A sale sign is seen in front of a foreclosed home in South Los Angeles.
(Aurelia Ventura/La Opinion/Newscom)Photos (1 of 1)
‘Shadow market’ may undercut real estate rebound
Only 30 percent of foreclosed homes are currently on the market nationwide. Could the backlog of hundreds of thousands of empty or rented homes swamp recovery?
By Patrik Jonsson | Staff writer/ May 22, 2009 edition
Reporter Patrik Jonsson talks with CSMonitor.com's Pat Murphy about 'shadow markets' and the current real estate market in the Phoenix area.
Reporter Patrik Jonsson
Surprise, Ariz.
Brian Mehigan, the self-described “Mayor of Tara Lane,” knows all too well the rise and fall in real estate prices that he calls, simply, “the madness.”
One of a handful of original owners left in this decade-old Phoenix-area subdivision, the freelance plumber can tell you the fate of homes up and down his street. He points them out one by one: That one’s for sale, that’s now a rental, rental, foreclosure, short sale, foreclosure, original owner.
“Who knows what’s going to happen,” says Mr. Mehigan, as he keeps a watch on the street. “All I know is I’m not going anywhere.”
In the cookie-cutter burbs ringed by saguaro groves here in the shadows of the White Tank Mountains, there’s new hope for neighborhoods in disarray after the housing quake. Plumbers like Mehigan are busier, and Phoenix real estate is suddenly red-hot as buyers snap up bargains.
But, despite the short sales, foreclosure sales, and the burgeoning rental inventory, there’s also a massive “shadow market” of empty or rented homes yet to come on the block, as banks try to optimize returns on failed investments and homeowners hold off, waiting for a rebound.
In this foreclosure capital – over 75 percent of homes on the market in Phoenix are owned by banks – such a big backup of inventory could affect streets like Tara Lane for years to come. And it could dramatically impact the trajectory of the much-awaited recovery.
“Taking a house in foreclosure but not putting it out on the market, that’s common right now,” says Rajeev Dhawan, a real-estate economist at Georgia State University in Atlanta. “Short term, it’s good, but long term you’ve got a problem. When the market starts to recover, they’re going to dump the inventory,” pushing prices down again.
As many experts glimpse a possible bottom to the housing market, theories diverge about the potential impact of the shadow market.
Sudden boom
For now, investors are wading into the Phoenix real estate market in droves. Foreclosures are leveling off, sales are being bid on by five to 10 buyers, and more homes are being bought than any time since 2006. Home prices in the Phoenix area have slid nearly 34 percent since the mid-2006 peak and are still falling at about 3 percent a month. More than half of all home sales in the first quarter of this year were made by first-time homebuyers, reflecting affordability that’s at a 20-year high in many parts of the country.
The positive sales numbers and the slowing price slide – mirroring trends in California and Florida, two other housing-crash epicenters – is a sign that the real estate market may finally be shoring up, said Arizona State University real estate professor Karl Guntermann in a recent report.
“It appears that we’re turning,” said Professor Guntermann.
Housing investor David Isom has seen the buying craze firsthand. Despite being able to offer cash, he bid unsuccessfully on 15 homes in the past few months before scoring one with a pool in nearby Glendale, Ariz.
“I don’t follow the herd, man, you’re talking to a different guy,” says Mr. Isom, explaining his foray into the market. “Most people are reactive. I go against what most people do. It’s the only way to be successful.”
A ‘phantom inventory’
Despite such exuberance, many real estate experts are predicting more of an L-shaped recovery than a V-shaped one, as properties glut the marketplace in response to home-buying activity.
Only 30 percent of foreclosed homes are currently on the market, meaning that some 500,000 sit vacant across the country, part of a vast “phantom inventory” that the market has yet to grapple with.
“There’s a frenzy for bank properties right now, and as a consumer, I’m likely to say, ‘Wow, that’s got to be an indicator of the bottom,’ ” says Brett Barry, a real estate agent at HomeSmart in Phoenix. “But a lot of us expect a tsunami of foreclosures to come on top in June, July, or August, because at some point the banks are going to release this stuff.”
