South Orange County Blog from Bob Phillips

The shadow inventory equals shadow gibberish?

Posted in Foreclosures, Real estate, short sales by southorangecounty on May 8, 2010

Here’s an article I just read which talks about the “alleged” Shadow Inventory of foreclosures that we’ve been being warned about for the past year or two:

The shadow inventory equals shadow gibberish?

By Russell Shaw on May 8, 2010 

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One of the more remarkable methods used (even by “Intelligence Agencies”) to establish if something is true or not is to is to label it true if it came from a “reliable source”.  Who said it?  If he or she is considered reliable or an authority the data is considered true or factual.  The other – perhaps even more silly – system in use is multiple report.  If a report is is heard from several areas or people it is “true”.   Five or ten people hear the same thing and pass it along, it becomes a “fact”.

I have been hearing about the Shadow Inventory for well over a year now.  It is HUGE.  It is sensational.  A Big Giant Tsunami (BGT) of inventory is going to be unleashed by the lenders.  Get ready.  Like nothing you have ever seen.  The housing market will be flooded with inventory like never before.  No doubt it will change life as we now know it.

Only it is complete crap.  Nothing but invented data dreamed up and endlessly passed along by organizations and individuals who heard it from someone else (I have not yet tracked the original source for this shadow inventory nonsense as it seems to emanate from “everywhere”).  What is really interesting are all the “new facts” dreamed up by “industry observers” to make the Big Giant Tsunami theory still possible – in spite of the overwhelming abundance of easily observable data that would directly contradict the idea of the banks having this huge inventory that they are holding back to be released later.

I bet I have your attention now.  Some of you may even be angry – you damn well KNOW there is a shadow inventory!!!  So lets look over why I am publicly saying it isn’t true and what the thought process was for the people and organizations who have been saying (and continue to assert) it is true.  These people would have no reason to intentionally forward false data. 

So what system is being used by economists and others to calculate this shadow inventory?  Simple, take the cumulative total foreclosures recorded (the big number) and subtract the current active and pending inventory in the MLS, plus the sold MLS properties (the little number) and the remaining number is “the shadow inventory”.  Simple, quick and it requires NO LOOKING at anything – just grade school level math.

To be clear, I am NOT referring at all to any foreclosures yet to come.  Inventory the banks may wind up getting in the future.  I am only talking about NOW.  It is no secret that REO agents are losing market share as they, as a group, have less and less inventory being given to them by their asset managers.  These same asset mangers who – last year – kept telling them that they had a lot more coming in to give them.  It just never arrived for them to give.  The only REO agents I know who are doing better these days are those REO agents who deal in higher end homes.  Those high end agents are getting inventory, lots of it.  This is not to say that all across the country there is no REO inventory, there is – just less and less of it.  The BGT crowd has invented the idea that the banks have the inventory but are keeping it until the prices go up!

How about a few facts that I know are true here in the Phoenix area – and I have every reason to believe are true right across the country (as I can think of NO reason for these facts to only be true here).

Fact: In my local MLS, there are about THREE TIMES as many bank owned homes listed in the MLS as the MLS actually shows.  I know this because two guys who actually look counted them all.  One by one.(Mike Orr of The Cromford Report and Tom Ruff of The Information Market)  They counted them and compared the addresses shown in the MLS, one by one, with the County Assessor records.  These are homes listed by banks who instructed the listing agent to NOT use the term “bank owned” in the listing.

Tom Ruff and Mike Orr spent months going over every deed transfer in Maricopa County (Looking at each foreclosure going to the bank and tracking that house for its current ownership and they could directly account for all but about 5,000 houses) and established that for the Greater Phoenix Area THERE IS NO SHADOW INVENTORY. 

Fact: Major banks often off load huge portfolios of inventory to hedge funds.  Huge portfolios.  Anyone or any organization who is claiming that they are “tracking” what the banks are doing who does not have sufficient access to track those portfolio sales is simply engaging in the simple grade school math referenced five paragraphs above.

