A “shadow inventory” of foreclosures–fact or urban legend?
Photo by g-hat
For those who have been active in the buying market, you may have heard of the concept of today’s “shadow inventory”. According to the theory, banks have foreclosed homes that they are holding on to and not releasing to the marketplace, because they don’t want to flood the market with homes and drive prices down. So, the theory goes, even though inventory levels are low today, there is a “shadow inventory” of homes that just aren’t on the market yet, but will be coming.
Those who hold this theory are divided on what this means for the marketplace. Some think that banks will continue to foreclose on homes and slowly put them on the market until the market turns around. Under this version of the theory, prices will continue to stabilize and/or increase, in part because of bank manipulation. Some think that at some point, banks will be forced to sell their shadow inventory whether because of profit concerns or because government regulations will require them to. Under this version of the theory, banks being forced to “dump” inventory will hurt prices.
The “shadow inventory” theories generally started at the end of last year when defaults were on the rise, but foreclosures had not caught up. By early this year, the theory was more developed and seemed like a “given.” Those who believed that the banks were going to be forced to dump properties were told to expect summer to bring a flood.
When the flood didn’t come this summer, many believed that it was because of California laws and the Obama stimulus plan, which were hampering foreclosures. Mid-summer, commenters who held the “flood” theory were sure that the flood would start in the fall. Many said, “wait for September.”
Since we are in September, we thought we would run the numbers to date in the month to see how the flood is coming along. In Orange County, according to the MLS, the number of bank owned homes listed in the last few months were 536 (June), 454 (July), 436 (August) and to date 345 (September). September is on pace to have 450 this month. By the way, almost all of those properties have sold. 47% have closed escrow already. Another 34% are in escrow.
The flat REO listing numbers suggest that if there is a flood of REO properties coming, it hasn’t started. The high REO sales numbers suggest that if there were a flood, for some buyers, it would be welcome.
Our suggestion to our buyers is to look at what you know. If you happen to know the CEO of Bank of America and know their REO strategy, operate accordingly (by the way, we’d like to talk with you!). Otherwise, in a market with low prices, low interest rates, and motivated sellers, if you find a home you like, grab it. Don’t hesitate because you are guessing at what the banks may or may not do over the next year. You may not find another home like it.