Shadow Inventory
Definition of ‘Shadow Inventory’
A term that refers to real estate properties that are either in foreclosure and have not yet been sold or homes that owners are delaying putting on the market until prices improve. Shadow inventory can create uncertainty about the best time to sell (for owners) and when a local market can expect full recovery. Also, shadow inventory typically causes reported data on housing inventory to understate the actual number of inventory in the market.
Investopedia explains ‘Shadow Inventory’
With the unprecedented number of foreclosures stemming from the subprime mortgage meltdown of 2007-2008 and the overall housing market collapse during that crisis, lenders were left with significant real estate holdings. Many lenders were slow to put their inventory up for sale for fear of flooding the market and further driving down prices, which would in turn lower their potential ROI.
The utterance of the term “shadow inventory” can conjure up fear, uncertainty and mystery about the future of the housing market.
First coined to describe the volume of lender-repossessed properties that haven’t yet reached the market as REOs (bank-owned listings), the term has been expanded by some to include homes in a foreclosure process and even those with delinquent loans that haven’t yet entered the foreclosure process.
These various definitions have added to the confusion about its potential threat to the housing market and economy as a whole.
One of the great economic success stories of 2012 was that the housing market finally found a bottom, and even began to show signs of a nascent recovery. But even as positive data on the real estate market began to trickle in early last year, not everyone was convinced. The main reason for skepticism were millions of homes that had not yet hit the market, but probably would soon — either because they were already inforeclosure or because the homeowners were so far behind on payments that foreclosures were imminent. These properties, which last year were estimated to range anywhere from 3 million to 10 million in number, were dubbed the “shadow inventory” of homes.
The reason the shadow inventory was thought to be bad news for the housing market was that when these homes finally did go up for sale, they would overwhelm the demand for housing, which had slowed in recent years due to the poor economy and sluggish population growth. But a recent report from analytics firm CoreLogic says that the shadow inventory as of October 2012 has fallen to 2.3 million, a 12.3% drop year-over-year. In other words, this catalog of homes has been reduced significantly without the detrimental effect on nationwide home prices that some had feared. So what happened, and why has the dreaded shadow inventory not yet sunk the convalescent U.S. housing market? I asked Sam Khater, Deputy Chief Economist at CoreLogic, and he outlined three key reasons:
Investors Got in on the Game
The housing recovery was prevented for so long in part because of tight credit standards and because so many homeowners owed more on their mortgages than their homes were worth. This left many homeowners unable to take advantage of increasingly cheap prices. But by 2012, home prices had fell so far that it became lucrative for investors — either investment vehicles like real estate investment trusts or individual investors looking to earn extra income as landlords — to snap up real estate at historically low prices. Khater says the speed and enthusiasm with which investors bought these properties was a bit of a surprise, and one of the main reasons why the market was able to work off a significant chunk of shadow inventory without it depressing home prices.
Lenders Ramped Up Principal Forgiveness
When a homeowner cannot repay his mortgage, mortgage lenders often end up losing a lot of money even after they repossesses and resell the home. Homes sold after foreclosure sell for a deep discount, and going through foreclosure proceedings is very costly for banks as they must continue to pay taxes and upkeep costs while the process unfolds. So modifying a delinquent loan so the borrowers can remain in the home, even if it means forgiving principal, can sometimes make sense for all parties involved.
The problem is that the securitization of home loans, whereby loans are pooled and sliced up into different payment “tranches,” or bundles, made it so that there wasn’t one specific investor who could decide to modify a loan. And the fight over who would bear the losses when a mortgage was modified prevented much modification from happening at all.
Beginning with the $25 billion mortgage settlement between the nation’s largest mortgage servicers and states attorneys general, however, the tide began to shift a bit. Banks have been forced, because of the terms of that settlement, to engage in principal-reducing mortgage modifications, which have helped keep homeowners out of foreclosure and, thereby, their homes off the market. According to a recent report from the OCC the share of loan modifications made by servicers in the third quarter of 2012 that include principal reduction have risen 110.6% when compared to the similar period in 2011.