No doubt there will be some readers who remain convinced that what they have read about and then co-created must be true.  That’s okay.  If you are happy believing that a Big Giant Tsunami is coming – enjoy the wait.  However, I’m betting you remain completely dry. 

Russell Shaw

Russell has been an Associate Broker with John Hall & Associates since 1978 and ranks in the top 1% of all agents in the U.S. Most recently The Wall Street Journal recognized the Top 200 Agents in America, awarding Russell # 25 for number of units sold. Russell has been featured in many books such as, “The Billion Dollar Agent” by Steve Kantor and “The Millionaire Real Estate Agent” by Gary Keller and has often been a featured speaker for national conventions and routinely speaks at various state and local association conventions. Visit him also and

Note from Bob Phillips:  I think Punxsutawney Phil will be looking for THIS shadow for a long time to come.

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The fallacy of the “shadow inventory” rumors.

Posted in Foreclosures, Loan modifications, Real estate, short sales by southorangecounty on February 13, 2010

How Many “Toxic” Loans are Really Coming to Market?

Here’s a current article written by a friend of mine, dispelling much of the myth of the alleged “shadow inventory”

Written by: Blanche Evans – Feb 12, 2010 4:30:00 AM

The housing crash will resume early this year, according to a story published recently.

Quoting analysts at Amherst Securities, the reporter wrote that 7 million properties “likely to be seized by lenders have yet to hit the market” creating a “huge shadow inventory” of homes. That could have a disastrous effect on inventories, 1.35 years worth, if not another home was added to the market. High inventories would collapse prices, knocking another 8% off homeowner equity, with a domino effect on the struggling economy.

The analysts told Bloomberg that the shadow inventory is likely to only be reduced by about 1 million homes through “cures” such as homeowners getting their loans refinanced, finding jobs, selling their homes before seizure, etc.

But the foreclosure threat, while very real, could be way overblown.

Foreclosures could have a much higher cure rate, due to increased government homebuyer incentives. The first-time homebuyer tax credit, which has now been extended to April 2010 and also includes a new program for qualified move-up buyers.

Add to that, inventories are diminishing. Existing home inventories have been reduced from a glut of over 11 months on hand, to about 7.8-month supply in September, down from 9.3-months on hand in August. Six months on hand is widely considered to be a balanced market.

Lawrence Yun, chief economist for the National Association of REALTORS® predicts that the tax incentives will invite as many as 2.3 to 2.4 million first-time homebuyers to the market this year, which should help to stabilize prices.

First-time homebuyers were 47% of the market in 2009, according to the National Association of REALTORS® 2009 Profile of Home Buyers and Sellers, up sharply from 41% in 2008’s survey

Next, foreclosures aren’t pandemic. Four states accounted for 52% of foreclosure activity in October – California, Florida, Illinois and Michigan, according to RealtyTrac. Some of the hardest hit states are showing significant reductions in foreclosure filings. Nevada is down 26% from the previous month, California down 1%, and Florida down 6%.

Last, foreclosures appear to be declining as job losses bottom.

According to RealtyTrac® chief executive James J. Saccacio, the number of foreclosures declined for three months in a row through October 2009, but filings are up nearly 19% from October 2008.

“However, the fundamental forces driving foreclosure activity in this housing downturn — high-risk mortgages, negative equity, and unemployment — continue to loom over any nascent recovery,” said Saccacio in a statement. “And despite all the efforts and resources directed at helping homeowners avoid foreclosure, we continue to see foreclosure activity levels that are substantially higher than a year ago.”

And that’s why shadow inventory remains worrisome. Explains Rick Sharga, senior vice president of RealtyTrac Inc., “Essentially, the 7 million ‘shadow inventory’ number consists of all the properties currently in foreclosure (about 1.2 million), all the loans that are delinquent (about 5.5 million), and some of the REOs (about 900,000 in our database).” However, he says, “it appears that the analyst is working on the assumption that 100% of everything that’s delinquent or in default will ultimately go back to the banks as REOs. That’s never happened, and is unlikely to happen this time.”

