Tag Archives: Distressed Property Index

Shadow inventory Armageddon

Shadow inventory Armageddon – Foreclosure timeline up to an average of 599 days with 798,000 mortgages having no payment made in over 1 year and no foreclosure process initiated. Shadow inventory grows to over 6,540,000 properties.


The biggest problem facing the housing market is still the large amount of stubborn shadow inventory.  The fact that this figure remains elevated is a sign that the banking system after all these years and trillions of dollars in bailouts has yet to figure out a streamlined way to unload properties. The Federal Reserve is trying to grease the wheels with historically low mortgage rates but that has done very little since this does not address the weak economy.  At the latest count there are 6.54 million loans that are either delinquent or in the foreclosure process.  This figure hasn’t really moved much for the entire year.  Properties have been sold from the REO (bank owned) pile but this is the tiny chunk of properties that is covered by the mainstream news and also that appear in public listing services.  As we will show in charts later in this article, only examining this piece of the real estate pool is like seeing the tip of an iceberg and thinking there is nothing underneath it submerged in the water.

The stagnant shadow inventory

The latest data shows that the shadow inventory has increased a bit in the last few months:

total shadow inventory loans distressed aug 2011

To break down the figures even further you have 2.48 million loans that are less than 90 days delinquent (3 missed payments), 1.9 million loans that are 90+ days delinquent (more than 3 missed payments), and 2.16 million loans already in the foreclosure process.  In total, this adds up to over 6.54 million loans in the distressed pipeline and this is what I would categorize as the shadow inventory.  As the chart above highlights, only about 500,000 properties are actually real estate owned and show up for sale in local MLS data (and not all REO show up but a lot do).  The cure rates are abysmal on many of the loans and many are underwater to levels that will never cure on these properties.  In fact, the latest data shows that the typical foreclosure process timeline is now up to a stunning 599 days!

“(LPS) The July Mortgage Monitor report released by Lender Processing Services, Inc. shows that foreclosure timelines continue their steady upward trend, as a payment has not been made on the average loan in foreclosure in a record 599 days. Of the nearly 1.9 million loans that are 90 or more days delinquent but not yet in foreclosure, 42 percent have not made a payment in more than a year with an average delinquency of 397 days, also a new record. At the same time, first-time foreclosure starts in June were near three-year lows, and first-time delinquencies accounted for only 25 percent of new delinquent inventory.”

Even more disturbing you have 42 percent of the 1.9 million loans that are 90 or more days delinquent not making a payment in more than a year (approximately 798,000 mortgages are going with no mortgage payment for more than a year yet no foreclosure process has been initiated).  The data doesn’t break this down further but how many of these non-payment properties are here in overpriced markets in California like Beverly HillsBel-AirManhattan BeachCulver City, or Pasadena?  The numbers are stunning from the pieces we have gathered.

Part of the interesting market dynamics is that you see areas like Florida, Nevada, Arizona, and even theInland Empire here in California selling well given to the crash in home prices.  In other words, the market will clear properties out nicely if the price is right.  Of course banks are pretending the most expensive areas are the healthiest when that is not necessarily true.  Take for example the overpriced Orange County:

MLS non-distressed listings:                      16,307

Notice of default filed:                                 4,721

Auction scheduled:                                        6,951

REO:                                                                      1,798

Even in a county where prices are still inflated you have nearly as many homes in the distressed shadow inventory pipeline as you do on the MLS.  And keep in mind, 4.38 million properties have missed at least 3 mortgage payments and no foreclosure process has been initiated.  The NOD is the first step in the foreclosure process.  Also, you have 798,000 people living in homes that have not made a payment for at least one full year.  How many folks in Orange County fall in these categories and are part of the shadow data?

Now the issue about the shadow inventory is the pipeline shows no signs of sizeable clearing.  Why?  Even though properties are being cleared out via REO sales, this is a small fraction of the pool and it also doesn’t include the fact that tens of thousands of people each month are thrown into the distressed pool because of the economy.  This is why you have a tough battle ahead.  What is a more “normal figure?” for shadow inventory?  Hard to have an exact figure but a healthy range is within the 1 to 2 million range.  6.54 million is very far from that baseline figure.

The hidden cost of living

There is a good measurement tool over at MIT that is called the Billion Prices Project (BPP).  This measure seeks to get a better idea of the real nature of inflation in the economy:

annual inflation

Source:   MIT

Contrary to what we are being told the cost of living is going up.  You have a variety of things happening from producers chopping down ounces or repacking goods giving you less for the same price to energy costs still being high (a gallon of gas here in L.A. County is stilling running over $3.8).  You also have health premiums going up all the while people have no growth in household incomes.  Yet the MIT data shows year-over-year inflation is now up over 4 percent.  This figure is incredibly high when there is no added wage growth (even a 1 percent spike with no wage growth is crushing).  You don’t need to be an expert here but just look at your monthly purchases to see this revealed.

