Thursday, June 19, 2008

Big Game Hunting: On the Trail of the Elusive Shadow Inventory Beast

This post is based on an email I sent to Agent Bubble 10 days ago. Without getting too long winded about it, Mrs. Max and I have begun traveling down the long road toward house ownership. Our criteria is very tight, and we probably won't be successful any time soon, but now that sellers are at least entertaining the notion of a below-asking price offer, we thought we'd put ourselves out there and see what happens.

We started scouting a more established neighborhood east of town, and despite the lack of listed inventory, (we really like the area and it fits other important criteria for us), we noticed an interesting phenomena: what appeared to be tons of empty houses (dead or dying lawn, no furniture inside or blinds tightly drawn, no trash can out on trash day etc.) with no for sale sign, no auction notice on the door, nothing! There was one street with 5 out of 15 houses like this.

That was when we realized we had stumbled upon the elusive Shadow Inventory Beast, lurking in the very neighborhood we wanted to buy in! After barely escaping with our lives during our first casual encounter (those claws are sharp), we went back in a couple of days later better armed and started taking notes. Agent Bubble was kind enough to check into the properties for us.

Since we're not sure of the exact disposition of some of these, I'm not revealing the complete address. (Who knows, the owners could be on a 6-month European holiday.)

8*** Rolling Green Way, 95628 – Nothing in tax records.

8*** Kermes Ave, 95628 – Nothing in tax records

8*** Clifford Ct, 95628 – NOD filed 3/5/08

8*** Villa Campo Way, 95628 – bank bought on 12/21/08

This is just a small sampling, and we'll probably do a better survey in a couple of weeks. The takeaway from this is, don't rely solely on the MLS to do your house searching for you. Get on the ground in the neighborhood you're interested in: you never know where the Shadow Inventory Beast could be hiding. :)


... said...

At least you're looking in Fair Oaks.. no Mello Roos, no HOA fees, great schools - the upside potential is great.

patient renter said...

Hahaha, love the thread title. We too will be looking in Fair Oaks, when the time is right.

Keep us updated and happy hunting!

Buying Time said...

Good Luck Max, hope you have more luck than far we are 0 for 3. Sigh.

As for shadow inventory, I did a check, courtesy of Agent Bubble, who sent me all active MLS listings. Less than half of the foreclosures listed at are in the MLS right now. That's approximately a 10% shadow of bank owned homes. Yikes.

Buying Time said...

Sorry...I should have mentioned that my check was only for 95762.

... said...

Yikes? in Greater Sacramento, 10% shadow inventory is less than 1 months inventory.

Future foreclosures - much of this stuff will just change status, from short sale to REO - something that can be worked with.

Anonymous said...

drdoom, you are correct about interest rates but let's expand upon this a bit. The foreign central banks (FCB's) have been propping up our bond market for years, partly for their own benefit with resepect to currency pegging.

The slower the US economy gets, the higher oil prices need to be to allow petro-recycling to continue without too much FCB printing. The problem is that the Arabs and Asians are now printing like mad to make up the difference. This FCB printing is the fuel for the crack-up-boom.

With the commodities crack up boom now raging on, oil has become a sort of defacto replacement currency and now China and India have both begun to scale back on the subsidies for fear of wrecking their government's finances. This will have the same effect as currency de-pegging (slower growth in Asia and higher import prices in the US). Once the FCB's realize the predicament they are in and that monetary discipline will be applied regardless of whether they choose it in the form of a crack-up-boom or actual currency depegging, they will choose actual currency de-pegging and our bond market will collpase.

The reason is that a crack-up-boom is far more dangerous than a plain-vanilla recession/depression and will lead to revolutions and chaos (Mad Max) followed by a depression. We are rapidly approaching the point where the FCB's will say "NO MAS!" to our agencies and treasuries. Needless to say, interest rates will be going much, much higher from here.

Anonymous said...

And anybody that buys before the bond market collapses will REALLY be wishing they hadn't. RE will get an immediate 30-40% haircut with much higher rates. Who can afford to take such a hit? This will lead to yet another wave of equity-related foreclosures.

Q: When do smart money RE investors buy?

A: When rates are HIGH and prices are LOW.

Now is a terrible time to buy. Think this scenario is far fetched? Think again. A bond collapse happened in 1931-32 for much the same reasons as it will happen in 2008.

Anonymous said...

Darth ... go outside and smell the fresh air. Quit scaring people with this fantasy of yours.

Max said...

Good Luck Max, hope you have more luck than far we are 0 for 3. Sigh.

Oh, our hopes aren't very high, but thanks for the encouragement. :) The recent interest rate rise will take 6+ months to effect prices, and competition is really fierce for REOs in "desirable" zip codes. Houses are a dime a dozen in south Elk Grove and Natomas, but the neighborhoods are going downhill before our very eyes.

