"Second Crash" Fears Recede Our Bank's Shadow Inventory

For years, some real estate analysts feared that banks would suddenly release a wave of foreclosed houses, swamping the local housing market and sending house prices into a second collapse.

That second tsunami isn't happening, according to an analysis by the North County Times.

A house-price crash precipitated a series of foreclosure spikes in 2007 and 2008, leaving banks holding thousands of houses and struggling to hire staff to process them.

After 2009, real estate agents and some analysts became convinced that lenders were holding off on foreclosures, and sitting on foreclosed properties in order to prop up prices, creating a "shadow inventory."

They feared lenders would have to process and release all those houses ---- sending house prices, which have been bouncing along a price bottom for two years, into another downward spiral.

Instead, the number of homes in default has been steadily declining in the region, thanks to a host of programs from government and private banks and a turn toward short sales, in which borrowers sell their properties for less than they owe.

And once lenders have foreclosed on properties, they have moved quickly to sell them, so the stock of properties held by banks is declining, according to an analysis of foreclosure data by the North County Times.

No conspiracy

"The idea that the banks are intentionally doing anything is itself ridiculous," said Chris Thornberg, a principal and an economist with Beacon Economics near Los Angeles. "There's not some Illuminati of banks. They're not holding back units, they're selling them as fast as they can."

Thornberg has long argued against a second wave of foreclosures, but other analysts worried about the shadow inventory.

Tim Ellis, an analyst at national real estate brokerage Redfin, has been among the most concerned, writing onRedfin's blog in February: "The fact remains that the banks are currently sitting on tens of thousands of homes across the country that they have foreclosed and not yet listed, along with tens of thousands more homes somewhere in between the first missed payment and the actual foreclosure.

"... Any sign, however slight, that prices may be on the rebound will cause banks to release more of their inventory onto the market, along with a wave of pent-up supply from would-be sellers on the margin to rush to list their homes to take advantage of the 'recovery.'"

Locally, the sentiment was similar.

Seeing shadows

"There's a lot of shadow inventory," Jeff Jenkel, a Rancho Bernardo real estate agent, said in May. "And so at some point it's going to get a lot worse before it gets better."

Even Douglas Duncan, chief economist for government lending giant Fannie Mae said in December, "The shadow inventory has to be worked through."

Do lenders hold properties off the market? Chase Bank responded to the North County Times' question, speaking only for themselves:

"No," said Lisa Shepherd, vice president of Chase REO and property preservation. "The only time that you would see a property that's not available for sale that goes through foreclosure is if it's in some sort of legal action that prohibits me from selling it."

Lenders sold off the majority of homes they foreclosed, according to a North County Times analysis of foreclosure data from ForeclosureRadar and transactions from the San Diego and Riverside county assessor's offices.

Fire sale

Between Jan. 1, 2007, and June 30 this year, lenders foreclosed on 16,570 houses in North San Diego County. By the end of that period, lenders held 780 houses ---- they'd sold off 95 percent of the houses they'd taken back.

The same trend holds for Southwest Riverside County over the same period: Lenders foreclosed on 36,037 houses, and by the end of June possessed 1,625, which is to say, they sold 95.5 percent of all the houses they'd foreclosed.

At a peak in fall of 2008, lenders held 1,315 houses in North County and 3,173 houses in Southwest Riverside.

If the lenders had the capacity to drop all those houses on the market right away, they probably could have affected prices: All those houses would have represented one-third of North County listings in the period, and half of Southwest County listings. Even this year, if lenders put all their houses on the market, it would change pricing.

But lenders can't flip a house instantly, said Shepherd from Chase.

"If the property is vacant and there are no issues, it should be anywhere from 30 to 45 days to get it on the market," she said. To sell the property, "on average, and especially in the state of California, anywhere from 60 to 90 days."

Inventory turns over

In 2007, lenders needed a median of 10 months to sell a house they'd just foreclosed on. By 2008, they needed a median of six months. At the end of 2011, they'd reduced that median to four months, in North San Diego and Southwest Riverside counties.

"What that means is rather than mismanaging things and holding things back, they (lenders) are reducing their inventory." said G.U. Krueger, a housing economist with Krueger Economics in Los Angeles.

Even as lenders have become more efficient at selling the houses they foreclose on, they're also foreclosing on fewer of them, largely thanks to government refinance and loan modification programs, private loan modification programs, and a new focus on short sales.

Those programs have helped lower the number of people in default. In San Diego County, as of June 30, there were 6,539 people in default on their loans but not yet foreclosed, down 35 percent from three years earlier, according to ForeclosureRadar. The number of people in default in Riverside County fell 34 percent over the same period to 8,821.

Those programs also have sharply reduced the number of foreclosures in the region: In July, lenders foreclosed on 223 houses in Southwest Riverside and on 126 houses in North County.