Reasons for the backlog vary. For one, the sheer number of complex foreclosure proceedings – six times the average in the past year – has overwhelmed many mortgage-servicing companies. And some banks may find accounting advantages to delaying the loss they’ll have to book when they ultimately sell the property at prices below the value of the principal.
But Alexis McGee, a real-estate blogger at ForeclosureS.com, wrote earlier this month that banks may also be gaming the market so as not to depress prices – especially as bidding wars are heating up in places such as Surprise.
There are some indications, too, that the Obama administration may have leaned on banks not to release the entire foreclosure inventory at once in order to preserve neighborhood values.
That’s not necessarily a bad thing, argues Rick Sharga, a vice president at RealtyTrac.com, a real estate tracking firm in Irvine, Calif.
“The L-shaped prognosis does not offer much hope, but hopefully it will turn into a U or something,” says Mr. Sharga. “The counter argument [is that] … if they manage the inventory back into the marketplace, they can actually contribute to a quicker stabilization. The question is, will the rest of the dynamics in the marketplace allow the buyers to absorb this inventory in a manageable way, or will something else come along to throw the equilibrium off again?”
The shadow may stretch beyond foreclosures. Zillow.com, a real estate tracking firm, revealed in a survey this week that a third of the nation’s 55 million homeowners would be somewhat likely to try to sell their homes in the next 12 months if the market improves. A large chunk of those are likely to be the 15 million or so US homeowners currently “underwater” on their mortgages – owing more than their home is worth.
“[A] lot of these home sellers will also be buyers so they will help some of the inventory,” writes Stan Humphries, a vice president in Zillow’s data-analytics division. But it’s also likely that some sellers will become renters or will downsize, so “this ‘shadow inventory’ represents more supply … than demand.”
The impact of short sales
So far, political appetite for a nationwide “principal reduction” bailout – forcing banks to reset principals to current, depreciated values – has waned. In its place, the Obama administration on May 14 outlined new rules for so-called “short sales” to help homeowners who don’t qualify under last year’s Help for Homeowners program, which Congress bolstered this week.
A short sale is a complex, acrimonious, and often unsuccessful process that allows homeowners to sell homes for less than they owe, while reducing the amount of credit damage to two years instead of five to seven years in a foreclosure.
The short-sale gambit “will push prices up, because people know that it’s a viable sale that will take place,” says Ron Farber, whose website, shortsaleplan.com, aims to help put the new Washington rules into play. “This’ll be helpful to the borrower, the real estate agent, the bank, and it’ll really help the economy.”
Whether it will help Tara Lane is another question, says Mehigan, the Surprise plumber. The one short sale in his quiet neighborhood led to a group of rough characters moving in. Mehigan called the police, and they retaliated after moving out by busting his windows and scrawling graffiti on his house.
Looking out on the empty street of low-slung adobe-style homes, Mehigan says, “This used to be a nice neighborhood where people got together, but now it’s a ghost town.”
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Comments
2. Rich Rosa | 05.23.09
I agree that banks are holding on to a lot of inventory, but not because they are so sophisticated that they are waiting for just the right time to sell. The fact is these banks are run by incompetent people, who simply do not know how to handle the inventory.
3. Kevin Z | 05.23.09
The length and depth of this recession will determine the stamina of pockets holding all shadow inventory. Note that various sites used the term differently. Some for non-listed bank owned properties and others for the pent up desire of homeowners to sell should the market show any sign of improvement.
Markets are affected by emotions. The “irrational exuberance” of the .com bubble (and subsequent housing bubble) was fanned by unrealistic expectations and, one could argue, mass hysteria. Is the US economy suffering from a collective bi-polar mood disorder - swinging between states of high exuberance and deep gloom?
Perhaps . . . more likely, there are economic fundamentals driving us back to an equilibrium spun out of control by the financial collapse of hyper inflated residential and commercial real estate values. There is strong evidence this complicated leveraged debt will continue to unwind for the next 12-24 months. The effects on housing inventory could be exacerbated by a widening inventory gap between new buyers and aging, boomer sellers.
I suspect the major players have monitoring the deterioration of the “alt-a” and option pay loans and the more disturbing increase in the prime and jumbo default rates. This ever steepening treadmill will place far more stress on banks and the availability of future credit than has been anticipated (or admitted) by the Treasury. And that could hem up all but the deepest pockets.