My gut is telling me that we'll know by mid-2009 how low the market will get. If we can in before then, it will be on our terms only.

Anonymous said...

Elk Grove, telling me! I just left elk grove a month's going down hill fast. Once a quiet neighborhood is now trashy, thug-like family moving in the area. I'm now in west sac southport area...quiet area for now. It's more expensive here than elk grove.

Atleast Elk Grove area is better than that place...near pocket road... MEADOW VIEW, yeah... that place is a ghetto's ghetto. (home prices there should drop below bottom).

Deflationary Jane said...

This is awesome. One of the things I'm doing this weekend before we skip town to run around on my bike and take pictures of all the beat up, ready to be torn down, craptastic davis houses. I'll send some to you if you're interested.

Max said...

I'll send some to you if you're interested.

Definitely, and get the addresses if possible. The Shadow Inventory Beast can't stay hidden forever. :)

Speaking of that, you've all probably seen this quote on Lander's blog:

Since January, banks in the region have foreclosed on 10,224 homes, according to the Web site, based in Fair Oaks. At the same time only about half the number – 5,448 – of repossessed homes were sold, DataQuick reported. "The sales numbers are great, and if we can keep on that track we could have just a slight decline in value," said Scott Thompson, a partner in Mortgage Resolution Services in Carmichael. "But we're still foreclosing on more than we're selling, and that's the troubling part."

14,000 on the MLS, plus another 2,500 in the shadows using BT's math. That's a total of 6.45 months of inventory (16,500/2,556 May Sales). Looks like the banks are playing this perfectly, since more than half the sales were REO.

Deflationary Jane said...

Max, saw this and thought of your EG trash thread

DrDoom said...


It is so exciting all the news from you including to see you are speaking in terms of "months of inventory". You the man!

The 6.45 months of inventory would match better with current declining prices. In fact, there is an indication that the shadow inventory is even larger (or a surge is coming in the pipeline) since declining prices often come to play at 9 months of inventory.

Deflationary Jane said...

Trying to figure these 2 out:

880 SHILOH CT, Woodland, CA 95695
Last Sale: 05/02/05 $697,000
1753 SPRUCE DR, Woodland, CA 95695
Last sale: 03/07/08 $690,000

Both smell like fraud

Anonymous said...

"Looks like the banks are playing this perfectly, since more than half the sales were REO."

Max, in your view the banks are playing this bust perfectly and have everything well under control? LOL! Were you aware that there have only been a handful of bank failures this year (5 or 6 that I'm aware of) and yet the FDIC has ramped up staffing to handle as many as 150-300 over the next year or two?!? Were you aware that the FDIC just released a couple of full-page ads in the WSJ and elsewhere saying that your money is safe and there hasn't been a need to distrust FDIC insurance? Why would they be doing this?

Something is terribly wrong with the banking system and drdoom is on to something with his comment about 9 months of inventory being the critical point where price declines manifest. Lenders such as CFC are now simply not pursuing non-performing loans at all and are aggressively seeking workouts that will ultimately lead to massive writedowns. I know personally of some examples of this if you are interested.

Why are they doing this? So they can "manage" to 6.5 months of inventory as you surmise? Or, more likely so they can NOT mark numerous loans as non-performing and forestall the inevitable collapse? Isn't this more of the same level three accounting gimmicks and mark-to-fantasy? If we say the loan is good, it is good regardless of whether or not the borrower is actually PAYING on it. ROFL!!!!!

You must realize that this cannot continue for very long before the flood of bank failures envelops the entire system and the FDIC is exposed as the thinly capitalized fraud that it is, similar to FSLIC.

PeonInChief said...

I thought this was common knowledge. It seems to take the banks a fair time to list properties once they've been foreclosed. There are six within three blocks of me (in Greenhaven, ferhevensake!) and only one of them is listed with MetroList. (And remember that my gardening standards are different from most in my neighborhood. I think many of my neighbors wander by my yard muttering "hippie gardener" at my front yard.

Anonymous said...

Um, anonymous 4:55PM, re: your comment on Meadowview. It was a ghetto way back in the early 1980s (I know, I worked a delivery route in the area) and white flight from that area peaked in the 1970s, so why should it be any different now?

In a way, I feel sorry for Elk Grove (it was such a nice sleepy little town back in the early '80s - I used to call it City by the Hay), but they did it to themselves, so my pity for their plight is rather small.

Anonymous said...

How has the average days on market for sold properties been affected by declining inventory levels? Have absorbtion rates changed since inventory started declining? What was the peak inventory level in months supply at the fattest point in inventory levels and what is our current months supply based on average monthly absorbtion rates? Do you think the decline in inventory is a result of investor bottom feeding or sellers that don't have to sell just giving up or both? this info will help me decide when to buy