A more likely scenario, says Sharga, is that many of the loans that are only modestly delinquent will be cured or re-financed. “Of the loans that go into foreclosure, probably 50-60% will either be sold at foreclosure sale or taken back by the banks,” forecasts Sharga.

In addition, Sharga says that 20% of that number is already on the market, and are therefore not “shadow” inventory.

So what’s the real number of shadow inventories? “The only shadow inventory we can really be certain of is that which has already been repossessed by the banks, and isn’t yet listed for sale,” explains Sharga. “We estimate between 400,000 and 500,000 such properties. Everything else is pure speculation.”

The worst case? “If you were to assume that 50% of loans in all stages of delinquency would enter foreclosure and that 50% of those (as well as 50% of the homes currently in foreclosure) would ultimately wind up as REOs, and add these to the current off-market REOs, that would give you potentially 3.7 million homes in the pipeline.

“If 20% of those are currently listed, you come down to 2.96 million properties. Given processing timelines, which range from 3 weeks to 600+ days, and other delays in the system, predicting when these homes become REOs and hit the market is virtually impossible right now.

“And it doesn’t factor in two other important variables: how many loans are yet likely to go into default during this cycle, and how rapidly will buying activity increase? At the end of the day, we’re not looking at 7 million properties that are likely to flood the market all at once; but we will have several million properties go through foreclosure over the next 3 years and ultimately keep market prices from recovering as quickly as everyone would like.”

That could mean a long, slow recovery through 2013, predicts Sharga, rather than another precipitous drop in home prices. The foreclosure pipeline will continue to be slow, but what will hold the finger in the dyke is sheer volume, accounting and strategy.

“Even with the current slowdown, foreclosure activity is running at 6 times what it was four years ago, and REO activity at 10 times,” says Sharga. “Secondly, there are financial reasons to slow down foreclosures and subsequent resales.

“When the “mark to market” accounting rules were relaxed last year, it meant that lenders didn’t need to write down the value of their real estate assets until the assets were re-sold. This allows lenders to repossess properties at full loan value (on their books) and defer the losses for months or even quarters. Finally, now that we’ve reached “critical mass” – a point where releasing all of the REOs onto the market would probably drive prices down – lenders realize that it’s a better strategy to gradually release the properties back onto the market, and may even benefit from a small bounce in prices which will minimize some of their losses.”

Actually, the housing market in many areas such as California, could use more inventory, so lenders would do well to release some foreclosures for resale. In some recovering areas of Southern California, for example, there is less than one month’s inventory for sale on hand.

Says Walt Molony, spokesperson for the NAR, “At the end of Sept. we were showing 3,630,000 homes on the market, down 7.5% from Aug. and 15.0% below a year earlier.  That works out to a 7.8-month supply.

“Census is showing a 251,000 new home inventory, down 3.8% from August and 36.5% below a year ago.  That represents a 7.5-month supply, so it’s headed in the right direction.”  ( End of article.)

Blanche Evans is CEO of Evans Emedia, Inc. and publisher of The Evans Ezine. As an award-winning journalist, Blanche has been named one of the “25 Most Influential People In Real Estate” by REALTOR Magazine, and twice recognized as one of the industry’s most “Notables.”

Notes from me:

Most of the negative rumors you may have seen or heard lately are a distortion of the same data that RealtyTrac, and other compilers of distressed information have provided above, but which Doom & Gloom Bubble Bloggers ( DGBB.) “conveniently” spin or distort the reality portion of the info, cited above, in order to employ their scare tactics that real estate in the United States is going to go further into “heck” in a hand basket.

As reported above, by experts, who are actually compiling, and analyzing the foreclosure information, and which have a much more complete and realistic picture of the forthcoming situation.  That realism, however, won’t help the DGBB’s sell subscriptions to their disciples, so they “conveniently” leave those “little” tidbits out of their incessant blogs about impending tsunamis of foreclosures, with preposterous predictions of a forthcoming additional “crash” of 30-60% lower real estate values.

