Bank's Shadow Inventory Continues to Shrink

Where did the shadow go — and why does that bother hedge fund managers?


Shadow inventory is thought to be the pending supply of distressed homes, which can create uncertainty in U.S. housing markets. CoreLogic reports that by its math the nation's shadow inventory tumbled 15% year-over-year in April to a four-month supply. Since peaking in January 2010 at 2.1 million units, the shadow inventory has fallen by 28 percent to 1.5 million units.


The trend and the size of these shadow supply numbers must be greeted with some trepidation by Wall Street hedge funds. They found it easy to raise over $6 billion for plans to buy and rent foreclosures. But these money managers may have difficulty spending it as the supply of troubled properties shrinks.

The Calculated Risk blog pointed out that there are numerous measures of shadow inventory. Some estimates are larger — and more soothing to hedge funds — than CoreLogic's data. CoreLogic counts seriously delinquent properties; properties in the bureaucratic foreclosure process (notices of default); and properties that are already owned by lenders. But CoreLogic adds a twist to their estimate by trying to eliminate distressed homes already listed for sale or already sold in the short sale process. Obviously, those properties have already come out of the shadows into the light of day.

Many people, myself included, appreciate CoreLogic's approach. It separates "better visible" from "invisible" supply than other estimates. It also avoids making the idiotic assumption that anything that looks distressed — such as 30-day delinquencies — inevitably will become visible foreclosure supply at some future date.

But even if one adds up everything that crawls and breathes in the distressed mortgage space, one cannot but notice that these shadow supply estimates are a moving target – a downwardly mobile target actually. This might mean that the foreclosure-happy hedge funds may be coming a little late to a party that already has been well-tilled successfully by smaller investors.

Take California as an example. If you add up all the housing distress data for California by the Mortgage Bankers Association (MBA), such as 30-day, 60-day, and 90-day delinquencies, and homes in foreclosure, you get 542,252 properties. Furthermore, if you make an adjustment to reflect that not all mortgages are captured by the MBA you end up with 637,944 distressed properties, a big and some might say bogus shadow supply number.

Still, this number is down 43% from its peak of 1.12 million homes. Father time apparently may not be able to help much with the "under-accumulating" problems mentioned above.

Shrinking supply is good news for all but hedge funds, who have other challenegs to profiting from foreclsoures.

Gaining access to bulk sales from government mortgage handlers or banks may be stymied by political oposition from Realtors, for whom distressed sales are a life blood.

Furthermore, home prices are recovering in distressed geographies like Phoenix. That makes bulk sales less necessary.

Why auction off bulk to Wall Street for a discount, when you can take advantage of the auctioning process for the masses?

The $6 billion that hedge funds want to be on foreclosures smacks like a questionable business model, at best. And at its worst, it's a potentially unproductive market distortion.

SOCAL Real Estate Market Posts Solid Gains in May

Southern California's real estate market got its buying season bump in May with home sales increasing more than 20 percent and the median price hitting a 20-month high, a market tracker said Wednesday.

Sales increased in all six Southern California counties, according to San Diego-based DataQuick.

"The market is being slowly nursed back to health by low interest rates, a modestly improved economy and, we suspect, a widening sense that the housing sector is at or near bottom," DataQuick President John Walsh said in a statement.

Last month home sales increased 20.6 percent to 22,192 properties from 18,394 a year ago. DataQuick's count includes new and previously owned houses and condominiums. Los Angeles County did even better, with sales jumping 25.3 percent to 7,496 properties from 5,983 a year ago.

Sales have now increased on a year-over-year basis for five consecutive months with last month's gain the biggest, DataQuick said.

May's regional median price increased 5.4 percent to $295,000 from $280,000 a year ago. It was up 1.7 percent from $290,000 in April, DataQuick said. Last month's median was the highest since $295,500 in September 2010. The year-over-year gain in the May followed a 3.6 percent annual increase in April. Before then, the median had fallen year-over-year for 13 straight months.

DataQuick attributed the price increase to higher demand, a drop in the number of distressed property sales and more sales in the higher-cost coastal markets.

Last month sales in San Diego, Orange, Los Angeles and Ventura counties represented about 70 percent of all sales, up from 67.6 percent a year ago.

The higher end is finally getting some action, too. Last month sales between $300,000 and $800,000 - a range that would include many move-up buyers - jumped 23.1 percent year-over-year. And sales over $800,000 rose 11.8 percent from May 2011.

