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.