Tuesday, March 10, 2009

Shadow Inventory Analysis For Zip Code 95628


Hopefully, this post can help address some of the questions raised in the comments yesterday and today about the REO "shadow inventory" question. I decided to focus on a zip code my wife and I are looking in, both for the sake of brevity, and self-interest.

95628 is a mid to upper scale suburb located in Sacramento County, and most dwellings are single family houses. According to the Sacramento Bee Home Sales Database, there were 1654 sales transactions in 95628 between January 2006 and January 2009. According to Foreclosure Radar, there were 365 foreclosures during that same time. (Note: The Sacramento Bee database includes some foreclosure sales, so the numbers aren't directly comparable.) Unsurprisingly most of the foreclosures took place in 2008 (206).

I ran a comparison of the 365 foreclosures against both the MLS and the county sales records:

Of the 365 foreclosures during that time, 260 were listed at least once after the auction date. Of those that were listed, 160 were sold. Of the 100 that were listed but haven't sold, 63 were listed at some point during 2009.  44 were sold without having been listed at all, and 46 were taken at auction but have never been sold or listed.  I defined "Shadow Inventory" as houses that haven't been listed after auction, or haven't been listed since 2008 and haven't sold. That leaves 83 foreclosures in 95628 that are off the MLS map, or over 27% of the MLS + Shadow total.

Clearly this is a market in flux, and there is a significant amount of bank-owned inventory in 95628. Ominously, Foreclosure Radar shows another 177 pre-foreclosures there right now, with 49 auctions scheduled. I don't expect the pressure from distressed sales to end any time soon.

25 comments :

Anonymous said...

Looks like a lot more than 83 dots. You must take your graphics lessons from the Bee!

You point is made; however, there is some normal delay from foreclosure to relisting. There will always be some in process. For perspective, There is a mothballed new home subdivision next door to Bella Vista HS about this size.

Not that big a deal.

Sippn

DT, you were already talking to a non owner occupied investor, one step removed from being a retail "consumer".

patient renter said...

Great stuff! We're actually interested in the same zip code, just not on the hunt yet.

Max said...

Yeah, that's all 365. I thought that new subdivision next to BV was just graded land. Is there actual construction that was mothballed?

I actually think 27% is pretty significant for an upscale 'burb like Fair Oaks, which didn't have as much subprime. (Alt-A anyone?) It's enough to drive pricing at the margin. I do suspect the ratio is much higher in places like Elk Grove and Natomas.

Anonymous said...

95628 - Fair Oaks - is a great zip where I've lived before. I am a fan of the chrome rooster at Hazel x Madison.

The project next to BV is ready for pavement, underground utilities are in and actually homes could start at the drop of a hat and a few $$. Funny thing is that the US Census counts it as inventory (lots authorized)

During the boom, next door in Carmichael, 300+ new homes per year were typically built.

Sippn

Max said...

The project next to BV is ready for pavement, underground utilities are in and actually homes could start at the drop of a hat and a few $$.

We are actually considering some of the newer infill developments in Orangevale and FO, but the prices are a bit higher than we'd like. The Tim Lewis development over off of Greenback is egregiously overpriced. Anybody have a good $/sqft cost of construction these days? Does $180 seem high?

Anonymous said...

Great post today. Very glad you chose this issue. Would LOVE LOVE LOVE to hear your thoughts about why the shadow inventory exists (to 30%). Do you believe either of these two theories: banks can't process so many properties at once; and/or they don't want to flood the market? Will banks and lenders ever capitulate hold a fire sale of their inventory? What would prompt them to do it?

Darth Toll said...

That chrome rooster is a real trip. When it was first erected I thought it was really gaudy and ugly but since that time its actually grown on me and I like it now. Go figure.

Max said...

Will banks and lenders ever capitulate hold a fire sale of their inventory? What would prompt them to do it?

Hate to say this, but I think we're experiencing the fire sale right now. 75% of all sales are REOs, and prices are dropping like a rock. While there is a shadow inventory, the banks are working it off.

There is no easy way to forecast beyond a few months. Will cash flow investors keep buying at these prices if rents fall? Will ARM recasts and other structural problems with the loan products cause a second foreclosure wave? Will job losses and the overall recession pile on more? Will the Obama bailouts save us all? Only time will tell.

Sold in '05 said...

"Anybody have a good $/sqft cost of construction these days? Does $180 seem high?"

