Last week I wrote a story based on a report from ForeclosureRadar arguing that there was no such thing as a shadow inventory, meaning that there was no glut of houses banks were secreting away for future sale in a better market.
Before my story ran, I put in a call to real estate economist Chris Thornberg of Beacon Economics. He couldn’t get back to me until today, but he had some good thoughts about ForeclosureRadar’s analysis worth repeating here:
“He’s right, the number of REO units is falling, but the reason it’s falling is because the inventory is stalled in the pre-REO space. There’s all these crazy programs out there, all these help for home owners programs that banks are forced to indulge in.
“Something like nine percent of mortgages are extremely behind on payments, another six percent of mortgages are somewhere in the foreclosures process.
“So you have about 15% about to be foreclosed on. That the number of REO units is dropping is irrelevant, because there’s an enormous backlog behind them. You haven’t cleaned the pipe.”
If I may rephrase, if the flow of foreclosures is like a river, then the government programs are a dam, slowing the flow of the river. The drop in bank inventory corresponds to a drop in foreclosures, which are the lessened flow beneath the dam. But the water behind the dam is still building up, and at some point it will need to be released. And when that happens, the flow of foreclosures may be another flood.
Tags: Chris Thornberg, ForeclosureRadar, foreclosures, Housing inventory, Shadow inventory
Properties that are in the foreclosure process are not “in the shadows”… you can look up each and every one using tools like ForeclosureRadar.com. Plus we clearly said there was no shadow inventory of “bank owned homes” just to be really clear.
I think you dam analogy was really good, I’d just remind you that dams can last a very long time, and it isn’t clear that is “has to be released”. The reality today is that we have millions of folks underwater in their homes, hundreds of thousands who aren’t making their payments, no political will to bail them out, and no political will to foreclose on them. We will sit in this limbo until some combo of the following things happen:
1. We get the political will to bail people out – whether through principal balance loan mods, bankruptcy cram downs, or the like.
2. We get the political will to foreclose on folks – politicians will have to have the stomach to be responsible for putting people on the street, and their constituents will have to be ok with a flood of properties hitting the market.
3. We suffer massive inflation that doubles wages (that’s what it will take to bring prices back to 2006 levels).
Those three realities have created a pretty strong dam… its unlikely to break anytime soon.