Many Homeowners Remain Underwater
Even with the improving housing market, many homeowners remain underwater. Paradoxically, this has buttressed the housing market of late, as it keeps these homeowners from putting their property on the market. These homeowners being locked out of the market, combined with avid interest from investors in cheap residential real estate, has led to the amount of homes for sale being historically very low. And when supply is restrained, prices go up. As prices rise, more homeowners will get out from their underwater mortgages. “This dynamic will unlock some borrowers, but it won’t lead to a flood of new homes on the market,” Khater says. “It’ll be more of a slight opening of the spigot.”
All this goes to show that predicting the movement of large, complex markets like housing can be difficult even for experts who make a living doing just that. A year ago, many smart people took a look at the inventory waiting on the sidelines, and couldn’t imagine the market being able to absorb it. The fact that lenders are more aggressively modifying mortgages and a new investor class has stepped up to take advantage of cheap prices shows that even the savviest of analysts can be caught off guard by new trends.
The number of homes in “shadow inventory” dropped from 2.6 million in October 2011 to 2.3 million in October 2012, according to a new report from CoreLogic.
Shadow inventory refers to the supply of homes that are in foreclosure or have seriously delinquent mortgages but are not yet on the market.
Many housing experts once predicted that the shadow inventory would cause overall inventories to skyrocket and place downward pressure on home prices. Yet an increase in short sales and loan modifications have helped to lessen the impact, analysts say.
“The size of the shadow inventory continues to shrink from peak levels in terms of numbers of units and the dollars they represent,” says Anand Nallathambi, president of CoreLogic. “We expect a gradual and progressive contraction in the shadow inventory in 2013 as investors continue to snap up foreclosed and REO properties and the broader recovery in housing market fundamentals takes hold.”
A new report from CoreLogic shows that the shadow inventory of homes fell 12.3 percent in October from a year ago.
Also known as pending supply, shadow inventory represents the houses that are intended for sale but aren’t yet on the market.
There are 2.3 million units in the shadows, which represent a seven month supply.
“The size of the shadow inventory continues to shrink from peak levels in terms of numbers of units and the dollars they represent,” said Anand Nallathambi, president and CEO of CoreLogic. “We expect a gradual and progressive contraction in the shadow inventory in 2013 as investors continue to snap up foreclosed and REO properties and the broader recovery in housing market fundamentals takes hold.”
Here are some key points from the report.
- As of October 2012, shadow inventory fell to 2.3 million units, or seven months’ supply, and represented 85 percent of the 2.7 million properties currently seriously delinquent, in foreclosure or in REO.
- Of the 2.3 million properties currently in the shadow inventory (Figures 1 and 2), 1.04 million units are seriously delinquent (3.3 months’ supply), 903,000 are in some stage of foreclosure (2.8 months’ supply) and 354,000 are already in REO (1.1 months’ supply).
- As of October 2012, the dollar volume of shadow inventory was $376 billion, down from $399 billion a year ago.
- Over the three months ending in October 2012, serious delinquencies, which are the main driver of the shadow inventory, declined the most in Arizona (13.3 percent), California (9.7 percent), Michigan (6.8 percent), Colorado (6.8 percent) and Wyoming (5.9 percent).
- As of October 2012, Florida, California, Illinois, New York and New Jersey make up 45 percent of the 2.7 million properties that are seriously delinquent, in foreclosure or in REO. In October 2011, these same states made up 51.3 percent of all the distressed mortgages that were at least 90 days delinquent, in foreclosure or REO.
What to do when an appraisal comes in too low
With the recent uncertainty and shifts in the real estate market, REALTORS® are experiencing sale contracts that are falling out of escrow due to appraisals that come in below the agreed upon purchase price.
Low appraisals are not necessarily wrong, but it does create a situation in which the lender might not approve the loan. The appraiser is merely comparing the value of a certain home with other comparable properties in the area.
Lenders will only fund a mortgage up to a certain percentage of the appraised value of the home. If the appraisal comes in low, the parties to the transaction must come up with a solution to the problem.