In Southern California, where I have been practicing real estate for over 33 years, that alleged tsunami is more likely going to be a trickle of additional distressed listings – just like it was in 2009 – that will be quickly absorbed by a tsunami of ready, willing, and able buyers – just like it was in 2009.

That’s another dose of reality that the DGBB’s choose to ignore, while they spew their misinformation.

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The Myth called “The Shadow Inventory” of foreclosed properties.

Posted in Foreclosures, home affordability, Real estate by southorangecounty on October 17, 2009

The Myth called “The Shadow Inventory” of foreclosed properties.( aka, “The alleged forthcoming Tsunami of foreclosures”. )

For the past year or longer, there has been a veritable Tsunami of articles, warning us of a gigantic wave of foreclosures heading our way – destined to give us yet a further “crash” of real estate prices, both locally, here in Orange County, and Nationally.  The catalyst for this forthcoming wave is an alleged “Shadow Inventory” of properties, already foreclosed, but being warehoused by the lenders who took them back, in order to not flood the current real estate market with a doubling or tripling of properties, which would theoretically drive prices down even further than they’ve already gone.

These articles were almost all based upon charts and graphs that had been formulated by various financial institutions, and were designed to provide a peek at the potential future of many types of mortgages which had been originated 3, 5, or more years ago, giving financial “experts” facts to base their opinions of the market that would exist when the loans adjusted, at some future point.

It is easy to look at some of these charts from a year or two ago and conclude that there are a whole lot of troublesome mortgages that could be coming due at the worst possible time. Frankly, going back four or five years, and looking at similar charts then, one could easily foresee the financial woes that came upon us a couple of years ago, which have brought us to our present dismal condition – as a local economy, and as a Nation.

The problem, that people writing the warning articles mentioned above, is this. They are reading last year’s charts the same way they read similar charts 4 or 5 years ago, and coming to the same conclusions, not considering that there have been a multitude of changes implemented over the past year and a half, that have wrought corresponding changes in the results forecasted.  Many of the troubled homes forecasted a year ago to hit the market early this year never really did. Sure, there are a lot more foreclosures on the market than there were 3 years ago, but not nearly the huge wave that had been forecasted.

So then, this spring, the pundits who created the charts of a year or two ago, told us that they were revising their projections – pushing them off for 6 months or a year. They hadn’t been wrong in their forecasts – the Government had merely intervened, postponing the inevitable. That wasn’t an entirely correct assessment of the situation, as it was more complicated than just that simple conclusion.

Yes, there was a foreclosure moratorium or two, both National, and locally, but there were many additional factors, simultaneously affecting the future of the mortgages portrayed on the charts. Many of the troubled loans had already been refinanced into ones more friendly to the borrowers. Many of the properties involved had already been sold, eliminating their mortgages. Many of the properties were now becoming short sales. And still more loans were starting to be modified. These factors, acting in concert, have had a serious impact upon the properties and mortgages that had been forecasted years or even months earlier.

Changes have happened, and the data of even just a year ago is obsolete. That is why there wasn’t a wave of foreclosures earlier this year that had been forecast, and why the coming wave being forecast for now or early 2010 is NOT going to materialize, in my humble opinion. I fully expect that 2010 will be a virtual duplicate of 2009 – with a lot of foreclosure properties coming onto the market in the spring, and just like this year, for them to be swallowed up quickly by a huge wave of pent-up buyers – eager to take advantage of low prices, and low interest rates – just like this year.  And, just like this year, prices will continue to nudge upward – not “crash” further downward – at least here in Orange County, California.  By the way, those buyers, from earlier this year, and those expected next year, are the REAL Tsunami in both our current, and our forthcoming, real estate markets.

A recent report from  No Shadow Inventory of Bank Owned Homes

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