Tuesday, September 21, 2010

Shadow inventory: More homes coming

I have spoken before about how the supply of forced sale (foreclosed or short sale) inventory continues to increase but may be close to peaking. Here's an article stating the peak is not yet in and we have more to come:

From Realestatechannel comes some rather scary data regarding how the pipeline continues to be filled and they see no let up on new supply being dumped on the market.

If this were early 2005, one could claim that 40% of homeowners who were delinquent 90 days or longer would eventually bring the mortgage current. But the cure rate has plunged along with home prices. As early as one year ago, the cure rate had dropped to almost zero. A delinquency of 90+ days now means almost certain foreclosure or short sale.

. . .  To come up with a total for the shadow inventory, let's first add the total number of loans in default to those delinquent 90 days or more since we know that these loans are headed for foreclosure or a short sale. That comes to 4.5 million properties. Based on the cure rate for loans delinquent at least 60 days, we will add 95% of those 60-day delinquencies. That is an additional 723,000 residences. For the same reason, we will add 70% of those delinquent for at least 30 days - 1.25 million properties.
And, of course, let's not forget the REOs that have not yet been placed on MLS listings by the bank servicers. We'll be conservative and estimate them at 500,000. Adding all of these together, we come up with a total of roughly 6.97 million residences which are almost certainly going to be thrown onto the resale market as distressed properties at some point in the not-too-distant future. This massive number of homes will put enormous downward pressure on sale prices. To believe that prices are firming now is to completely ignore this shadow inventory. Ignore it at your own risk.
I suggest you read the whole article.

ht: PragCap

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