So, what are your options when this happens?
- Appeal errors or bad comps to the appraiser. Maybe they miscounted bedrooms or under reported square footage. If you find errors, or feel like there are more recent, better comps, work with your agent to send the correct information and the applicable comps, to your lender, who can then relay the information to the appraiser.
- Come up with more cash than you had originally planned to bridge the difference, or you can work with the seller to split the difference.
- Renegotiate the purchase price. A low appraisal is a disappointment for everyone, and assuming there are no glaring errors in the appraisal, it might be in the best interest of the seller to bring the purchase price down. If this sale falls through, and the appraisal was correct, the next deal that comes in front of the seller will most likely result in a similar appraisal. He reality being that the value of the home is less than the agreed upon price for the home.
- Change lenders. Your new lender may have the ability to get your transaction a fresh start or find a way to work around a low appraisal.
- If all of the above solutions do not work, then you may just have to walk away from the deal.
Feel free to contact me if you are looking for a new home in 2013.
There are a lot of great homes in Yardley, Newtown and all of Bucks County.
Continue Reading > Add a Comment |Buying HUD Homes
HUD (Housing and Urban Development) is the federal agency that takes responsibility for FHA backed loans that go wrong… A HUD home is a 1-4 unit residential property acquired by HUD when a loan backed by FHA, goes into foreclosure.
Here are some specifics about the process of buying a HUD home:
- HUD becomes the property owner and offers the home for sale to recover the loss on the foreclosure claim.
- HUD homes are appraised and then priced at fair market value for their area. The homes are sold “as is”, but the price has generally been adjusted down to reflect repairs that the homeowner will have to make.
- HUD homes are sold using a bidding process. There is an offer period, during which, sealed bids are accepted from your agent. Once the offer period closes, all bids are opened, and HUD will generally accept the highest bid, or the bid that brings them the highest net.
- If your bid is accepted, your agent will be notified within a couple of days. You will be given a settlement date – usually 30-60 days from the date of the accepted contract.
- If no one makes an offer for a HUD home within a certain amount of time, HUD will lower the price. The price will continue to drop until an offer is made and accepted.
So, what is the best way to safely purchase a HUD home?
- Find the right real estate agent. Only agents who are registered with HUD may represent home buyers and investors in the purchase of a HUD home. The best way to track down the right agent is to go through the website that lists HUD homes in your area, and determine which agent has the most winning bids.
- Be sure to inspect the property before making an offer. The listing agent has access to the property and can show it to you.
- Make an offer based on the process above
- Get your financing in order so you can close in a timely fashion. It could be as soon as 30 days from acceptance date. It would really be in your best interest to secure financing before you make an offer.
Buying a home in Bucks County after Foreclosure or Short Sale
Buying a home in Bucks County after Foreclosure or Short Sale
The past 5-7 years have displaced a lot of homeowners. When the Real Estate market crashed, many people were left way underwater on their homes, and were forced to Short Sell them. Additionally, when the economy tanked right alongside the Real Estate market, another large group of people lost their homes to foreclosure.
Both of these circumstances put black marks on credit reports, leaving these people unable to buy a new home.
So, the big question out there right now is – when can people buy homes and get mortgages after a short sale or foreclosure appears on their credit report?
In looking at foreclosures and time to buy, it can differ if there are extenuating circumstances that led to the foreclosure – such as a death in the family, illness, or an accident resulting in serious injury. In these cases the waiting period can be less.
- Normally to buy after a foreclosure – 5-7 years
- With extenuating circumstances – 3-7 years
- Buying after a short sale – generally 2 years
All of this is becoming relevant right now because a large percentage of people who lost homes, have worked their way through the waiting period and are ready and able to buy again.
It is important for those who go through a Short Sale or Foreclosure to maintain pristine credit while they wait to be able to buy again. Lending guidelines have tightened – the lenders will require a strong credit score with the borrowers having paid all their bills on time.
