Tuesday, August 19, 2008

MSM Pickes Up The Shadow Inventory Story

I won't say I wasn't interviewed by the AP for this, but since they don't quote anonymous bloggers anyway, you'll have to take my word for it. I'm glad this story is getting wider attention. That's what we do here at Sacrealstats: drive the national debate. :)

Foreclosures distort housing data


11:45 a.m. August 19, 2008

NEW YORK – As if the housing market wasn't scary enough, the record-setting surge in foreclosures could be distorting some of the closely watched housing data used to gauge the market's health.

The foreclosure glut is making listings of homes for sale a less reliable indicator, because much of the distressed inventory might be left out. In addition, fire-sale prices for such properties may also be skewing volume figures.

Some real estate analysts say this may indicate that housing conditions are worse than they now look, dampening hopes that the troubled market could soon be bottoming out.

The combination of weak housing sales, falling home values, tighter credit conditions and a slowing economy have left financially strapped homeowners in a tough spot – some borrowers have no other choice but to foreclose if they can't find a buyer for their home or pay or refinance their loans.

Nationwide, more than 272,000 homes received at least one foreclosure-related notice in July, up 55 percent from about 175,000 in the same month last year and up 8 percent from June, RealtyTrac Inc. said.

Irvine, Calif.-based RealtyTrac monitors default notices, auction sale notices and bank repossessions. More than 77,000 properties, or 28 percent, were repossessed by lenders nationwide in July, up from 16 percent a year ago, the company said.

"The wave of foreclosures is unprecedented, making it difficult to analyze, difficult to gauge how large it will get or how bad it will make things," Deutsche Bank analyst Nishu Sood said in an interview.

Sood, in a recent report, lays out a case for why the surge in foreclosures isn't being fully reflected in the resale inventory levels, as measured by the real-estate databases known as multiple listing services, or MLS. In nine of the 33 markets Sood examined, distressed inventory is significantly higher than what is found in the MLS listings.

This is most pronounced in what have been deemed "bubble" real estate markets, which saw the biggest gains during the home buying boom and are experiencing the largest declines since the pullback began more than two years ago. For instance, in Sacramento, the foreclosed inventory was 31,219 units, or more than twice the 14,913 units on the MLS listings. San Francisco had foreclosures running at 190 percent of MLS listings, while foreclosures in Phoenix ran at 130 percent of the MLS listings.

Sood attributes that gap largely to bank-owned foreclosed homes that aren't always captured in the MLS listings. He calls that the "shadow inventory," and says the behind-the-scenes glut of properties wreaks havoc on housing-related statistics.

Foreclosures also are influencing sales and price data. Transaction volumes are being boosted by the sale of the distressed inventory, which in bubble markets represents 40 percent of sales. But such sales then tend to push market prices down, with banks offering steep discounts to move inventory, according to Sood's research.

"Since foreclosed properties are reduced in price until they sell, an increase in foreclosure transactions simply means there are more foreclosures rather than more buyers," Sood said.

What seems key to stabilizing the housing market is finding a way to slow the pace of foreclosures. Industry executives are looking for the Housing and Economic Recovery Act of 2008 to provide some help. Starting Oct. 1, as many as 400,000 borrowers on the brink of losing their homes may be eligible for a more affordable loan backed by the Federal Housing Administration.

"Congress and the White House have offered a lifeline to many homeowners facing foreclosure, which could help keep more people in their homes and fewer distressed properties from coming to the market," Toll Brothers Inc. CEO Robert Toll said Aug. 13 after the Horsham, Pa.-based company reported that a steep decline in new home contracts and sales would hurt quarterly results for the three months ended July 31.

The government program will allow those who qualify to cancel their old home loans and replace them with 30-year fixed-rate loans for up to 90 percent of the home's current value. The FHA will insure a total of $300 billion of the loans over a three-year period.

But this won't necessarily fix the foreclosure problem since refinancing into the new program requires the lender to agree to the loan change. That means the banks would have to be willing to take a loss on the existing loans in exchange for avoiding an often-costly foreclosure.

This new program also is only for primary residences, not investor-owned properties, which have been hard hit by foreclosures.

Until there is clear evidence that the surge in foreclosures has slowed, it will be harder to call the housing collapse a thing of the past.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck@ap.org


Anonymous said...

Same old same old.Prices will correct to the point that homes become affordable,period,full stop.

Buying Time said...

Nice Max....looks like your 15 minutes has now extended itself to at least 1/2 hour.

Keep up the good work.

patient renter said...

Good stuff. Did you purposefully remain anonymous or is that just how they cared to view you?

I'm sure you've seen Tanta's media inquiries policy that trashes the whole idea that bloggers as a source of professional analysis or opinion are only valuable if they're not anonymous. Tanta seems to think that notion is BS, and I agree.


Lander said...

1 week. That was pretty fast for the MSM.

Anonymous said...

Why are all of you giving Max credit for this? Sood is the one who did the research and published the findings. All Max did is post it on his blog. I don't call that getting credit for squat.

Max said...

Did you purposefully remain anonymous or is that just how they cared to view you?

No, I'm anon on purpose. Whenever I'm interviewed, I tell them before we get started to save time. Usually, editors won't print any "anonymous" quotes or opinions, and they have their reasons. They've been burned many times recently by reporters making up sources etc. While I disagree with their editorial choices (there's a difference between well-established blogger with a pseudonym and a truly anonymous person), I respect them for it. That's one reason why I blog instead of "report": 100% control over content. I can even misspell post titles and nobody gives me (too much) crap. :)

Why are all of you giving Max credit for this?

Read the original post. I'm not taking credit for anything other than helping make a wider audience aware of Nishu's work. FWIW, the shadow inventory portion was a rather small excerpt of a large home builder analysis report. (Search Google news for his name for more info.) I merely keyed in on that part because it's something we've been trying to understand.

wannabuy said...

Same old same old.Prices will correct to the point that homes become affordable,period,full stop.

Bubbles will be followed by overcorrections. Stop.

Max did some of the pioneering quantification of 'shadow inventory.' So its time to take a bow! :)

I'm very amused how the MSM is having to come to terms with bloggers. They've done everything possible to discredit bloggers... and failed.

This downturn will get interesting before its winter... too interesting.

Got Popcorn?

Anonymous said...

How many of you have used the CME housing futures to hedge the value of your home or have just used them to profit of the housing decline?

Unknown said...

I don't want to call BS on your stats and analysis, but I think your numbers imply about 1 in 10 homes in the Sac region are either for sale or are in foreclosure (~400 single family homes in Sac County). That number seems really, really high to me. In some neighborhoods, that is probably about right - but I have a very, very hard time believing 1 in 10 homes for the entire Sacramento region. Also, any analysis that uses data from Realtytrac is very suspect.

Bryan said...

Fightin' words.