If these are not mere shadows of things to come, then it is best to be forewarned and to be forearmed.
4. Richard Y | 05.24.09
Great write-up. It reflected what I’m experiencing while trying to find a foreclosure in Avondale area for over last two months. The banks are not releasing new foreclosed houses any more, at least for now. I think the “bank” is beginning to understand the human’s emotion of fear & greed. It’s a smart move as compared to letting the market taking its course.
5. Thorstein Veblen | 05.24.09
Shame on the banks for failing to liquidate their assets while they accept cash handouts from the government! We should force them to sell these properties, especially at a time when so many people are homeless and in need of affordable housing BEFORE they get any of our taxpayer bailout money!
6. Elvis Shrempp | 05.24.09
As a professional real estate appraiser with my own company, I can affirm that foreclosures are determining market value now. We are witnessing an stonishing loss of value of more than 50% since 2006 in some neighborhoods, especially in new homes subdivisions. This is unprecedented. I cannot foresee how we are anywhere but in a seriously bad real estate market with a severe recession attached. Remember too that this is supposed to be the high season. Heaven help us come winter. Hold on to your hat!
7. patience | 05.24.09
The banks are trying to make their books look good by holding out selling these properties. This can’t go on forever. They have got to sell, and I’ll be there waiting. The house depreciation bubble is only half deflated. Good things come to those who wait.
8. Bill | 05.25.09
“The holders of these properties typically have the deep pockets that allow them to seek the best possible deal. They won’t be dumping these properties in an already sour market. They have the patience to wait for better times.”
Yeah, take a visit to Surprise and the other Phoenix exurbs. Deep pockets does not describe the holders of these underwater houses heading to foreclosure. Few rational people will continue paying on a $250K loan for a house worth $100K, especially in a non-recourse state like Arizona. There are years of bank owned inventory in the pipeline. Maybe there will be a “L” curve, but the horizontal line will not kick in until 2011 or later.
9. Bubble Deflater | 05.26.09
Sorry David S… Real Estate markets in California and Arizona are far from a bottom. But the people you claim are in a position to “hold out” on releasing properties to the market are fools. They’ll have to hold those properties for 10 years to break even. Have you heard about a thing called Alt-A and Option Arm mortgages set to expire later this year… and increasing in velocity thru the end of 2011? http://www.doctorhousingbubble.com
I recommend you check out the above site… It’s very informative and logical… Not “doom and gloom”. They predict a housing bottom in late 2011 at the earliest, because that’s when all the bad loans will be reset. Makes perfect sense… Sure the rest of the U.S. housing market will bottom sooner… But the most overpriced markets have yet to come back to reality…. aka… median income affordability levels.
10. Chris Hann | 05.26.09
The whole idea of a rebound is misplaced. Perhaps in the way that a parachutist, sans parachute, will bounce a couple of feet as they auger in from 15,000 feet. There aren’t the millions of well qualified buyers with great credit and fantastic jobs that that would take. Even if there were, the banks don’t have the money to lend. Meanwhile people are losing their jobs by the tens of thousands and there aren’t new jobs to go to. In CA I think prices may half from here, and some houses will sit empty and abandoned until they are demolished. Look at Russia after the cold war for an example of where we are headed. Perhaps even bankruptcy, crashing life expectancy and depopulation.
11. LA-renter | 05.26.09
“…fan the flames of doom and gloom.” What? David S, did you read the same article that I read? Quite the opposite, Mr. Jonsson quoted a slew of people who put lipstick on this pig.
Why would anybody think that prices would stabilize as long as more people are foreclosing than are buying? It’s illogical.
12. SouthFla | 05.26.09
There is obviously more than one and maybe many reasons why the banks are holding off. First, if the banks put all of the properties on the market, who would the buyers be? Without available credit, the private investors would be on them like coyotes on a three legged rabbit. This of course would take the properties back off the market again until prices rose. Still no homeowners next door to bbq with but, realtors would see a moderate increase rental management.