The report showed that in May:

The median price in Los Angeles slipped 1.6 percent to $315,000 from $320,000 a year earlier

Sales in Ventura County soared 43.3 percent to 993 from 693 a year ago. The median price fell slightly to $360,000 from $360,500.

In San Bernardino County, sales increased 16.3 percent to 2,702 from 2,323 a year ago. The median price rose 5.7 percent to $158,500 from $150,000 a year earlier.

Distressed sales - the combination of foreclosure resales and short sales - made up 44.8 percent of last month's resale market. That was the lowest level since the figure was 44.4 percent in March 2008.

Investor and cash-only home purchases remain near record levels.

Absentee buyers - mostly investors and some second-home purchasers - bought 27 percent of the homes sold in May. That's down from 28.4 percent in April but up from 25.1 percent a year earlier.

Buyers paying with cash accounted for 31.3 percent of May home sales, down from 32.2 percent the month before and up from 29.2 percent a year earlier.

Indicators of market distress continue to move in different directions. Foreclosure activity remains high by historical standards but is much lower than peak levels reached in recent years. Financing with multiple mortgages is very low, and down payment sizes are stable, DataQuick said.

It all adds up to a market still on the mend.

"There's still plenty of uncertainty swirling around out there," Walsh said

Santa Clara County Real Estate Market Heating Up

The Santa Clara County housing market continues to show signs of a rising market: more closed sales and shorter days-on-the-market when compared with a year ago.

In May, the average price for a single family home stood at $832, 078, a 7.54 percent increase from the $773,722 of May 2011, according to data compiled by MLSListings. The average price of a condo stood at $410,778, a 12 percent jump from the $366,773 of May 2011.

From May 2011 to May 2012, the number of days a single family home stayed on the market before being sold shrank from 66 to 53, and it decreased from 82 to 55 for condos. At the same time, the number of closed sales went up from 967 to 1,215 for single family homes and from 379 to 418 for condos.

Inventory was still low, but slightly more new listings came on the market than in the previous months. Sellers listed 1,498 single family homes and 482 condos for sale in May, 227 and 71 more than in April.

"The slight increase in the number of new listings is a hopeful sign," said Barbara Lymberis, president of the Santa Clara County Association of REALTORS®. "With record low interest rates and a bit more inventory, buyers who have gotten pretty beat up in the last few months may have a small breathing space over the summer to prevail."

To see hot properties in Santa Cruz click here: http://authenticre.com/Hot-Properties

Read more here: http://www.sacbee.com/2012/06/13/4560279/santa-clara-county-real-estate.html#storylink=cpy

West Coast Leads US Real Estate Prices Out of Slump

"National real estate prices in May have finally moved past the continued losses of the last few years. The subsequent stabilization pattern seen in recent months has progressed into the start of moderate growth," said Dr. Alex Villacorta, Director of Research and Analytics at Clear Capital.

"While gains in national home prices over the quarter and year were minimal in May, there are encouraging trends continuing to play out and gaining momentum beneath the surface," Villacorta added. "Strength in REO-only price trends as well as some early indications of price gains spreading from low tier sectors to the mid-, and higher-priced homes is helping confirm that the country continues to make progress on its recovery, and we are expecting to see improvements extend over the next several months."

Rolling Quarter Results: Prices are Gaining Ground

Short-term quarterly price trends picked up slightly at the national level, with appreciation of 0.4% turning into the first quarterly gain since November of 2011. The positive move at the broader market level is a reflection of the increasing strength at the regional level.

Helping to support growth at the national level, the West saw a notable jump in prices over the quarter, taking the lead over all the regions with growth of 2.7% (shown in Chart 1 below). The 2.2 percentage point gain over last month's report not only put the West out in front of the other regions tracked, but it marks the first time in five months it saw a quarterly change in any direction greater than 1.0%.

Fueling the growth in the West appears to be a shift in demand. Over the past year, the real strength in the West was seen in the lower priced home segment (those selling for $140,000 and less), likely indicating increasing investor demand for the lower priced units. While this trend isn't unique to the West, recent growth in the mid and top-tier sectors of the market is. Over the last rolling quarter, mid and top tier segments not only saw growth (top tier is a price point over $347,000), but started catching up to the gains in the lower tier. This new dynamic is encouraging, as it shows a broadening demand and a stronger base for growth.