As these potential homebuyers are moving back into the Bucks County Real Estate market, housing prices are getting ready to rise, and mortgage rates are still low. It’s a great time to buy Real Estate in Bucks County.
Feel free to contact me if you are looking for a new home in 2013.
There are a lot of great homes in Yardley, Newtown and all of Bucks County.
Continue Reading > Add a Comment |Buying your first home
There are many benefits to home ownership. Buying your first home will make you a part of the Bucks County community you move into and you will experience the security and satisfaction of owning the roof over your head.
Some of the other advantages of homeownership include:
• Building equity – you will be growing your assets as the value of your property increases
• Huge tax benefits – you can deduct mortgage interest and property tax
• You will be building your credit
Owning your own home is a big commitment and you need to take into account credit, cash flow and your savings.
That being said, right now is a great time for first time homebuyers to take advantage of record low interest rates and home prices.
Here are a few tips/suggestions for first time homebuyers:
• Meet with a licensed mortgage broker (or three). They will help you know what you can afford and what down payment and plans will work for you.
• Find a knowledgeable agent. As a REALTOR®, I have earned many prestigious production awards. I have worked with people from all over the world. I have assisted many Fortune 500 companies with their relocation efforts. I have helped families buy and see real estate at all different price levels. Having lived in the area for over 20 years, I have a great deal of knowledge about the area, and am able to share that knowledge with buyers and sellers.
• Take a class on home ownership so you can fully understand the financial commitment you are taking on. You’ll need to understand insurance, taxes, budgeting, utilities, home warranties, credit scores and potential government programs available for first time home buyers
• Ask lots of questions – of your agent, your mortgage broker, and home inspector. These are the professionals that you have hired to guide you successfully through this process.
In Bucks County, there are multiple resources for first time homebuyers, including:
• The Home Program
• Bucks County Housing Trust Fund
• Housing Rehabilitation Program
• Brownfields for Housing Program
Give me a call (215-519-1399), or drop me an email (Marty@MartinMillner.com) and I will help educate you on the assistance that is available to first time homebuyers, and help you with your search for the perfect home.
Continue Reading > Add a Comment |
Housing Starts way up in 2012
When the Real Estate market crashed in 2005-2006, new home construction ground to a halt. This occurred all over the country, not just here in Bucks County.
This drag on the Real Estate market and the economy has turned a corner. Growth in this sector is the latest sign that the housing market is gaining strength. In 2012, builders started work on 780,000 new homes – a 28.1% increase from 2011.
A bonus in the recovery of the market is in the jobs market. More new home building equals construction jobs.
For the economy to recover, the housing market needs to recover. Housing starts, along with low mortgage rates, shrinking inventory in the housing resale market are critical to recovery and a step out of the nation’s financial crisis.
In Bucks County, there are currently 39 developments that are building new homes, with prices ranging from the mid $200’s up to $2.4 million. All of this new construction provides more inventory to choose from and is adding jobs to the local economy.
As the chart below shows (for Doylestown), inventory of all homes is down, and prices are going up. It is a perfect time for new home builders to get in the market and bring the inventory numbers up, while still providing affordable homes. The ratio of inventory to price is consistent throughout Bucks County.
If you are looking to purchase Real Estate in Yardley, Newtown or Doylestown, please visit our Featured Homes section for wonderful properties or search the Multiple Listing Service for all available listings. We’ll help you find your perfect home.
Continue Reading > Add a Comment |The Housing Market is rebounding, both Nationally and in Bucks County!
The Housing Market is rebounding, both Nationally and in Bucks County!
For the first time in almost 6 years, most Real Estate markets experienced increases in home prices in 2012. It is still a long road back to where we were in 2005 and 2006, but the market has stabilized and is now improving.
In the 3rd quarter of 2012, home prices had the biggest home price gains in more than two years – an increase of 3.6% on a National level.
If you look back a year ago to the 3rd quarter in 2011, there was a 3.6% decrease. We’re moving in the right direction.
