While the lower end of the market in Pleasanton, Dublin, San Ramon, and the Tri-Valley shows strong improvement, there is a condition lurking in the background which could prolong the local real estate market slump. The so-called “shadow inventory” consists of homes owned by banks that are not yet on the market. According to sfgate.com there are probably 80,000 homes in California alone that are owned by banks, but not currently on the market. And thanks to a moratorium on foreclosures nationwide, there are many more homes in various stages of default, and thousands more which the banks are reluctant to begin foreclosure proceedings on.
To be sure, banks have been very slow in starting the foreclosure process on homes in general. Loans can often be 3 to 9 months in arrears before a bank will file a Notice of Default, which is the first step in the foreclosure process. And even when a bank files a NOD, it is up to their discretion as to when they actually file the Notice of Trustee’s Sale, the final step in the foreclosure process that sets the date for the foreclosure sale. And banks can and often do postpone the sale depending on many factors, including efforts by the owner of the property to do a short sale to avoid foreclosure. In general, banks have just not been in a hurry to take back properties, and according to many industry insiders, once they take back a home they have not been in a hurry to put them on the market. According to this article in the Chronicle, there are several reasons for this condition:
– The “pig in the python”: Digesting all those foreclosures takes awhile. It’s time-consuming to get a home vacant, clean and ready for sale. “The system is overwhelmed by the volume,” Sharga said. “In a normal market, there are 160,000 (foreclosures for sale nationwide) over the course of a year. Right now, there are about 80,000 every month.”
– Accounting sleight-of-hand: Lenders could be deferring sales to put off having to acknowledge the actual extent of their loss. “With banks in the stress they’re in, I don’t think they’re anxious to show losses in assets on their balance sheets,” O’Toole said.
– Slowing the free-fall: Banks might be strategically holding back some foreclosures so prices don’t fall as fast. “They want to be careful about not releasing them too quickly so they don’t drive prices down and hurt the values,” O’Toole said.
And foreclosures are still occurring in large numbers. In fact, we are starting to see foreclosure activity in Alt-A and adjustable rate loans made to prime credit worthy borrowers that are seeing an erosion in their property values and huge increases in their payments as their low interest-only payments reset to fully amortized payments, with sometimes devastating results. Many in the industry are concerned that the upper end of the market is going to see continued downward pressure as more distressed properties hit the market.
This leads to the real question… Is any uptick in demand for homes going to be met by more inventory of distressed properties, thereby keeping prices down for a few years until we burn through the inventory of unsold bank owned homes? Only the shadow knows…