Wednesday, August 4, 2010

California Shadow Inventory Report - Q2 - 2010

There was a point in time where various housing bloggers were talking about "shadow inventory" as houses taken back by the bank and purposely kept off the market. According to these bloggers this horde was supposed to be released en masse and flood the market. It was a great, sexy story and I never saw any making much effort to prove or disprove if it was actually happening. Since trustee sales are a matter of public record I went and matched up all trustee's deeds that never made it to the MLS and it turned out to be a trivial sum when you accounted for turnaround time for eviction, trashout, bpo's, and all the other stuff that happens before the houses hit the market. This data was not well received by those bloggers espousing that version of the shadow inventory opinion but they have since changed their tone to the "other" version of shadow inventory. The other housing bloggers talk about "shadow inventory" in the terms of number of delinquent borrowers... this is a very very large number. But in terms of houses foreclosed but not on the market, it is very small. In short, If there is going to be a tsunami that floods the market it will be trivial to see coming before it hits.

This is a simple graph to show the accumulation (or lack thereof) of REO inventory. When the blue line is above the green line REO inventory could be accumulating. I say "could be" because the green line is merely the number of homes sold during the quarter that were foreclosed in the past 12 months, so investors trustee flips would be captured in the data as well. I think the blue line will elevate somewhat but the two lines will stay pretty close as it makes little sense to foreclose and not market the home.

I am very doubtful of the tsunami theory simply because the government has said it is not what they wish to happen and they have gone to great lengths for it not to happen. What we will have instead is stagnation in the market for a very very long time.

As you can see with the above graph, there was no great accumulation of REO's during Q2.


Richie said...

"What we will have instead is stagnation in the market for a very very long time. "

Yeah, but when I go to open houses, the realtors tell me prices have bottomed, interest rates are low and there will never be a better time to buy a house. Who, oh who, should I believe?

Effective Demand said...

I wish I could better quantify the large number of price declines that have been going on the last few months but my ability to capture the data in a way that shows a historical trend eludes me. I have been impressed by the number and size of price cuts. The reason you have seen the number of contingents stop falling is only because sellers are cutting price and finding the market. It took agents much longer last time things slowed down to recognize it for what it is.

djviking21 said...

Wow! realtors have been saying the same thing for years...good thing you didn't listen then..huh.....Hi E.D. hey what's your take on the white house's massive freddie/fannie morgage forgiveness order another uber housing bailout/crutch on the way?
thanks for your great

Effective Demand said...


I think the rumor is false. If you look at the math of what they are talking about it doesnt make much sense as far as net benefit. Plus you'd piss of all the people who didn't get the principal cut (much more the majority) so it is politically untenable as well.