, but as far as I can see this has never materialized...why- and is it still to come or no- do you suppose? Does this have anything to do with the calls that the market has bottomed? Enquiring minds want to know!

[BobPhillips-RE]

Hi EquitySeller,  It's a perfectly logical question, since Doom & Gloom bloggers have been predicting such a "Tsunami" for the past 4 years, and as you've noticed, reality has been more like a trickle.

[Mike_]

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BobPhillips-RE wrote:

Hi EquitySeller,  It's a perfectly logical question, since Doom & Gloom bloggers have been predicting such a "Tsunami" for the past 4 years, and as you've noticed, reality has been more like a trickle.

Below is a "heat map" that I posted in another thread, back in November, which probably hasn't changed much, since.  As you can see, the author or original poster, I copied it from is USA Today.

Looking at the potential supply for California, you can readily see that it's not gonna happen, soon, or ever.  Thanks for bringing up the subject.  Have a great day!

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why not provide a source for your image? point us to a usatoday link where you got that image from?

i searched usatoday around nov 2011 and didn't find any article that was anywhere near as  optimistic as that map.

in fact, a usatoday article from november 2011 says foreclosures will take --decades-- to clear.

why would foreclosures take decades if shadow inventory is only 5 months or less in most of the USA according to your map?

http://www.usatoday.com/money/economy/housing/story/2011-11-07/foreclosure-pipeline/51126600/1

Foreclosure backlogs could take decades to clear out

[truelie]

YES. Yes, from this heat map,  it has been 5 months from last November...  seems to me , 90% of USA should not have any shadow RE to sell now ? Am I right ?

[BobPhillips-RE]

Mike_ asked for a link to the map I posted.  The map was made up from the data published by USA Today, and which IS clearly shown in the link YOU provided.  Click on YOUR link, and look at the column on the left, titled:

"Clogged foreclosure pipelines"

As you can see, there are numbers for each state, represented in that column.  A creative person then superimposed that data onto a map of the USA.

The company from whom I got the map is a subscriber only system, so I can't post a link to it.  Hopefully, the explanation I'm giving will be sufficient to satisfy your curiosity.

[Seneca]

It hasn't materialized because the people who could make it happen -- banks -- are doing absolutely everything they possibly can to prevent it.  And of course they would, because a sudden drop in prices, even a modest one, would freak out investors and equity sellers, driving the former out of the buyer pool and dumping the latter into the seller pool.  That could readily result in self-reinforcing death spiral of desperate sellers and plummeting prices.   Just imagine a world in which nearly everybody, buyers and sellers alike, think prices will drop 10% a year for the next 3 to 5 years.   Selling frenzy, anyone?

The banks are trying to control the supply of REOs by foreclosing primarily on what will sell readily -- which at this time is low-end properties, in the 400-500k range, with no back taxes and not much work to be done on them.  People who have houses that are worth much less than the mortgage, or in areas that aren't selling well, they will leave alone for a while.  (Or indefinitely, if they continue to pay the mortgage -- the bank doesn't give a **bleep** if you're upside down on your house, so long as you keep writing the monthly check.)   The loss of the cash flow is, or at least has been up to this point, less of a problem than the problem they have for their balance sheets if e.g. a $500,000 asset (a mortgage loan) suddenly turns into a $420,000 asset (a house) plus an $80,000 loss (the difference between the loan and the asset's value).

One reason they do this is that Federal regulations restrict the amount of new loans they can make -- and new loans is how they make money -- based on the health of their balance sheet.  If BofA theoretically has assets of $40 billion, they can make a certain amount of loans.  If their assets suddenly shrink by $10 billion, they will have to either stop making loans (which for a bank is the equivalent of stopping breathing, i.e. a death sentence) or raise capital, by selling bonds, borrowing, or (ha ha) attracting depositors with great new higher interest rates, until the ratio of loans to assets gets back down to where the Feds say it has to be.

Of course, it's all a bit of a game of chicken.  Sooner or later, the bank won't be able to afford to have a nonperforming loan on the books, and they're just going to have to eat the loss by foreclosing and getting the loan off their books.  The only reason to delay is the hope that the prices of houses will bottom and start rising.  Then they can foreclose and sell the houses gradually, so as not to depress prices too much, and hope to gradually convert their hidden losses into visible, but much smaller, losses.

That's the way it works out in the best case for them.  The worst case is that the market does not recover soon enough, or strongly enough, and some big banks just have to raise the cash to meet operating expenses, balance sheet be damned, and so they start foreclosing as fast as they can.  In that case, because of all the holding back -- the shadow inventory -- the amount of foreclosures that appear in short order will be far larger, leading to a much bigger drop in prices and a much worse outcome for banks.

As long as the present regime is in power this is unlikely, because if any bank actually got into that situation, you can be sure the government would lend it money -- by printing it, if necessary -- to stave off its need for cash.  However, even the Feds can't backstop banks indefinitely.  Sooner or later they run out of taxpayer money, or, if they're printing it, sooner or later no amount of fiddling with the definition of inflation can keep people from noticing that the value of a dollar is plummeting as more and more of them are printed, and you get popular revolt and a regime change.

Will it all work out?  My personal opinion is that under the present Administration, if it manages to keep office in November, it will not.  Genuine new economic growth, the only thing that could provide soft landing to this Coyote running furiously in thin air after he goes off the cliff, can only happen when capital formation is encouraged (by good returns on savings) and entrepreneurship is encouraged (by lightening regulation, lowering labor costs, cutting off charity, and not demonizing wealth creation).  These are all anathema to the modern Democratic Party, and so the huge game will end up in some vast train wreck or other.  If you get a different regime in power next January, maybe things can change. We'll see.

[AlexSin]

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Seneca wrote:

......$500,000 asset (a mortgage loan) suddenly turns into a $420,000 asset (a house) plus an $80,000 loss (the difference between the loan and the asset's value)....

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So why was there a need for "robo signing"?

[Seneca]

"Robo-signing" was a conspiracy of convenience between the Federal government, banks, and underwater homeowners, all of whom wanted the foreclosure process slowed down, and the media, which loves a hard-luck sob story starring big corporate villains and the plucky widow Mary Ann just trying to keep the family spread from being foreclosed upon by Black Bart the Banker, because it's what dear old departed daddy would've wanted.

The actual number of people affected by genuine robo-signing mistakes, i.e. those who were being foreclosed upon who weren't, in fact, in default was miniscule.  If you can point to more than five such genuine stories in the media over the last two years, I'd be astonished.

[AlexSin]

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Seneca wrote:

"Rob-signing" was a conspiracy of convenience between the Federal government, banks, and underwater homeowners, all of whom wanted the foreclosure process slowed down, and the media, which loves a hard-luck sob story starring big corporate villains and the plucky widow Mary Ann just trying to keep the family spread from being foreclosed upon by Black Bart the Banker, because it's what dear old departed daddy would've wanted.

The actual number of people affected by genuine rob-signing mistakes, i.e.. Those who were being foreclosed upon who weren't, in fact, in default was miniscule.  If you can point to more than five such genuine stories in the media over the last two years, I'd be astonished.

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"Rob-signing" is a hard fact.

So why banks are in favor of it if in return they are destroying their own balance sheet?

How would it slow down the foreclosure process?

[IrvineFancy]

While the numbers from the USA Today link and your map match, the units of measure are different.  The articles states the numbers as "years", your map shows "months". 

Anyone can read to verify....