Meanwhile, the South recorded home price appreciation of 1.2% quarter-over-quarter, doubling the small gains of 0.6% reported on last month. Similarly, the Northeast matched the national level gains of 0.4% over the quarter, showing a modest uptick over the gains of 0.2% reported last month.

At the same time, the Midwest continued to absorb price declines. With prices declining only 2.0% over the quarter the magnitude of the declines are subsiding, as compared to last month's quarterly losses of 2.7%. More on what's driving the Midwest price declines below in the "Turning the Corner" section.

Chart 1: Observed Results

        
                             Qtr/Qtr       6 mo/6
                               % +/-       mo              Yr/Yr
        --------------------------------------------------------
        West                   2.7%              3.8%      1.9%
        --------------------------------------------------------
        Midwest                -2.0%            -4.4%      -3.1%
        --------------------------------------------------------
        Northeast              0.4%              0.8%      1.6%
        --------------------------------------------------------
        South                  1.2%              0.9%      0.9%
        --------------------------------------------------------
        National               0.4%              0.1%      0.1%
        --------------------------------------------------------
        
        

Year-over-Year Results: Long Term Trends Turning Positive

Mirroring the quarter-over-quarter results, the longer-term yearly price changes at the national and regional levels also showed improvement. The national results show a mild 0.1% gain, which is the first time the U.S. has seen yearly gains since September of 2010, when price growth was fueled by the first-time home buyer tax credit in place at the time.

The West, Northeast and Southern regions all recorded more substantial gains over the past year, of 1.9%, 1.6% and 0.9%, respectively. This appreciation in prices over last year was in part furnished by a stronger than typical winter home buying season, where mild weather got homebuyers out on the hunt and motivated earlier than usual.

The Midwest has clearly not seen the same strength of the other regions, with price declines of 3.1% over the last year. However, this month's annual declines are softer than last month's reported losses of 4.0%, which aligns with the moderating losses in quarterly trends as well.

The Highest Performing 15 MSAs

Overall, the top 15 MSAs extended improvements. The average quarterly gain of this group was 4.5%, more than a full percentage point above last month's average. Each top metro also recorded quarterly gains in excess of 2%, making May's top 15 metros the strongest since September of 2011. This group is represented by a variety of regions, with the majority (40%) coming from the West.

        
        Highest Performing Metro Markets
        
          Qtr/Qtr                                     Qtr/Qtr
           Rank   Metropolitan Statistical Area        % +/-    Yr/Yr REO Saturation
        ----------------------------------------------------------------------------
             1    Phoenix, AZ - Mesa, AZ -
                  Scottsdale, AZ                          9.4%   17.0%         25.6%
        ----------------------------------------------------------------------------
             2    Seattle, WA - Tacoma, WA -
                  Bellevue, WA                            9.0%   -1.1%         19.5%
        ----------------------------------------------------------------------------
             3    Dayton, OH                              8.3%    9.0%         30.3%
        ----------------------------------------------------------------------------
             4    Washington, DC - Arlington, VA -
                  Alexandria, VA                          5.1%    7.5%         13.9%
        ----------------------------------------------------------------------------
             5    San Jose, CA - Sunnyvale, CA -
                  Santa Clara, CA                         5.1%    3.3%         20.1%
        ----------------------------------------------------------------------------
             6    Miami, FL - Ft. Lauderdale, FL -
                  Miami Beach, FL                         4.7%   10.6%         28.8%
        ----------------------------------------------------------------------------
             7    Minneapolis, MN - St. Paul, MN -
                  Bloomington, WI                         4.7%    9.0%         40.5%
        ----------------------------------------------------------------------------
             8    Denver, CO - Aurora, CO                 2.9%    9.0%         22.5%
        ----------------------------------------------------------------------------
             9    Pittsburgh, PA                          2.9%    9.4%          7.6%
        ----------------------------------------------------------------------------
            10    San Francisco, CA - Oakland, CA -
                  Fremont, CA                             2.7%    2.4%         27.6%
        ----------------------------------------------------------------------------
            11    Virginia Beach, VA - Norfolk, VA -
                  Newport News, VA                        2.7%    2.8%         17.9%
        ----------------------------------------------------------------------------
            12    Tucson, AZ                              2.7%   -1.8%         38.5%
        ----------------------------------------------------------------------------
            13    Tampa, FL - St. Petersburg, FL -
                  Clearwater, FL                          2.5%    9.0%         26.0%
        ----------------------------------------------------------------------------
            14    Richmond, VA                            2.5%    3.0%         23.0%
        ----------------------------------------------------------------------------
            15    Hartford, CT - West Hartford, CT -
                  East Hartford, CT                       2.4%    9.4%          8.0%
        ----------------------------------------------------------------------------
        
