Overall California REO inventories show a 21% increase compared to last year’s numbers, but despite this spike, the latest numbers are still well below record levels. In July 2008, the banks repossessed 42% more homes in California. So, July of last year still holds the record for the largest increase in foreclosed homes.

So What Does that Mean for the California Housing Market?

As banks took back nearly a 25% more homes in the October period, REO resales declined, leading to a slight jump in overall REO inventory of almost 6%. But all of this was expected as market demand continues to increase at a rapid rate. The majority of these foreclosed loans in October 2009 originated between January 2005 and December 2007. So it may seem as though we’ve only seen the beginning of the new wave of foreclosures.

Based on ForeclosureRadar’s latest California Foreclosure Report, the number of foreclosures sold at auction to investors continues to grow significantly. Third-party sales jumped 16% from September to October, and compared to October 2008, they are up 381% overall.

Why? Investors are becoming more confident in their ability to resell the properties they purchase at foreclosure auctions. Even though their courthouse discounts decreased from 20% to 17% as well.

Does that Mean More Shadow Inventory?

Even though there is an estimated that there is a still an unreleased inventory of almost 7 million loans, most of these loans have already started to liquidate and contribute to the growing shadow inventory in the real estate market in California. Shadow Inventory numbers increased only due to the slight decline in REO resales.  As things begin to stabilize, more banks will release these shadow foreclosures into the market.

Overall, the number of California’s foreclosure filings have remain relatively steady month-over-month. With renewed investor confidence and increased demand for foreclosed homes, all of the pieces are starting to come together.

And this can only mean that we’re starting to recover.

Sincerely,

Mark Shandrow
Real Estate Broker
Shandrow Group
shandrowgroup.com

Though prices have fallen significantly and housing is more affordable than at any point over the last 20 years, I don’t think that the housing market is even close to a recovery.

Why? Because of Shadow Inventory.

What is Shadow Inventory?

Shadow Inventory is the number of foreclosed homes repossessed and processed by the banks that have yet to be put back on the market. It’s the difference between actual distressed home inventory and the number of homes fully processed and listed on the market for sale.

The gap is created by the actual number of loans in delinquent status or in foreclosure that are being held or longer periods of time by the banks. It is estimated that there is an overhang of 7 million loans – these loans are going to liquidate soon and will contribute to the growing shadow inventory in the real estate market in California.

When Will We Start to See the Effects of Shadow Inventory?

Given these changes, it’s likely that delinquent loans could stay in process for up to 12 months.  That’s 6 months longer than they are usually held in process in California. But this isn’t just happening in California. It’s a nationwide phenomenon. In cities such as Las Vegas, Phoenix, Denver, Detroit and Tampa, the percent of homes on the market compared to those being held is between 40 – 70%. The impact of this increase in lag, is that there are fewer loan liquidations and a much larger shadow inventory. As a result, we see that only a few homes are trickling through the foreclosure process to make their way back onto the housing market.

Though Shadow Inventory seems like the biggest problem the housing market is facing at the moment, the much larger issue is what will happen to the market once all the loan are liquidated and these home enter the market once more. If only 30% of the homes in processed by the bank are available, it’s hard to tell what is truly happening to the housing market at the moment.

So, Why Not Release Shadow Inventory to the Housing Market?

While it appears that the quicker homes are put back on the market, the quicker banks will get their money back, when it comes to recently foreclosed homes the opposite seems to be true for two main reasons.

Reason # 1 – If the banks put all the distressed homes onto the market right away, it would devastate an already devastated real estate market.  Reducing the inventory of distressed properties will slow the downfall and stabilize the market.  A slow controlled release of foreclosed homes will make the properties more valuable.

And Reason # 2 - When a bank forecloses a home and returns it to their inventory,  they record the property value as the price of the delinquent loan.  When the homes are finally listed and sold, the bank must then alter the records to reflect the accurate value of the property.  If big banks were to disclose the homes true value, their equities and stocks would hit rock bottom pretty quickly.

On the surface it might seem as though we’re on our way to recovery, and it would be a good time for banks to reduce Shadow Inventory and sell homes while investors are looking to buy, but we’ve really just begun the long process of recovery. It’s going to take a long time to release Shadow Inventory to the market in a way that doesn’t jeopardize the progress we’ve made so far.

Sincerely,

Mark Shandrow
REO Broker-Associate
Shandrow Group
shandrowgroup.com