Bloomberg reports that First American CoreLogic (whatever that is) is stoking worries about the “shadow inventory” of foreclosures:
The number of homes that may be in the pipeline for a sale because of foreclosure and delinquency climbed about 55 percent to 1.7 million at the end of September, according to estimates by First American CoreLogic.’
But lookie here:
Total inventory — including the shadow supply — was 5.5 million in September, down from 5.7 million a year earlier.
So even assuming for the sake of argument that every house in the foreclosure pipeline ends up in foreclosure, the supply of homes for sale was lower this fall than it was a year earlier.
Yes, the supply of home for sales is getting smaller, not larger.
Home inventory in Orange County hasn’t been this low since 2005, Jon Lasner reports for the Orange County Register. According to local Realtor Steve Thomas, it would take 2.87 months for buyers to purchase all homes for sale at the current pace vs. 14.05 months two years ago.
Remember that massive “shadow inventory” of foreclosures that housing bears keep talking about? Where is it? Not in Orange County, evidently. Not in Las Vegas. Not in Bakersfield, Calif. Not in Sacramento either.
Actually, the headline above is fiction. The surprising truth is that foreclosures in Las Vegas and the rest of Nevada have been plunging, in spite of the state’s 13 percent unemployment rate:
Foreclosures filings plummeted in November in Las Vegas and the rest of Nevada, but analysts are unsure if this marks a trend.
California-based RealtyTrac reported that foreclosure filings in Nevada dropped by double digits for the second consecutive month. The 9,295 filings in November were 33 percent fewer than October, in which filings were 26 percent below September.
November’s filings were also 33 percent below November 2008.
“It has been pretty amazing what we have been seeing in Nevada and Las Vegas in terms of the last two months,” said RealtyTrac spokesman Daren Bloomquist. “It was surprising to us. We didn’t expect to see this trend to continue because so many forces are driving foreclosures. It is still up in the air if this is a temporary reprieve or if it has truly turned. We are going to be watching it closely in the next two months.”
By the way, it’s not just Nevada. Nationally, “[f]oreclosure filings fell by 8% in November, making it the fourth consecutive month of improvement in the housing market. There were 306,627 filings last month, according to RealtyTrac, an online marketer of foreclosed properties. That decline follows a 3% drop in October, 4% in September and 1% in August.”
So, housing bears, how’s that “shadow inventory” thesis working out?
A growing chorus of commentators and analysts argue that home prices are due to fall another 10-20 percent or more.
“Until we start seeing a healthy housing market that can stand on its own, without government props, without distressed properties selling 60% off peak levels – that’s how you know the bottom is in,” says blogger Barry Ritholtz, who believes home prices are “not even close” to the bottom.
Henry Blodget, who blogs at Business Insider, agrees wholeheartedly: “The recovery’s momentum is slowing … and it seems likely that house prices will now resume their fall and drop another 10%-15%.”
In the wake of this week’s Case-Shiller report, many headlines were similarly gloomy about the prospects for continued home price appreciation:
- “Housing prices rise, but not for long”
- “Home prices up – but for how long?”
- “Housing data points to rocky rebound”
- “House of cards: Home prices may be headed back down”
- “Home Prices’ Ascent Slows”
- “Seasonal Bump in Case Shiller Home Price Index Abates”
- “Case-Shiller Home Price Index Up For 5th time, But Cracks Showing”
This follows Meredith Whitney’s prediction last month that U.S. home prices will fall another 25 percent. “There is no doubt that home prices will go down dramatically from here, it’s just a question of when,” she told CNBC.
Granted, the housing market may correct a bit from here, especially in the winter (traditionally a slow period for home sales), but I think the odds of a major retrenchment in prices are very low.
First, the Case-Shiller index is up five months in a row–a sign of substantial strength.
Second, pending home sales are up eight months in a row–the longest streak since measurement began in 2001.
Third, the inventory of new homes at the current sales rate was 6.7 months in October, the lowest since December 2006. As Mark Perry observes, that’s “just slightly above the average inventory of 6.13 months, based on new home sales data going back to 1963.” Perry provides the following chart:
Fourth, the number of new housing starts is at a 50-year low. (At least. Records don’t go back further than 1959.)
Fifth, mortgage rates are at a 38-year low. (At least. Records don’t go back further than 1971.)
Sixth, exuberant demand and limited supply in many post-bubble cities are leading to bidding wars, especially (but not exclusively) for low-end properties. In San Diego, prices are up 14 percent in the past eight months. In Las Vegas, where bidding wars are the norm, buyers are “going crazy.” Some California cities, like Bakersfield, report unsold inventory of just two months. San Diego reportedly has just a 1.5-month supply of low-end homes, despite a steady stream of foreclosures.
Housing bears response that demand will dry up once federal tax credits expire. Moreover, they argue that supply will surge once the much-discussed “shadow inventory” of foreclosures hits the market.
But homebuyer tax credits aren’t going to expire until June 30, 2010. That’s seven months from now. And, let’s be honest, if the housing market is showing significant signs of distress, Congress will not allow the tax credit to lapse. Not in the middle of an election year.
