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A shadow lurks in the housing market
This is scary. The San Francisco Chronicle reports that lenders are sitting on hundreds of thousands of foreclosed homes that haven't even been listed yet. If this "shadow inventory" hits the market, we'll have a new definition of bottomless pit.
From the article:
"We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You'd have further depreciation and carnage."
The Chronicle suggests several reasons why banks might not be selling off their foreclosures:
-- 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 then, there are people scamming the system. Two dozen people have been indicted for "allegedly conducting a wide-ranging mortgage fraud based in San Diego and led by a street gang member." From Reuters:
The defendants allegedly used straw buyers and inflated appraisals to purchase homes that had sat on the market for extended periods and had been reduced in price.
They submitted offers that exceeded the homes' asking prices, and had the overage paid to a shell construction company that they claimed would make upgrades or handicap modifications to the properties, prosecutors said.
The defendants instead disbursed the "kickback amount" to members and associates of the enterprise as payments for their participation, the indictment said.
Lenders later foreclosed on the properties, taking "severe financial losses," after the straw buyers failed to make payments, the indictment said.
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I think we are loosing sight of the fact that if the price is right some of these builders will buy up these distressed properties and either make repairs, remodel them, or tare
them down and rebuild either homes, condos, or turn them into commercial properties.
By giving the banks money, we are in fact giving them bridge loads. Instead of asking them to sell of nonperforming assets. The same is true of repossessed cars, boats, even factory machinery, when the price is right someone will jump in and try to earn money on the deal. Not everybody was mortgaged up to the hilt, there are plenty of people in this country siting on cash looking for an opportunity.
What's funny about this story is that Marketplace had a radio story on today about mergers in the homebuilding industry and how it must be a sign that the housing economy is coming back. Oops. BTW, John H., the construction industry is never going to get back to pre-recession employment levels. If you're waiting for that to happen, you've got a long, long wait. Time to find a new career, IMHO. Unfortunately, it's probably going to involve a pay cut.
How is this scary or bad. Why does the media always play the fear card?
As a single guy in his 20s who rents and has a stable job in Southern California, I wouldn't mind if the market got flooded with foreclosures and makes housing cheaper. How in the heck would that hurt me? And please spare me the "it will trickle to me" BS. No it won't.
The only people who get hurt are the irresponsible to over-leveraged themselves.
I believe this is "bad" because a large number of individuals rely on home construction to make a living.
Applications for new housing starts have been rising (slightly) the past month or two, and many view this as a leading indicator for construction (and the employment associated with it). If however these applications are filed under the assumption there's a certain amount of foreclosed homes on the market. If their assumption is incorrect and there's actually far more foreclosed homes in this "shadow market" (i.e. not counted in the current audits and potentially going to enter the market in the near term). Then that means we're looking at an even longer wait before new construction starts & the spending / jobs associated with it enter the economy.
Of course, if there are legitimately more houses out there just waiting to enter the market... then the right course of action is for new construction to slow down / continue at low levels until that glut is absorbed. But it will make life even more painful for the many Americans who make their living in that field.
I was under the impression that most of the new housing starts were for multi-family units (i.e. rental units / apartments / flats,..)
Which means builders are choosing to build rental property rather than smaller homes that people can afford.
I think what the single-family housing market needs is a return to the 1200 sq. foot first-ring suburb homes on 1/6 acre lots that they built in the 1950s. That's the kind of starter home most young families can afford nowadays.
I bought my house in 2005. I'm over 200K underwater, owing double what my house is now worth. I'd pay less via hit to my credit rating if I walked that pay down debt on home value that doesn't exist. I could easily live here for 10 years and not recoup.
Like you, I'm in my 20's. We saved 60% of our income for a year for a down payment, and lost it all and then some.
People are hurt by this, even if they did things responsibly. Funny how people don't blame the "irresponsible" individuals who bought stock at the peak. Buying a house you could afford that's now worth half that value is harmful any way you cut it, particularly because (unlike stock) you've got to keep paying on that wothless value. Advocating forcing prices down further so you can afford them is cruel.
John is absolutely right. Most everyone agrees that housing prices got out of control and builders built larger and larger homes with ridiculous finishing (slate shower stalls, granite counters, rainforest wood floors...)
Most single people like John (and myself) with middle-incomes can not afford what they're building.
And ah, yes, the good old "Trickle down" phrase - one of the most poorly thought out Presidential sound bites in history. "Let all the rich people get even richer and some of that will 'trickle' down to you"
Only problem is, telling people they're only going to get a 'trickle' is like telling them to sit under the table of rich folks and wait for the crumbs to drop. Brilliant!
After 25 years people are still saying it, it will be a long time before they can escape that one. ;-)
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