A shadow lurks in the housing market
This is scary. The San Francisco Chronicle reports that lenders are sitting on hundreds of thousands of foreclosed homes that haven’t even been listed yet. If this “shadow inventory” hits the market, we’ll have a new definition of bottomless pit.
From the article:
“We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market,” said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. “California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You’d have further depreciation and carnage.”
The Chronicle suggests several reasons why banks might not be selling off their foreclosures:
— The “pig in the python”: Digesting all those foreclosures takes awhile. It’s time-consuming to get a home vacant, clean and ready for sale. “The system is overwhelmed by the volume,” Sharga said. “In a normal market, there are 160,000 (foreclosures for sale nationwide) over the course of a year. Right now, there are about 80,000 every month.”
— Accounting sleight-of-hand: Lenders could be deferring sales to put off having to acknowledge the actual extent of their loss. “With banks in the stress they’re in, I don’t think they’re anxious to show losses in assets on their balance sheets,” O’Toole said.
— Slowing the free-fall: Banks might be strategically holding back some foreclosures so prices don’t fall as fast. “They want to be careful about not releasing them too quickly so they don’t drive prices down and hurt the values,” O’Toole said.
And then, there are people scamming the system. Two dozen people have been indicted for “allegedly conducting a wide-ranging mortgage fraud based in San Diego and led by a street gang member.” From Reuters:
The defendants allegedly used straw buyers and inflated appraisals to purchase homes that had sat on the market for extended periods and had been reduced in price.
They submitted offers that exceeded the homes’ asking prices, and had the overage paid to a shell construction company that they claimed would make upgrades or handicap modifications to the properties, prosecutors said.
The defendants instead disbursed the “kickback amount” to members and associates of the enterprise as payments for their participation, the indictment said.
Lenders later foreclosed on the properties, taking “severe financial losses,” after the straw buyers failed to make payments, the indictment said.
- Apr 8, 2009 12:16 PM — Scott Jagow
- 23 comments
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Comments (23)
April 8, 2009 1:17 PM PT
Disastrous for whom? If the markets were flooded with all of the inventory what would it mean? New housing starts are about as close to zero as they can be. Maybe it could hurt median home prices in some markets? But we’ve already seen big drops in those with sales volume increasing. Maybe this isn’t a disaster so much as a sign that we shouldn’t expect new housing starts to see any big gains anytime soon.
April 8, 2009 1:43 PM PT
Market price is determined by supply and demand, so I’m not sure what else anyone can do besides letting prices fall until people buy them. I suppose they could burn some of the houses down to reduce the supply.
I periodically shop for houses and have noticed that banks are not willing to lend as much to buy a house as they were to all other things being equal. My credit score has risen and my income has been steady but the amount of loan I qualify for as dropped by probably 1/3 in the last 2 years. So, I can’t buy the house I want unless the prices also drop by 1/3.
How can they move houses unless the amount people can borrow will pay for the purchase?
April 8, 2009 1:48 PM PT
How is this scary or bad. Why does the media always play the fear card?
As a single guy in his 20s who rents and has a stable job in Southern California, I wouldn’t mind if the market got flooded with foreclosures and makes housing cheaper. How in the heck would that hurt me? And please spare me the “it will trickle to me” BS. No it won’t.
The only people who get hurt are the irresponsible to over-leveraged themselves.
April 8, 2009 2:00 PM PT
I believe this is “bad” because a large number of individuals rely on home construction to make a living.
Applications for new housing starts have been rising (slightly) the past month or two, and many view this as a leading indicator for construction (and the employment associated with it). If however these applications are filed under the assumption there’s a certain amount of foreclosed homes on the market. If their assumption is incorrect and there’s actually far more foreclosed homes in this “shadow market” (i.e. not counted in the current audits and potentially going to enter the market in the near term). Then that means we’re looking at an even longer wait before new construction starts & the spending / jobs associated with it enter the economy.
Of course, if there are legitimately more houses out there just waiting to enter the market… then the right course of action is for new construction to slow down / continue at low levels until that glut is absorbed. But it will make life even more painful for the many Americans who make their living in that field.
