Tuesday, June 23, 2009

Banks "Hoarding" Foreclosed Homes?

Folks in the real estate industry have been debating for months about whether or not there’s a “shadow inventory” of homes banks have already foreclosed on, but have not yet listed for sale.

The theory says banks will eventually open the floodgates, list all their hoarded inventory and home prices will take another shocking nosedive. They follow up by saying don’t buy now, wait until the banks let loose and prices drop another 20%.

So, is there a shadow inventory?

Not according to Mike Orr. He runs the statistics-packed subscription real estate website The Cromford Report, which focuses on the greater Phoenix real estate market.

This is palpable nonsense.

Let’s look at why the shadow inventory is relatively insignificant:

First, we need to establish how many properties have been foreclosed but not yet sold to a third party. It takes much time and effort to establish this, particularly because government entities are not required to file an Affidavit of Value when they deed property. They get an "A-3" exemption. However Tom Ruff of the Information Market is up to the challenge and has counted all the trustee sales, searched for subsequent sales to third parties, accounted for all the A-3s and produced a spreadsheet of shadow inventory counts by ZIP code within Maricopa county. There are a total of 18,386 homes within Maricopa county in REO status.

How many of these are in the ARMLS system as of this morning?

  1. 5,213 are active

  2. 7,170 are pending (i.e. in escrow)

  3. 477 are temporarily off market (in many cases because multiple offers are being negotiated)

Thus there are 12,860 accounted for. So the "shadow inventory" of REOs not currently being marketed through ARMLS for Maricopa is 5,526. No doubt many of them will be listed in the next few weeks.

Is this number likely to cause a flood? Absolutely not. This represents less than 1 month of supply based on the current rate of purchase of REOs through ARMLS (which is 5,556 as of today). In fact if this is the only new supply, the inventory of active REOs will fall over the next month, just as we expect. The trustees would have to increase the rate of their sales substantially to keep up with the current market demand for REOs.

So we can conclude, at least for Greater Phoenix, that shadow inventory is a fake issue.

I’ve got to say, so far I’m with Mike Orr on this point. The amount of buyer interest in bank owned homes continues sky-high. Nearly every buyer I’ve worked with this spring & summer who’s focusing on bank owned homes has faced multiple offers, bidding wars, and is often losing out to cash investors.

That’s the case from the very low end (sub-$75,000) all the way up through to the high $400,000s. I haven’t been looking at bank owned homes above $500,000 in the past 2 to 3 months, so can’t knowledgably comment on what’s going on up there. Any readers with first hand knowledge of making offers on bank owned homes above the half-million mark? Please comment.

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Note: I originally picked up on Mike’s story via Irene Hammond’s Click to Arizona website.