There are a number of factors helping the market recover – historically low mortgage rates, low inventory in most markets (a lot of this is caused by and investors taking advantage of Short Sale and Foreclosure opportunities), an improving jobs market (slow, but moving in the right direction), and lower than usual construction on new units.
With the kinds of numbers we have seen over the past 6 months, it is safe to say that we are in the midst of a housing recovery, and that things will continue to improve.
Here are what the numbers look like for Buck County:
Metrics obtained from trendmls
If you are looking to purchase Real Estate in Yardley, Newtown or Doylestown, please visit our Featured Homes section for wonderful properties or search the Multiple Listing Service for all available listings. We’ll help you find your perfect home.
Continue Reading > Add a Comment |Let Your Tenants Finance Your Child’s College
There are many owners of Bucks County real estate who are concerned right now about how to afford one of the larger price tags of parenthood: funding your child’s college education. As homeowners, we have a lot of things to save for and invest in, but not always enough discretionary income after the family essentials have been met. In almost any economy, wise real estate investors have an interesting option…
With a relatively small investment in a rental home, you can create rental income that generates positive cash flows and pay for itself. The borrowed funds create leverage that will earn a return on the total value of the home and not just the amount of cash you have invested.
The strategy is simple. Find a slightly below average priced home that will rent well. Find one in a popular school district, or near other desirable community amenities. It will appeal to a larger group of people while it’s rented and when it’s ready to be sold.
Rent the home and maintain its condition over the years. As the loan amortizes and the value increases, the equity will grow. When your student is ready to start college, you’ll actually have several options.
1. You can sell the property; pay the tax on the gain at a reduced capital gains rate and fund the education.
2. Alternatively, you can refinance the home and take the proceeds to pay for the tuition. This would allow you to continue to own the asset but would free your equity, and under current tax laws is a non-taxable event.
Regardless of whether you’re trying to plan for your children’s education or your own retirement, rental property offers many solid investment opportunities. Contact me if you want more information about purchasing investment property in Yardley, Newtown or anywhere in Bucks County.
Continue Reading > Add a Comment |Mortgage Insurance Premium – Who Needs MIP in Bucks County?
First-time homebuyers in Yardley, Newtown and Bucks County can wonder why they may be required to pay an extra fee each month on top of their regular mortgage payment. Before you make a choice on a mortgage loan, make sure you understand the mortgage insurance premium, and how you can reduce it and put the money toward building up your equity.
Here’s a tip for potential FHA buyers of Bucks County real estate: Paying extra principal on your mortgage loan can help you remove the required monthly mortgage interest premium (MIP) faster, which will lower your monthly loan payment, reduce your overall interest, and build equity faster on your home.
FHA loans require mortgage insurance premium to cover a possible loss to the lender if the property has to be foreclosed and sold. The premium is sizeable and does nothing to help build equity in your home. Eliminating the MIP would reduce the payment considerably, and help you keep more cash in your pocket.
FHA loans require that MIP remain in effect for five years. But after that time, the MIP requirement will be released if you have paid down your loan to at least 78% of the original purchase price. With that extra payment removed, your monthly payment will go down. Since amortization is affected by interest rates, the normal time to reach this 78% point could be from 9 to 12 years at today’s interest rates.
Contact your mortgage professional for more information about your particular situation.
Continue Reading > Add a Comment |Inventory Reduction this Past Year – Sign of Market Improvement
REALTOR.com has released September real estate statistics that show a continued strengthening of the national market, with notable inventory reduction and a respectable increase in median sales price since this time last year. These numbers show that overall the market is doing better this year than it was a year before.
You can view the report to see that it has specific statistics for each of 146 U.S. metro areas to get a general idea of our market here in Yardley, Newtown and all of Bucks County. Not all of the regions have shown a substantial change from last year, but on the whole it depicts a positive trend in the national housing market that will soon hopefully be reflected in every neighborhood across the county.
Contact me for more specific information on the state of the Bucks County real estate market. I’ll be happy to perform a market analysis for your home if you are thinking about selling.
Continue Reading > Add a Comment |Chat With Marty