Second, the banks recently played the stress test game where they needed real, though devalued, assets on the books to qualify for more handouts. Once that is final, I would expect more inventory to hit the market as the banks risk is lowered.
Either way, no jobs-no homeowners or renters and no credit-no BBQ’s.
13. Thomas | 05.26.09
I agree with “Patience” - the banks are holding off selling repo homes because this would force the banks to recognize the loss on their books and income statements. Dragging their feet allows executives to receive outsized bonuses on past “profits” for as long as possible… not to mention that revealing the truth about their lending practices could cost some of them their jobs.
14. Joe | 05.26.09
We’ve only just begun with housing price declines. Realtors give it up - the party is over. Case Shiller has been correct with predictions. They are predicting a lot more depreciating home values in the coming two years. Don’t be a fool and throw your money away on a depreciating asset. The next wave of foreclosures has just begun - 1) Obama’s foreclosure moratorium has ended. 2) Unemployment is still rising. 3) Prime loans are just now beginning to reset and will cause a Tsunami of foreclosures as large as subprime. We are in the eye of the storm and the wind has just started to gust and soon it will turn to hurricane force winds (foreclosures).
15. martin | 05.26.09
It is easy to belive that Banks are holding onto inventory for the summer selling season.
Think about this little fact. Banks can borrow money from the Fed for ZERO, which means their cost of holding the house is limited to the Property Tax, more or less.
Since there is no rush to clear these from their books, why woouldn’t they wait for a better price?
16. Herb | 05.27.09
Perception is reality. When people percieve the market is rising, it doesn’t matter how high the prices are; greed drives the market higher. There are three factors controlling the market now; fear, hysteria and greed. Investors who have dollars are putting multiple offers on properties now, all competing with eachother in a mass hysteria of buying frenzy. If the banks can hold on to their properties and release them slowly, the greed of the investors will again drive up the prices. Real estate is consumed in huge binges, by hysterical buyers blinded by greed, and then purged out in one big dripping pile of foreclosure fear once those buyers over-indulge.
17. computer consultant | 05.27.09
Stats that came out today show that for sale inventory keeps growing despite a rise in sales.
18. Bert Kemp | 05.27.09
The idea that the “recovery” will return us to “normal’ is just fundamentally flawed. We are coming out of a bubble. It wasn’t normal for house prices to go up 10-30% every year. The only way we are getting back to that is if we repeat the same mistakes again and inflate another bubble.
There will be no V or U shaped “recovery”, because you cant recover to something that was a gross distortion of the market to begin with. Returning to normal will mean returning to prices that are in the 90’s levels and then slowly rising at a rate slightly above with inflation. That is the best case scenario, assuming that everything else in our economy stabilizes….
We went through the same thing with the Nasdaq bubble. Those holding on to their stock, hoping for a return to a Nasdaq of 5000 are still waiting. And they will be waiting for a long time to come. You cant go back there, at least not in the near future, because you never should have been there in the first place.
19. RE Investor | 05.27.09
Folks, as a real estate investor in the market, I can tell you that prices are not going much lower in Phoenix. This is a case of first in - first out. We went up the most, and now have fallen the most. Prices are at an affordability level (in good areas) maybe not Surprise, but Gilbert, Chandler, Tempe etc. that we have not seen in a long time. If you are a first time home buyer, with the $8000.00 tax credit, and a 4.75% (fixed) interest rate, you are getting the deal of a lifetime. Imagine, getting a house for LESS than rent, then getting your downpayment GIVEN BACK to YOU, by the feds. The average FHA down payment required is 3%, that is roughly $4100 dollars for a home priced about $136000.00. The payment is around $850.00 / month PI TI, AND considering the government is giving you back about $8000.00 as a direct credit, you are MAKING $3900.00 when you sign on the dotted line. That is a hell of a deal, and quite a persuasive argument to get off the fence. And as far as employment, Phoenix presently has an unemployment rate of 7.3%, below the national average currently, and also meaning that 92.7% of the population is still employed. I am betting that a number of that 92.7% could qualify for an FHA loan and would want to take advantage of this program. Martin is dead on, banks are paying NOTHING for the money that are borrowing currently. Not only that, they are borrowing more at NOTHING and loaning it to all the first timers at 4.75% plus closing costs and fees. That is a GREAT spread for a bank loaning out the Governments money long and borrowing short. They are making money hand over fist currently, and as long as short term rates remain low, they will earn their way out of the hole. It is insane for them to flood the market, and make their assets more toxic. They are much better served by just releasing small amounts of product, as prices rise, they release a little more. They have little competition anymore from homebuilders so they are now the OPEC of housing….think about it, and keep an open mind. Don’t be too much doom and gloom, or rosy, just think it all through from birth to death and you will clearly see what is happening.