The big ticket items like housing have been falling but for most other daily goods the cost has gone up.  This is why the bigger issues that will push housing lower are outside of the housing arena (i.e., jobs, healthcare, education, food etc).

REO not reflective of overall market

As we have mentioned, the coverage in any mainstream press is heavily focused on REO inventory:

REOInventoryQ22011

Source:  Calculated Risk

The above snapshot is incredibly limited since it covers about 500,000 properties whereas the trueshadow inventory figure is up to 6.54 million.  Of course the banks are happy pretending the housing issue is only 500,000 homes but the reality is much more disastrous and given the immobility of the figure, we realize banks still have no handle on how to move the properties.  Why?  Because they are only focused on keeping their personal interests going at the expense of taxpayers.  Most of the loans are government backed (aka taxpayers) so it is ironic that we give the same banks that caused this financial mess the obligation and power to clear out the inventory.  Is it any wonder it has been a boondoggle?  How many million dollar bonuses have been paid to banking executives all the while the housing market has continued to implode?  It would have been better to create a RTC like entity, let too big to fail actually fail, and simply clear out the market.  As we have seen, price will get sales going and also free up disposable income instead of paying the bank to live in a stucco home.  Four years into the crisis and we are still at worse than square one.  What do you expect when people trust the same financial and banking sectorthat led us into this mess to solve it with no actual change?

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Existing Home Sales: Investors, Distressed Sales and First Time Buyers

Existing Home Sales: Investors, Distressed Sales and First Time Buyers.

by CalculatedRisk on 5/19/2011 03:48:00 PM

The following graph shows existing home sales Not Seasonally Adjusted (NSA).

Existing Home Sales NSAClick on graph for larger image in graph gallery.

The red columns are for 2011.

Sales NSA are below the tax credit boosted level of sales in April 2010, but slightly above the level of March sales in 2008 and 2009.

The level of sales is elevated due to all the investor buying. The NAR noted:

All-cash transactions stood at 31 percent in April, down from a record level of 35 percent in March; they were 26 percent in March 2010; investorsaccount for the bulk of cash purchases.

First-time buyers purchased 36 percent of homes in April, up from 33 percent in March; they were 49 percent in April 2010 when the tax credit was in place. Investors slipped to 20 percent in April from 22 percent of purchase activity in March; they were 15 percent in April 2010. The balance of sales was to repeat buyers, which were 44 percent in April.

Another survey, the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey “showed the proportion of first-time homebuyers in the housing market fell to 35.7% in April compared to 43.4% a year earlier.

[The] Distressed Property Index, a key measure of the health of the U.S. housing market, fell slightly to 47.7% in April, although sales of distressed properties continued to account for nearly half of the market.”

Distressed Home Sales and First Time buyersThis graph shows from Campbell/Inside Mortgage Finance HousingPulse Tracking Survey shows both distressed sales and first time buyers. From the survey:

First-time homebuyers absorb housing supply, while move-up and move-down buyers produce no net take-up in inventory. When the supply of distressed properties exceeds the demand from first-time homebuyers, investors must step into the market to buy these properties, often at bargain-basement prices.

Investors accounted for 23.0% of the housing market in the month of April, up from 18.0% a year earlier, according to the HousingPulse Survey. A common business model for investors has been to buy damaged properties, renovate, and sell the properties to first-time homebuyers. But increasingly, investors are being forced to put renovated properties out as rental units as demand from first-time buyers drops.

Clearly investors are picking up the slack, and this has kept overall existing home sales elevated.

Update for clarity: The Campbell press release suggets some investors are being “forced” to rent because they can’t flip. I’ve spoken with several cash buyer investors who have told me they are buying for cash flow (to rent, not flip), so the word “forced” is probably inaccurate in many cases (not that it makes any difference). These buyers are helping clear out the excess inventory – although many of these properties are probably future supply.

Earlier:
• April Existing Home Sales: 5.05 million SAAR, 9.2 months of supply
• MBA: Total Delinquencies essentially unchanged in Q1 Seasonally Adjusted
• Philly Fed Survey shows “regional manufacturing activity grew slightly in May”
• Weekly Initial Unemployment Claims declines to 409,000, 4-Week average highest since November
• Existing Home Sales graphs

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