The result has been a steep decline in the number of houses available for prospective buyers ---- listings in both regions are down one-third from a year ago, according to the North San Diego County Association of Realtors and Redfin.

The tight inventory of homes for sale has led to bidding wars among buyers for the first time since the boom ended in 2006, and a stabilization of home prices in the region.

"People are starting to come out and buy homes," said Nathan Moeder, an economist and principal with London Group in San Diego. "There's going to be demand to suck up those homes."

Deliquent Mortgages Reported at 3 Year Low

U.S. homeowners are getting better about keeping up with mortgage payments, driving the percentage of borrowers who have fallen behind to a three-year low, according to a new report.


Still, the rate of decline remains slow, credit reporting agency TransUnion said Wednesday. The percentage of mortgages going unpaid is unlikely to return anytime soon to where it was before the housing market crashed.

Some 5.49 percent of the nation's mortgage holders were behind on their payments by 60 days or more in the April-to-June period, the agency said. That's the lowest level since the first quarter of 2009.

The second-quarter delinquency rate is down from 5.82 percent in the same period last year, and below the 5.78 percent rate for the first three months of 2012. The positive second-quarter trend coincided with an improving outlook for the U.S. housing market.

A measure of national home prices rose 2.2 percent from April to May, the second increase after seven months of flat or declining readings. Sales of new homes fell in June after reaching a two-year high in May. Sales of previously occupied homes also declined in June, but were higher than a year earlier.

Home refinancing surged in the second quarter, as interest rates sank to historic lows. And more borrowers with underwater mortgages -- or home loans that exceed the value of the home -- refinanced through the government's Home Affordable Refinance Program than ever before.

"More people are making their payments, and that's great," said Tim Martin, group vice president of U.S. housing for TransUnion. "I expected a little bit better, but maybe we'll see some more of that pick up in [the third quarter]."

Even as housing trends turned positive earlier this year, the U.S. economy began to show signs of faltering. The national unemployment rate remained stuck at 8.2 percent, and the pace of job growth slowed sharply, with employers adding an average of only 75,000 jobs in the April-June quarter. Hiring appeared to pick up in July, however, with employers adding 163,000 jobs.

TransUnion anticipates the mortgage delinquency rate will continue to decline. But it doesn't see it falling below 5 percent this year.

The national delinquency rate remains well above its historical range, an indication many homeowners are still struggling five years after the housing downturn.

Before the housing bust, mortgage delinquencies were running at less than 2 percent nationally. It took about three years after the housing market crashed for the delinquency rate on mortgages to climb to a peak of nearly 7 percent in the fourth quarter of 2009. The rate has been trending down since then. Home prices need to recover further for the delinquency rate to decline.

At the state level, Florida led the nation with the highest mortgage delinquency rate of any state at 13.48 percent, down from 13.91 percent a year earlier. It was followed by Nevada at 10.85 percent; New Jersey at 8.15 percent; and, Maryland at 6.79 percent.

The states with the lowest delinquency rate were North Dakota at 1.32 percent; South Dakota at 1.94 percent; Nebraska at 2.24 percent; and, Wyoming at 2.41 percent.

Foreclosure hotbeds Arizona and California each saw marked improvement during the second quarter.
California's mortgage delinquency rate fell nearly 22 percent to 6.13 percent from a year earlier, while Arizona's declined 21 percent to 6.14.

One reason for the sharp declines in mortgage delinquency rates in those states is that homes tend to move faster through the foreclosure process than in Florida, New York and other states where the courts play a role in the process. That leads to logjams of cases involving home loans that may have gone unpaid for two years or more.

"You have states that are taking a long time to work through the delinquencies that they have, which is keeping their numbers up," Martin said.

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Are Real Estate Bellwethers Ringing?

In case you’re still a nonbeliever that housing has finally crawled its way into recovery mode, ask yourself: What are the bellwether indicators of the early stages of a rebound? You can probably rattle them off.

• Rising home prices in the vast majority of the country’s major markets.
• Tightening of the supply of houses listed for sale.
• Quickening rates of turnover of the available housing inventory – how fast houses listed for sale are put under contract

You could also add sustained periods of rising single-family housing starts (they were up in June for the fourth straight month), increased number of applications for home mortgages and more pending home sale contracts. All positive.

But let’s stick with the three key indicators bulleted above – prices, inventory and time on the market – because at the moment they are eye-openers. Though there are regional and local pockets where prices haven’t stabilized – notably in Pennsylvania, portions of New Jersey and the 

Midwest –  the vast majority of  U.S. markets are now seeing at least modestly rising prices compared with year-ago levels, and thus far fewer houses available to buy, according to the Realtor.com Real Estate Data Trends for June 2012.

