Me and My Shadow - Part II


So, now that we know what “Shadow Inventory” is, what is the anticipated impact of this looming inventory going to be on the housing market? Well, we’ve already established that a 33 month supply of “Shadow Inventory” currently exists and is waiting in the wings. How exactly is this inventory going to be absorbed in to the marketplace though?

Several scenarios are possible, consider this. According to S&P, “In summer 2009, it seems servicers nearly exhausted the supply of plausible candidates for loan modifications and switched their emphasis back to liquidation. The balance of loans that became recently cured fell to just more than 35% by October 2009 from about 56% in April 2009. During this period, the balance of loans that directly closed or entered REO rose to 64% from about 44%. Servicers are requesting, and borrowers are accepting, short sales in increasing numbers. Many of these are strategic defaults, meaning borrowers have significant negative equity and determine that they can enhance their standard of living by foregoing ownership to rent at a lower monthly cost.”

Liquidations equal an increase in inventory. Increased inventory equals more competition (supply). Home prices are directly impacted by the simple principle of Supply and Demand. Unless demand is present to keep up with the increased amount of supply anticipated to hit the market it is almost a certainty that home prices will be negatively impacted.

In recent months, prices have stabilized in the Atlanta marketplace. What’s the root cause? Again it comes back to that simple principle of “Supply and Demand”. In January 2009, there were 45,393 Residential Detached listings. Compare that to the 33,983 Residential Detached listings this January and it represents a 25% decline in inventory. Twenty five percent fewer homes to compete against coupled with increased demand as a result of favorable tax credits, interest rates and overall affordability will ultimately lead to price stabilization.

What does the future hold? S&P believes “In the coming months, servicers will increasingly conclude that a significant portion of the pool of seriously delinquent loans is unredeemable and, with slightly increased government support toward this direction, will conclude that the optimal workout solutions for these loans will involve liquidation. In addition, we believe most of the loans that became recently cured within the past year will once again become seriously delinquent. Given their track record and servicers' recent tendency to increase liquidations, we believe that this time servicers will opt for the liquidation of the homes backing these loans, either through foreclosure, deed-in-lieu, or short sale. “

It is estimated there are $473.4 billion in loans that will eventually need to be liquidated, which equates to approximately 1.75 million properties, or almost 50% of the existing homes available for sale year end 2009. Keep in mind; these estimates only include mortgage defaults in the private securitization market which makes up less than a 1/3 of the total securitization market and less than 5% of the total mortgage market. Granted, it is unlikely these properties will be liquidated at the same time, however without accompanying demand the introduction of these properties on to the marketplace will have an impact on prices overall.

Conclusion: An increase in inventory is inevitable due to “Shadow Inventory”. 2010 is going to be the “Year of the Short Sale” due to the composition of the “Shadow Inventory”. If you’re a seller who is not in a distressed situation pricing your home correctly is critical, the price must be COMPELLING not just competitive.