April 9, 2009 6:26 AM PT
I was under the impression that most of the new housing starts were for multi-family units (i.e. rental units / apartments / flats,..)
Which means builders are choosing to build rental property rather than smaller homes that people can afford.
I think what the single-family housing market needs is a return to the 1200 sq. foot first-ring suburb homes on 1/6 acre lots that they built in the 1950s. That’s the kind of starter home most young families can afford nowadays.
Jen: responding to John H | RespondApril 9, 2009 4:47 PM PT
I bought my house in 2005. I’m over 200K underwater, owing double what my house is now worth. I’d pay less via hit to my credit rating if I walked that pay down debt on home value that doesn’t exist. I could easily live here for 10 years and not recoup.
Like you, I’m in my 20’s. We saved 60% of our income for a year for a down payment, and lost it all and then some.
People are hurt by this, even if they did things responsibly. Funny how people don’t blame the “irresponsible” individuals who bought stock at the peak. Buying a house you could afford that’s now worth half that value is harmful any way you cut it, particularly because (unlike stock) you’ve got to keep paying on that wothless value. Advocating forcing prices down further so you can afford them is cruel.
April 8, 2009 2:26 PM PT
Lou,
I will spare you the explanation of why bad for the economy is bad for every one.
But do me a favor. Spare us the generalization “The only people who get hurt are the irresponsible to over-leveraged themselves.”
In this times a lot of responsible people are getting hurt too. If you don’t know that, maybe you should get out and talk to some workers who lost their jobs because of the economy.
April 8, 2009 6:22 PM PT
If a person was responsible, then they would have bought affordable house with fixed mortgage. If they gambled with ARM, that is not responsible.
As to recessions, they happen all the time. That is the reason you need to have emergency fund to be able to survive recessions. Otherwise they should not have bought the house.
April 9, 2009 6:36 AM PT
What about folks who DID have savings, and they invested it in what they were told was a low-risk “high-yield” savings account based on AA-bonds - Only to discover that the rating agencies lied to them and the result was that they lost 80% of their savings?
This is true, happened to a co-worker of mine. Her broker told her she was in a low-risk savings that was earning something like 6%. She did reasearch and determined that the level of risk was at most likely to be maybe a 15% loss based on the rating.
In fact she lost nearly 80% of it in about a month (I think it was August 2007) I remember hearing her crying on the phone to her broker several pods away from me. The losses amounted to over 14,000. She was about 28 years old.
April 9, 2009 10:26 AM PT
Dude, there are always fraud cases. In this case the regulators (SEC) and congress failed. This has nothing to do with housing market. If the regulators did their work then your friend would not have lost the money.
Except for tresuries (because treasury with FED owns printing press) there is always risk. Also never believe the rating agencies. They are run by same crooks that run wall street banks. They care about their bonuses next quarter and this year. That is farthest they think into future.
April 10, 2009 6:35 AM PT
gb:
You were the one that tried to pin the blame on people being irresponsible. All I was trying to say was that there were a lot of people who did try to be responsible who got caught up in the mess. That’s a fact, dude.
April 9, 2009 6:23 AM PT
John is absolutely right. Most everyone agrees that housing prices got out of control and builders built larger and larger homes with ridiculous finishing (slate shower stalls, granite counters, rainforest wood floors…)
Most single people like John (and myself) with middle-incomes can not afford what they’re building.
And ah, yes, the good old “Trickle down” phrase - one of the most poorly thought out Presidential sound bites in history. “Let all the rich people get even richer and some of that will ‘trickle’ down to you”
Only problem is, telling people they’re only going to get a ‘trickle’ is like telling them to sit under the table of rich folks and wait for the crumbs to drop. Brilliant!
After 25 years people are still saying it, it will be a long time before they can escape that one. ;-)
April 9, 2009 7:15 AM PT
Sorry, this was supposed to go in response to John H’s comments below. Apologies.