In 99 percent (144) of the 146 major markets tracked by Realtor.com, which has access to listing and sales data from hundreds of Multiple Listing Services around the country, median prices rose during the month of June by 2.7 percent over year-earlier levels. Twelve months ago, by contrast, the same survey found prices  declined by more than 1 percent in the majority (54 percent) of markets – 79 out of 146.

What’s  more significant, however, is what’s happening to local inventories of houses for sale.  They are plunging, and what’s on the market is generally moving quickly. On a national basis, the available stock of listings, i.e. what’s available for shoppers to buy, is down by 19.4 percent compared with the year before. But in 17 large metropolitan areas, inventory is down by more than 30 percent. In Oakland, California, for instance, there are 58 percent fewer homes listed for sale than 12 months ago. In Seattle, inventory is 43 percent lower.  In San Francisco and Phoenix, the drop has been just under 40 percent.  The median age of the national inventory – 84 days – is the lowest it’s been since early 2007, which means what’s getting listed isn’t sticking around nearly as long as it did a few years back.

These are extraordinary numbers, and in some cases they are helping to fuel multiple bidding situations on the remaining stock of houses available for sale. A handful of metropolitan areas that were badly battered during the bust are now reporting double digit listing price increases. Phoenix’s median list price is  up 32 percent year-over-year. Miami is up 14 percent. Detroit – yesDetroit – is up 10 percent.

But big rebounds in median prices aren’t limited just to localities with low home costs and lots of foreclosures. Three of the highest costing markets in the U.S. have experienced robust increases from June of last year through this June: San Francisco’s median is back up to $725,000, a 15 percent-plus gain.Washington, D.C.’s median of $425,000 is up 13.6 percent. And Santa Barbara, California, is simply off the charts, with prices one-third higher than they were 12 months ago.

Boom is a bad word in real estate these days, so let’s not apply it to any of these situations. But rebound or modest recovery? Those terms are hard to dispute.

Brace Yourself: Home Prices Back on the Rise

House prices, after falling for more than five years, are rising again. All the major sales-price indexes show that there have been modest national increases in recent months, even after adjusting for seasonal patterns.

When foreclosures and distressed sales are excluded from the data, prices are up even more. And we should expect further gains: The asking-price index, a leading indicator of sales prices, published by Trulia Inc. (where I work), climbed at an annualized rate of 3.3 percent in the second quarter of this year, adjusted for mix and seasonality, and rose in 84 of the 100 largest U.S. metropolitan areas.

Of course, if the U.S. economy falters, due to a deepening of the economic crisis in Europe or a wave of foreclosures, prices may reverse. For now, though, the increases are widespread. For the real-estate market and housing policy, this is cause for relief, but also for some concern.

One immediate effect of the price turnaround is that inventory tightens. In the past year, beginning even before prices rose, the inventory of listed homes shrank 20 percent, due to fewer foreclosures for sale and little new construction. Smaller inventory contributes to price increases; when there are fewer homes available, sellers can ask more. In some local markets, bidding wars have returned. Now, rising prices could even accelerate the decrease in inventory in the short term, as buyers act quickly in hopes of paying as little as possible, and sellers hold off listing their homes in anticipation of further price increases. In fact, 61 percent of people do expect prices in their local market to rise in the next year, according to a recent Trulia survey.

Sales Effect

In the longer term, if rising prices last, inventory will grow. Higher prices will encourage more owners to sell, including some who have been “underwater” on their mortgages, as well as banks holding portfolios of foreclosed homes.

Rising prices will also cue housing developers to accelerate construction. After overbuilding during the real- estate bubble, the construction industry has been very slow to recover. New-home starts are still less than half of normal levels, and construction jobs now account for a smaller share of economy-wide employment -- 4.1 percent -- than at any time since 1946. If rising prices nudge construction closer to normal, the housing market might finally contribute to, rather than hold back, the general economic recovery.

Rising prices should also take some pressure off policy makers to “fix” the housing market, and make some mortgage- modification programs more feasible. In particular, shared- appreciation loan modifications -- in which a lender or government agency reduces the amount of principal a borrower owes in exchange for a share of any future price appreciation -- become possible when there is a reasonable chance that prices will go up. Crucially, underwater borrowers -- those owing more on their mortgages than the property is worth -- who expect prices to rise have less incentive to default on their loans and abandon their homes.

Yet along with rising prices come two serious concerns.

First, higher prices make homes harder to afford again. When prices plummeted post-bubble, concerns about affordability faded. Even now rents are gaining faster than home prices, according to the Trulia Rent Monitor, which makes owning a better bargain than renting. Still, rising prices make it harder for renters to buy. And, in markets such as coastal California andNew York City, where new construction is limited by geography and regulations, high prices put homeownership out of reach for many residents.