20. Bert Kemp | 05.28.09
“Not only that, they are borrowing more at NOTHING and loaning it to all the first timers at 4.75% plus closing costs and fees. That is a GREAT spread for a bank loaning out the Governments money long and borrowing short. ”
If you have a steady job and income and good credit. Otherwise, the bank runs the risk of you not being able to pay back your loan. Right now any additional defaults is a catastrophe for any bank, given the huge amount of foreclosures they already have. How many buyers out there are in that situation right now: Steady job and good credit? How many of them are looking for a house?
“Folks, as a real estate investor in the market, I can tell you that prices are not going much lower in Phoenix.”
In the year 2000: “Folks, as a recent investor in the Nasdaq, I can tell you that there is still plenty of money to be made. So we’ve dropped a little from the highs of 5000, but if you don’t get in now you are missing the deal of the century!” As an RE investor, isn’t it your vested interest to keep prices from falling further?
It’s called a bubble for a reason. It has burst. Prices are not going up any time soon. And keeping foreclosed, empty houses off the market will only cause them rot to the point of a total loss. It’s short-sighted and it wont work.
22. Joe Donegivashidt | 06.03.09
Attention gloomers: MANY of the BS loans known as Option ARMs or Pick-a-freakin-payment loans have already long been adjusted upward to a principal and interest payment (verus MINIMUM payment) based on the decrease in the loan to value. Per the NOTE in these loans the lender must stop the negative equity from hitting a certain threshold, which in MANY of these loans was over a year ago.
What I’m getting at is that a substantial number of these “toxic” loans have already been foreclosed on or worked out. Many of the soon-to-be problem adjustments have already been problems and fixed.
It sucks but not as bad as many of you would like it to.
Booyah.
23. Joe Donegivashidt | 06.03.09
Bert Kemp:
So you’re saying that the fundamentals of a 1600 sq ft 3 bedroom home are that of a dot com stock trading at 250 P/E in 2000?
Sorry, but the real estate has much more intrinsic value than a nothing stock full of hot air and no revenue. There is an income stream from real estate, at the right price of course, that can’t be compared.
Bad analogy my friend, apples to pineapples.
Forward note: The inflation that we will see once there is a HINT of recovery, will make you wish you had bought 10 of those houses.
Adios amigos.
24. Commercial Real Estate | 06.09.09
Very interesting. I didn’t realize only 30% of foreclosed homes are on the market.
25. Brett Barry | 06.15.09
AS a Realtor I was quoted in the above article, and the thing many of the comments are misisng is this fact: The longer banks hold these so called shadow assets, the more their values are declining. That is the biggest holding cost, not the taxes & insurance.
Case in point is I was assigned a Fannie Mae asset Saturday here in NE Phoenix that Fannie has apparently been holding for nearly two years. The value of that home has dropped over $130,000 over those two years. Was that smart on the part of Fannie? No way, and taxpayers are the ones getting hosed. These banks need more sticks and less carrots from the Treasury department. Without a tougher line on the banks, they will never be motivated to do the right thing.
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2. Christian Science Monitor Article Discusses Shadow Inventory and Mentions Surprise, AZ - Phoenix area - Arizona - City-Data Forum | 05.25.09
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1. David S | 05.22.09
I respectfully disagree with the author’s premise. There has always been a so called “shadow market” of items held from the market to optimize value. The holders of these properties typically have the deep pockets that allow them to seek the best possible deal. They won’t be dumping these properties in an already sour market. They have the patience to wait for better times.
I don’t know about you, but I’m growing tired of media people grasping at straws to fan the flames of doom and gloom.