I know for a fact that one of the national builders just took an offer of just below $135 sq/ft for approx 2500 sq/ft in Roseville. So cost can't be all that high.

Anonymous said...

"Max Said...

Hate to say this, but I think we're experiencing the fire sale right now. 75% of all sales are REOs, and prices are dropping like a rock. While there is a shadow inventory, the banks are working it off."

Hate to say it but I agree. This is the fire sale, its just not as dramatic as we thought. Right now, they seem to be operating as a cartel. Under cartel theory, they are attempting to control the market by dumping X units per month. If prices drop, they will dump X-1 til price stability is maintained.

Conversely, if prices start to rise, the temptation of all cartels will be to cheat on each other, and to dump X+1, causing prices to fall. Once they realize this, they will go back to X-1 til stabilty is again maintained.

In the end, I think prices neither rise nor fall till all the inventory is exhausted, be it weeks months or years...

Max said...

Under cartel theory, they are attempting to control the market by dumping X units per month. If prices drop, they will dump X-1 til price stability is maintained.

They're also controlling supply by taking much longer to repo the houses than they would traditionally. I've talked to people anecdotally who haven't paid their mortgage in 12 months and still haven't received a default notice!

I think there are choke points up and down the chain, and each bank/servicer has its own unique problems. Unfortunately this data is tightly held, and we'll never know. All we can go on is the NOD/BO ratio. In 95628, it's 4:1.

patient renter said...

In the end, I think prices neither rise nor fall till all the inventory is exhausted, be it weeks months or years...

Except that even without all of the bank owned stuff, prices are falling anyways.

Anonymous said...

"Patient renter said...

Except that even without all of the bank owned stuff, prices are falling anyways."

In the regular market or the REO market? Regular market (most of the stuff guys who dominate this blog are looking for), clearly has a ways to go. But the REO market looks to have some elasticity.

Anonymous said...

"Max said...

I think there are choke points up and down the chain, and each bank/servicer has its own unique problems. Unfortunately this data is tightly held, and we'll never know. All we can go on is the NOD/BO ratio. In 95628, it's 4:1."

Max, another problem with this whole phantom inventory thing is sales at the courthouse steps. For years, long before there was such a thing as REO phantom inventory, the norman foreclosure process was for thing to sell at the courthouse - the would never go to REO.

Of course that all changed as the foreclosures overwhelmed the scavengers at the courthouse auctions circa 2005-2008. However take a look at this:

"But in the meantime, foreclosures are being finalized and deeds conveyed in Lee County at a record pace. On some days, more than 100 foreclosed properties are sold at courthouse auctions."

http://www.npr.org/templates/story/story.php?storyId=101511417


Hold on here! Bottom feeders are back at the auctions and buying? That means, the NOD/BO ratio can skew even further because "NOD" may continue to stay high, but they may sell at the courthouse before they become "BO".

Unfortunately, this could mean the NOD/BO ratio could rise to 5:1 10:1 yet mask that phantom inventory is not being held back, but has long since sold!

patient renter said...

In the regular market or the REO market?

I don't make a distinction because there's nothing inherantly different about the value of an REO versus an individually owned house. If there were, REO listing prices wouldn't effect individually owned listing prices, and visa versa.

But the REO market looks to have some elasticity.

The cartel theory would apply only if all sources for the product were controlled (REOs). That's not the case here. REO prices can't be freely elastic since they're still competing with non-REOs.

Max said...

REO prices can't be freely elastic since they're still competing with non-REOs.

Another fly in the ointment is the short sale. The conventional wisdom 6 months ago was that these deals seldom got done, and the lenders were impossible to deal with. Not sure that's the case anymore: 56 of the 176 95628 listings are short sales right now. (Just checked.) A majority of listings in 95628 have a lender involved in some way.

Anonymous said...

"Patient Renter said...

I don't make a distinction because there's nothing inherantly different about the value of an REO versus an individually owned house. If there were, REO listing prices wouldn't effect individually owned listing prices, and visa versa."

The only real difference (generally) is homeowner inventory is sticky, while REOs are not. REOs can seek and find their bottom much quicker than can regular sellers who continue to hold out for fantasy prices. Thats what I am saying here, REOs are finding their market clearing prices - hence the reason they sell so quickly.