Building Rules

While San Francisco is too beautiful and Manhattan too productive ever to become cheap places to live, local policy makers could make homes in expensive cities easier to afford by loosening restrictions on new construction. They could allow higher densities, as California is attempting to do near transit stations. In Washington, they could relax the height limit. And everywhere they could simplify and clarify the rules for approving projects. More construction in cities would mean less of it pushed out to sprawling exurban areas, where overbuilding during the bubble led to some of the nation’s most widespread foreclosures.

The second reason for concern over rising prices is that they fuel optimism. Some optimism is desirable, but unchecked optimism creates bubbles. In a recent Trulia survey, 58 percent of people said they expect prices in their local market to return to their previous peak in the next 10 years. In Pittsburgh, Houston and other markets where prices slipped only slightly during the recession, it’s plausible that they will again reach their previous peak. But even in the hardest-hit markets, such as Las Vegas and Sacramento, where prices rose to unsustainable levels and then fell by half or more, 56 percent of people still expect them to rise to their previous peak in the next 10 years. Such optimism can lead to a bubble if people pay more for homes that they expect to appreciate.

To ensure that rising prices and renewed optimism don’t inflate a new bubble, we must not encourage homeownership and housing construction beyond what our income and demographics can support.

Although full recovery in housing is still years off, rising prices will start reshaping the market right away -- for better and for worse.

Top 3 Issues Holding Back Real Estate Buyers

Fewer Buyer Challenges with Financing and Selling Existing Homes

REBAC members identified the top issues currently preventing buyers in their local market from completing a purchase. While difficulties obtaining financing were cited as the leading challenge among buyers in 2010 (61 percent) and 2011 (65 percent), in 2012, the percentage noting this challenge dipped to 49 percent. Problems selling their current homes, similarly, declined in 2012 to 43 percent, down from 59 percent in 2011 and 57 percent in 2010.

Top Three Issues Preventing Buyers from Completing Purchases

6 Reasons California Real Estate is in Recovery

California has served as a remarkable barometer for nationwide real estate trends over the past decade. This fact is in large part due to the widespread publicity and concentrated marketing efforts that come from the region, which tend to not only set the stage for public opinion, but also tend to exaggerate the peaks and troughs. This lead to the Southern California real estate market seeing some of the most stunning gains throughout the inflationary period of the housing bubble, as well as some of the most painful losses following the bubble's burst in 2007. However, the following 6 real estate market metricsare clear indicators that we have entered the light at the end of the tunnel.

1. No More Easy Money 
The single biggest factor that contributed fuel to the fire that eventually burned the nation in 2008, was easy money loans to under-qualified borrowers. Countless 3-5 year adjustable rate home equity loans were taken out by borrowers seeking to live above their means between 2001-2006. Then when those loan rates began to balloon in 2006 and borrowers could no longer afford the payments, the foreclosure market swelled to a Tsunami. Since then, numerous precautionary measures have made their way into legislation and bank policy, ensuring that easy money loans will not be a part of the equation in the foreseeable future.

2. Housing Market Inventory At 4 year Low 
As with any market, the laws of supply and demand are among the most fundamental factors effecting price. According to a CA Market Statistics and Real Estate Trends report on MontezumaProperties.com, the San Diego Real Estate market currently has only 1,742 homes on the market which is the lowest since 2008.

3. 67% Reduction in Distressed Properties On Market 
It was the tsunami of distressed properties flooding the market in 2007 that was one of the biggest contributors to the steep decline in home value. Today, distressed homes make up only 5% of the properties on the market in San Diego compared to 15% two years ago.

4. Median Home Listing Price At 2 Year High 
Currently the median home listing price in San Diego is $545,000 compared to $449,000 just two years ago according to the regional MLS. This rise in home value is telling potential home sellers that the waters are a bit warmer compared to the icy, foreclosure filled seas of the recent past. For buyers this means that now is the time to act while overall home prices remain a good value.

5. Pending Home Sales at 2 Year High 
Numerous reports have recently surfaced that an estimated 41,790 new and resale houses and condos sold statewide last month. This represents the highest number of home sales in May since 2006.

6. Days On Market At 2 Year Low 
In San Diego the median number of days on the market over the past month is 37, compared to a high of 73 over the past two years. One of San Diego's most successful real estate agents, Carlos Gutierrez of Prudential California Realty helped one client sell one home for the exact listing price and purchase another home all within 17 days. Within two weeks Mr. Gutierrez also found buyers for a $2,700,000 Luxury Property in Del Mar. "Of course a lot of people have had a difficult time over the past few years" said Gutierrez, "but luckily my team and I have really fine tuned a winning formula and have proven throughout this that we can perform for both buyers and sellers in any market. Now that the market is showing clear signs of life and health, things are really moving. But the most important thing remains that I take the time to understand and work with each and every person who reaches out to me. I make sure that they understand the current market conditions and their place in it. That's the foundation, and once we're on the same page we can make things happen quickly and confidently. That is the key."

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