And there is little empirical evidence to support the notion that a tidal wave of foreclosures is about to hit. “From the things I’m seeing, there’s not going to be a wave [of foreclosures] any time soon,” says Sean O’Toole, president of ForeclosureRadar. At least one major lender has dramatically reduced the number of foreclosures it is offering for sale. Fannie Mae has launched a program to rent homes back to borrowers rather than foreclose on them.
Yes, there are a lot of foreclosures in the pipeline — no one disputes that — but these homes will probably hit the market in a steady stream over a period of several years rather than all at once. The process of foreclosure is getting slower, due to clogged courts and borrower-friendly judicial rulings. If demand remains as strong as it has been, expect foreclosures to be promptly snapped up by buyers and prices to continue their upward trajectory.
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Jim the Realtor on home inventory in San Diego:
In December, 2008 the average amount of homes for sale was 15,116.
On August 11, 2009, the total amount of active listings was 11,457.
On September 22, 2009, the amount of actives was 8,149.
Today’s inventory count is 7,955…
The lower inventory counts are excruciating for the ready, willing, and able buyers. Any decent houses that list with an attractive price are still being scooped up quick.
And you thought all those Fannie Mae foreclosures were just about to hit the market. Silly you:
Fannie Mae plans to allow homeowners facing foreclosure to stay in their homes and rent them for up to one year as part of the latest effort to help troubled borrowers while keeping a glut of foreclosed properties from hitting the housing market.
The Deed for Lease Program, which Fannie plans to roll out on Thursday, will offer borrowers who fail to complete or don’t qualify for a loan modification or other workout to deed their property to the lender in exchange for a lease. Borrowers-turned-tenants will be able to sign leases of up to 12 months and will pay market rents, which in most cases are lower than the cost of mortgage payments.
According to housing bears, banks are withholding from the market a “shadow inventory” of millions of foreclosed homes. When these houses are put up for sale, the argument goes, the supply of foreclosed homes will overwhelm demand, resulting in another crash in housing prices. As my favorite housing bear David Rosenberg put it,
“the supply data have been distorted in part because of all the inventory that has been held off the market on bank balance sheets, but this cannot last forever. Estimates we have seen, peg the “shadow” inventory at 7 million housing units — those in foreclosure, those just entering the process, and those that have been in arrears for the past year but have yet to receive a notice. Tack these on to the “official” unsold inventory count of 3.6 million and what we are talking about is an overhang equivalent to 25 months’ supply. It is truly hard to believe that home prices are doing anything more than a wiggle right now in a long-term downtrend…”
Now, Mr. Rosenberg is a smart cookie. There is no question he is right about there being large numbers of foreclosures are in the pipeline, and there is no question that this will put downward pressure on housing prices (or, rather, limit price appreciation). Nonetheless, there are a couple of problems with the bearish “shadow inventory” argument.
To start with: According to the latest foreclosureradar.com report, there is no shadow inventory of bank-owned homes being intentionally withheld from the market. On the contrary, banks have dramatically reduced their inventory of foreclosed homes. (See, e.g., Sacramento.) So when we talk about “shadow inventory” we are really talking about homes that are in the early stages of foreclosure or have not yet been foreclosed on, such as (in Rosenberg’s words) “homes that have been in arrears for the past year but have yet to receive a notice.”
But such homes aren’t likely to flood the market in the the next few months. Instead, they will probably dribble out onto the market over a period of years, greatly reducing market disruptions. (Keep in mind that demand for foreclosures is very, very strong.) Why are we looking at a period of years rather than months before these houses hit the market?
1) Massive amounts of foreclosures are clogging up civil courts in post-bubble cities, tripling the amount of time it takes to to move from initial filing to final judgment and auction.
2) Recent judicial rulings will likely slow down the foreclosure process. According to the Kansas City Business Journal, a late August ruling by the Kansas Supreme Court “undercut the business model for one of the mortgage industry’s key players — an intermediary that monitors mortgage sales and transfers for mortgage holders — saying the company lacked legal standing to receive notification of a home foreclosure in a case coming from Ford County in Southwest Kansas.” Details here.
The Boston Globe reports that a separate ruling by a Massachusetts Land Court justice late last week puts into question the ownership of hundreds — and possibly thousands — of foreclosed properties in Massachusetts.
If we believe the most bearish estimate, the “shadow inventory” in the U.S. consists of 7 million homes. Let us assume, for the sake of argument, that every one of those homes ends up in foreclsoure and is placed on the market. Let us assume, further, that because courts are clogged and because banks have difficulty proving ownership, it takes about two years for this to occur. (Keep in mind we are talking about homes that are either in the early stages of foreclosure or that have not yet entered the foreclosure process.) If 7 million foreclosed homes hit the market over a period of two years, that would mean an average of 875,000 foreclosures per quarter for each of the next 8 quarters. By comparison, a total of 937,840 homes received a default or auction notice or were repossessed by banks in the third quarter of 2009.
The “shadow inventory” is certainly a problem for the housing market, but it is not necessarily an unprecedented or insurmountable one. The weight of evidence suggests that the long-term downward trend in housing prices is over.