This will affect the regular market but it will take time. If an REO price point is 500K and sells 10X as many as a simularly situated owner owned home at 900K, you can safely assume prices of the 900K home will come down. It may take a while to get there, but the non REOs will settle in at something much closer (maybe 550 - 600K).

Either way, it looks like there are 2 markets, REOs which sell quickly and are likely not falling much farther in price. and non REOs which sell at a snails pace and much fall much further to achieve a market clearing price.

Anonymous said...

Another fly in the ointment is the short sale. The conventional wisdom 6 months ago was that these deals seldom got done, and the lenders were impossible to deal with. Not sure that's the case anymore: 56 of the 176 95628 listings are short sales right now.

Max - there is one realtor I trust and he reports the same thing. For the longest time, he said avoid them like the plague, now he says they are starting to happen. Good thing though is these arent "hidden" they are out there on the MLS so we know generally how many of them are out there.

Incidentally, thanks for taking the time to explore this issue with some intellectual honesty. If I were to try this with my hometown blog, people go into denial - anything other than "hidden inventory is HUGE and will be UNLEASHED driving down prices" is seriously frowned upon. I dont mean to make people upset, but I for one would prefer to get issues hashed out rather than sit around forever for somethng that may or may not happen.

Max said...

"hidden inventory is HUGE and will be UNLEASHED driving down prices"

What we're seeing in Sac is what I'd imagine an "unleashing" would look like. REOs dominate sales. Builders and regular sellers are sidelined unless they play ball with lower prices. REOs and short sales dominate listings as well, and while there is enough of a backlog of both distressed inventory and potential distressed inventory (preforeclosures), the banks are successfully working it off.

I don't know where pricing goes from here, but it's hard to argue that a 75% REO market share at a high sales rate isn't an "unleashing" of some sort.

According to press accounts I read from other markets, this is a Sacramento-only phenomena. The banks could be using our region as a test-case for a US liquidation strategy; those in other markets stay tuned.

Anonymous said...

Max said...

"I don't know where pricing goes from here, but it's hard to argue that a 75% REO market share at a high sales rate isn't an "unleashing" of some sort.

According to press accounts I read from other markets, this is a Sacramento-only phenomena. The banks could be using our region as a test-case for a US liquidation strategy; those in other markets stay tuned."

Max - not necessarily. I lurk sometimes on one of the DC blogs, and stumbled across this account of Exurban Prince William County.

Apparently, the place was a hotbed of speculator activity, then foreclosures and now REO dominated 68% or more REO. More interestingly, the guys over there are calling bottom because of this:

http://www.recharts.com/mris/mris_11.html

Look at the second graph from the top re: prices - fascinating the way it abruptly flattened.

Also, they think they have a ton of phantom inventory there too (6,000 REOs not yet listed), yet total listed inventory is declining fast (see the 8th chart from the top) and prices have responded.

So there may be others out there but I dont know. Unfortunately I cant find much good about my specific market (florida), but it appears that this could be more than just a sacramento phenomenon.

Anonymous said...

With 554 sales last year, your shadow inventory is about 1.5 months. There's always a shadow inventory of people thinking of selling their homes.

If we're talking 225 (6 months) then there's some impact if they were all to be listed at once. But that won't happen.

Sippn

Anonymous said...

How does 95864, 95819,95818, 95816 look?

Max said...

How does 95864, 95819,95818, 95816 look?

That would be nice, wouldn't it? Sorry, but I just don't have enough time these days.

Max said...

If we're talking 225 (6 months) then there's some impact if they were all to be listed at once. But that won't happen.

I think the implications are a bit different. To me it looks like the banks are using an aggressive strategy to work off their REOs. Sales of foreclosures was a significant fraction of the total number of sales in 95628 last year, and REO and short sale contingencies make up a majority of the inventory now. At least at the REO level, the notion that banks are holding vast swaths of empty houses off-market appears to be disproved.

That being said, there is a lot more coming on this year, so I expect distressed inventory will keep pressure on the market for some time.

Trivedi GMT said...

The state of CA put a moratorium on Foreclosures and hence the stats are skewed. The original 90 days has been stretched to about 120 days. For the last four months the Foreclosures have dropped because
1) Banks were not allowed to do any more foreclosures and
2) The banks were waiting to show inventory to get a piece of the bailout.

Fannie Mae is starting foreclosures starting in 4th week of March and so is everyone else. So the REO inventory which has been semi-stagnant for the last four months will see a spike now driving prices even lower.