April 8, 2009 4:04 PM PT
So the idea to artificially create jobs that should not exist. Why don’t we pay people to build hydro-electric dams using only spoons? That will put some people to work, for sure.
April 8, 2009 4:05 PM PT
John H
So the idea to artificially create jobs that should not exist. Why don’t we pay people to build hydro-electric dams using only spoons? That will put some people to work, for sure.
April 9, 2009 6:45 AM PT
I think I have to agree with John. While I like the idea of the government “priming the pump” in a recession, I don’t like the way they go about it and I don’t think the current stimulus package does much over the long term. 90% of the money spent is designed to inject money into the economy short-term.
We learned in the 1930s that just building roads and bridges doesn’t rebuild an economy. I was not until WW II when some of the the massive government spending associated with the war actually went into research and development of technolgoies and the expansion of economic production that the depression ended.
The war spending was different than FDR’s spending in several key ways: 1. It increased natural resources production (oil/steel/nitrates/, etc) 2. It boosted R&D and forwarded technologies (communciation/chemicals/electronics/avionics/ machining, etc.) 3. After the war spending on the marshall plan created an export market for US goods 4. After the war the GI Bill and housing subsidies for GI’s increased the productivity of the workforce and creatsd jobs for housing.
I don’t see much in the current stimulus bill that does those kinds of things.
April 8, 2009 5:44 PM PT
Ned makes a good point. The banks seem to believe that the pre-crisis level of house prices was reasonable and will inevitably return, when everyone acknowledges it was a bubble.
Even if housing starts pick up, the new houses are unlikely to be affordable for most people who are renting or homeless now. The existing stock is needed to house displaced and economically distressed people, and the sooner the better. That means banks will have to take a hit. They can’t play this shell game forever. The market just won’t support it.
Why don’t the banks rent out these bereft homes for goodness sake, and hire property management companies to look after them?
April 8, 2009 7:39 PM PT
What’s funny about this story is that Marketplace had a radio story on today about mergers in the homebuilding industry and how it must be a sign that the housing economy is coming back. Oops. BTW, John H., the construction industry is never going to get back to pre-recession employment levels. If you’re waiting for that to happen, you’ve got a long, long wait. Time to find a new career, IMHO. Unfortunately, it’s probably going to involve a pay cut.
April 9, 2009 6:33 AM PT
Paul, the Marketplace PM story didn’t say it must be a sign of the housing market coming back. It said by merging, the companies will be better positioned when the market does bounce back (if they can survive that long).
Ned.: responding to Paul | RespondApril 9, 2009 6:47 AM PT
I think the companies are merging because the market is shrinking. They’ll combine the best that’s left of both companies and shed the excess.
April 8, 2009 9:43 PM PT
I think we are loosing sight of the fact that if the price is right some of these builders will buy up these distressed properties and either make repairs, remodel them, or tare them down and rebuild either homes, condos, or turn them into commercial properties. By giving the banks money, we are in fact giving them bridge loads. Instead of asking them to sell of nonperforming assets. The same is true of repossessed cars, boats, even factory machinery, when the price is right someone will jump in and try to earn money on the deal. Not everybody was mortgaged up to the hilt, there are plenty of people in this country siting on cash looking for an opportunity.
April 9, 2009 9:16 AM PT
dont ya wish you woulda stayed in that first home you bought? regards
April 10, 2009 2:47 PM PT
I have personal experience with banks/lenders hoarding properties.
My husband and I have been house-hunting for a year. We found two homes in the Minneapolis/St. Paul metro area that we were interested in. One was in a northern suburb, another in St. Paul.
The first was a short-sale that was being listed at 60% of its value in 2006. We made an offer for the list price, but were turned down. Six months later the house was still on the market, and we made another competitive bid. Again, we were turned down in favor of another “more favorable” offer.
Tax records show the home was purchased two days after our offer was turned down… by Countrywide.
The home in St. Paul was also purchased by Countrywide. Both homes are sitting vacant instead of having families in them because Countrywide wants to flip the homes for a larger profit.