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‘Shadow inventory’ of bank-owned properties may affect housing market

By Staff | Jan 7, 2011

Real estate prognosticators are envisioning another wave of foreclosures so ominous they require their own category. The effect of this looming threat will not be realized for several years, they say, and the bottom cannot be reached, let alone envisioned, until this inventory makes it way through foreclosure dockets nationwide.
Dubbed the “shadow inventory,” hundreds of thousands, if not millions, of properties are somewhere in the foreclosure queue, though it’s difficult to fully determine the exact number.
In fact, the exact parameters of the so-called shadow inventory remain fuzzy at best, though Realtytrac’s Senior Vice President Rick Sharga said it’s a very real thing.
Realtytrac is an online foreclosure tracking service.
“There is a definite and real inventory of distressed properties that have yet to come to market,” Sharga said. “At this point, there are so many we don’t even want them to come to the market.”
Sharga said there’s at least three tiers of shadow inventory on the horizon.
Roughly 1 million repossessed properties exist in their database, Sharga said, but only 30 percent are listed for sale, leaving 700,000 or so properties lingering in bank-owned limbo.
Right behind those properties, Sharga added, are another 1.2 million properties in “some stage of foreclosure.” Add to that, are another 5 million properties where homeowners are “seriously delinquent,” he said.
While Sharga doesn’t think 7.2 million shadow inventory properties is a “realistic” number, he said there’s not enough information to make a realistic prediction, especially where homes that are delinquent but not in foreclosure are concerned.
“While half of those properties will not make it to the market place any time soon, the most logical scenario is that somewhere in the neighborhood of 4 million will be hitting the market place as distressed,” Sharga added.
The fear of the “shadow inventory” is the concern that the bottom has not yet been reached, that the worst is still to come for the housing market, nationally and locally.
Lee County Clerk of Courts Charlie Green said the bottom has been reached, and the shadow inventory, if it exists, will be a minimal blip on the road to recovery that Lee County has now been on for some time.
Green said 12,000 foreclosed properties have been cleared year over year, and that he’d rather feel that properties will continue to move rather than believe Lee County is again “going to hell in a hand basket.”
While the shadow inventory could have some affect, Green said, he thinks filings will continue to decline and property values will stabilize.
“We’re on the downside of foreclosures, thank God,” Green said.
Rick Sharga agrees that 2011 will see the mythic and absolute bottom for the housing industry, probably in the fourth quarter.
He called Lee County a “microcosm” of things that went wrong during the housing boom and bust, and while 2013 could bring some hikes in valuations, he’s not ready to entirely commit to that ideology.
“In 2013 we should start to see some appreciation, but how rapidly that will happen, and how dramatic it will be, it’s too early to tell,” Sharga said.
Long-time Cape Realtor Gloria Tate from Raso Realty said she doesn’t see banks holding back properties for “rental purposes”, and that the shadow inventory will likely boil down to title issues.
Tate thinks Cape Coral has likely weathered the storm, and will start to pick up speed in 2011, with values rising and foreclosures falling.
She added that an influx of Canadian and European money, combined with a plethora of affordable homes, will aid the recovery, which has already begun.
“I think in Cape Coral we’re at the bottom,” Tate said. “We do see every now and then you get properties so low it defies the odds, but people are recognizing the value of that property and picking it up right away.”
Real estate database Zillow.com spokeswoman Katie Curnutte said a recent survey they conducted found that 5 percent of all homeowners nationwide would likely sell their homes if the market were healthy enough to allow it.
That would equate to an additional 3.8 million homes on the market, she said, another facet of the so-called shadow inventory.
While there is no recovery on the horizon, Curnutte said, by springtime there will be a better understanding of when, and if, the bottom can be reached in 2011.
“We don’t think we’ll be at the bottom nationally but if we do it will be much later this year,” she said. “There won’t be a recovery, per se, but once the bottom is reached, prices will likely remain static for three to five years.”