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.
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 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.
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The Perfect Offer – Bucks County Real Estate 2013
Have you heard news of the real estate market in Bucks County changing to a “seller’s market”? You may notice home prices are rising again, and competition for homes has increased as well. Competing with another buyer can happen frequently, and sellers have an advantage when this happens.
When the real estate market transitions from a buyer’s to a seller’s market, it’s important to do everything you can as a buyer to improve your chances of having a seller accept your offer. Here are a few offer-writing tips to help solidify a contract on your new home in Yardley, Newtown or anywhere in Bucks County:
* Don’t waste time – When you find the home you want, submit an offer as quickly as possible. Don’t assume that no one else is considering your dream home as well.
* Realistic offer – this market may not be the proper one in which to make “lowball” offers. Be reasonable and submit comparable sales that justify your offer.
* Pre-approval letter – alleviate the seller’s biggest concern that an unqualified buyer will unnecessarily take their home off the market and the seller will miss other opportunities.
* More earnest money – money up front will show that you’re serious, and makes the seller feel more confident that the contract will actually close.
* Minimize contingencies – don’t give the seller too many reasons to think the sale won’t go through. Multiple contingencies lessens the seller’s willingness, because they feel the home is “off the market” with less certainty of closing.
* Shorten inspection period – your agent can help you set a reasonable date, but it helps if you let the seller know you’re willing to close prior to that if possible.
* Write a personal letter to the seller telling them why you want their home – this emotional connection to the seller can make the difference in you getting the home.
A confident seller is one who will be more likely to accept your offer. Following these tips can positively affect negotiations and help you present an offer that is most likely to be accepted. I am happy to assist you with the details of purchasing Bucks County real estate.
Continue Reading > Add a Comment |FHA Changes – Higher Costs on the Horizon
Are you a buyer looking to purchase real estate in Yardley, Newtown or anywhere in Bucks County? Actually, anyone looking to purchase a new home with an FHA mortgage loan needs to be aware of some changes on the horizon for mortgage insurance premium (MIP) requirements.
FHA has announced a significant change to its loan program, which currently allows borrowers to cancel the MIP when their unpaid balance reaches 78% of the original purchase price. The change is anticipated sometime in 2013, and new FHA loans will require the mortgage insurance for the life of the loan.
Here’s a quick example: At existing rates, the monthly MIP on a $168,875 mortgage is $178.99 per month. Under the current rule with normal amortization, the MIP could be canceled in 9 years and 9 months. However, under the new rule, it would last for the entire 30 year term, adding many thousands of dollars to the total cost of the loan.
It was also announced that the annual MIP will also be increased from 1.25% to 1.35% in the near future. HUD, the parent agency for FHA, is making the changes to restore the capital reserves of the program that has sustained many failed loans over the recent years.
If you are considering an FHA loan for the purchase of your Bucks County home, it’s advised that you move to close your transaction quickly. FHA loans closed before the change takes place will fall under the old rules for canceling MIP and will retain the lower rates. Since no date was announced, it is not known exactly when the changes will take effect.
Whether these changes to FHA loans will make top headlines or not remains to be seen. But in any case, it will have a big impact on borrowers planning to use an FHA loan. Please pass it on to anyone you know who might be considering purchasing or refinancing with a FHA loan.
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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 |Paying Down Your Rate with Points – Tax Implications
If you are in process of procuring a mortgage to purchase a home in Yardley or Newtown, or any home for sale in Bucks County, it’s important to understand the tax implications of “buying down” your interest rate with pre-paid points.
Pre-paid interest, sometimes called “points”, can be tax deductible when a person pays them in connection with buying, building or improving their principal residence. Be aware however, that when you pay points on a refinance, they are not a current deduction, but have to be pro-rated over the life of the mortgage.
For example, if you pay $3,000 up front in points when refinancing a 30 year mortgage, you can deduct $100 per year. If you sell the home and pay off the mortgage, or you refinance again, the balance of any un-deducted points may be then deducted in that tax year.
You must inform your tax professional of any of these situations so that he can accurately reflect the deduction in your return. The most common situation today is where homeowners are refinancing their home for the second, third or even fourth time. If there are points that have not been completely deducted from these refinances, they need to be handled during the year of refinancing.
For more information, see the “points” topic in IRS Publication 936; there is a section on refinancing in this publication. Contact your tax professional for advice considering your specific mortgage situation.
If you already have yourself pre-approved for a mortgage and our looking to purchase a Bucks County home before the end of the year, then contact me to see some great homes!
Continue Reading > Add a Comment |Spacious 4 Bedroom Home in Lower Makefield Twp – 632 Kings Road
Introducing 632 Kings Road
If you are looking to purchase real estate in Lower Makefield Township or anywhere in Bucks County, this one is definitely worth the visit! Contact me to see this beautiful home that is convenient to I-95 and within walking distance of community amenities.
Here is a video tour:
We're sorry, but we couldn't find MLS # 6036171 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
Continue Reading > Add a Comment |Choose your Yardley, Newtown & Bucks County Mortgage Lender Wisely
This summer has brought out more real estate buyers in Yardley, Newtown and all of Bucks County. Here is a video that I posted a few years ago about choosing your mortgage lender, and I think it is still very applicable today, especially for first time home buyers.
In my many years of experience with Yardley Real Estate and Lower Makefield Township Home transactions, I have come to the conclusion that using a local mortgage lender has many benefits over going with a large, national mortgage company or bank. My video tells an actual experience I had with one of my buyer clients when they used a large company based out of state.
I feel that you can receive better service and better communication if you choose a lender based right here in Bucks County. Local mortgage brokers have daily experience with local and state guidelines, a relationship with our local title companies, and can produce a quicker turnaround for you. This is so very important in the case of clients who are selling one home and buying another in a matter of days, or sometimes hours.
Watch the video for the story. I would not like to see this stressful situation happen to any of my other clients.
If you are interested in more about Bucks County homes, feel free to contact me. I’ll be glad to work with you.
Continue Reading > Add a Comment |Buyers Tips to Viewing Homes – Yardley, Newtown, Bucks County, PA
The summer of 2012 has brought out more buyers in Yardley, Newtown and all of Bucks County than we have seen in the last few years. This wonderful occurrence has me thinking back to a video that I created a few years ago that focuses on some great tips for buyers when looking at potential homes to purchase. I have included it here.
I give my ideas about what to focus on when viewing a house for the first time, and what items you don’t really need to obsess about. I discuss the benefits of the home inspection and the concept of an offer to purchase being contingent on the findings of a thorough home inspector.
Please contact me if you are looking to find a new home in Yardley, Newtown or anywhere in Bucks County. There are great homes to choose from, and I would be happy to assist you in your search.
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