        

The Lowest Performing 15 MSAs

The lowest performing MSAs averaged quarterly losses of 2.8%, but these declines tapered slightly over the average losses posted in last month's report. Additionally, a third of the markets saw less than a 1.0% quarterly loss, which is another indication that losses are becoming less severe overall.

It's worth noting that Orlando has made an appearance on the lowest performing market list, with quarterly declines of only 0.2%. The region continues to show year-over-year price gains of 8.9%, however the slight cooling of short term price performance is far from confirmation that the metro's progress has subsided.

        
        Lowest Performing Major Markets
        
          Qtr/Qtr                                     Qtr/Qtr
           Rank   Metropolitan Statistical Area        % +/-    Yr/Yr REO Saturation
        ----------------------------------------------------------------------------
             1    Detroit, MI - Warren, MI -
                  Livonia, MI                           -10.4%   -5.4%         53.8%
        ----------------------------------------------------------------------------
             2    Houston, TX - Baytown, TX - Sugar
                  Land, TX                               -5.9%    5.7%         22.5%
        ----------------------------------------------------------------------------
             3    Milwaukee, WI - Waukesha, WI -
                  West Allis, WI                         -5.2%   -8.1%         35.1%
        ----------------------------------------------------------------------------
             4    Memphis, TN                            -4.3%   -8.6%         45.4%
        ----------------------------------------------------------------------------
             5    Honolulu, HI                           -3.8%    0.3%          9.0%
        ----------------------------------------------------------------------------
             6    Dallas, TX - Fort Worth, TX -
                  Arlington, TX                          -3.4%    4.5%         21.5%
        ----------------------------------------------------------------------------
             7    Columbus, OH                           -2.9%   -0.1%         34.8%
        ----------------------------------------------------------------------------
             8    Providence, RI - New Bedford, MA -
                  Fall River, MA                         -2.4%   -8.2%         14.7%
        ----------------------------------------------------------------------------
             9    Raleigh, NC - Cary, NC                 -1.2%   -4.6%         19.2%
        ----------------------------------------------------------------------------
            10    Nashville, TN - Davidson, TN -
                  Murfreesboro, TN                       -1.0%   -2.0%         21.4%
        ----------------------------------------------------------------------------
            11    New Orleans, LA - Metairie, LA -
                  Kenner, LA                             -0.8%   -1.2%         22.1%
        ----------------------------------------------------------------------------
            12    Philadelphia, PA - Camden, NJ -
                  Wilmington, DE                         -0.5%   -8.3%         13.8%
        ----------------------------------------------------------------------------
            13    Oxnard, CA - Thousand Oaks, CA -
                  Ventura, CA                            -0.2%   -4.0%         32.8%
        ----------------------------------------------------------------------------
            14    Cincinnati, OH - Middletown, OH        -0.2%   -2.2%         28.9%
        ----------------------------------------------------------------------------
            15    Orlando, FL                            -0.2%    8.9%         30.2%
        ----------------------------------------------------------------------------
        
        

Turning the Corner

The price gains seen at the national, regional and metro levels are being driven in part by the significant increases in REO-only prices. In fact, national REO-only gains of 8.1% over the last year on a median price-per-square-foot basis have outpaced non-REO price declines of -0.7% by 8.8 percentage points. Looking at REO-only prices on a year-over-year basis helps highlight why the Midwest lags the other regions in overall growth.

Chart 2: Regional REO-Only Prices (see image 2 for reference)

While growth in REO-only prices is driving broader market gains for most of the regions, the impact on overall prices depends on the level of REO saturation. For example, the Northeast has seen incredible growth in the REO-only sector shown above, yet has only recorded 1.6% gains year-over-year in overall prices. Because the Northeast has a mere 10% REO saturation, the lowest level across all regions, even substantial growth in the REO-only price segment hasn't swayed overall prices significantly. Additionally, the Northeast's REO-only prices are more sensitive to shifting demand, fueling the seemly high annual gains.

Clearly the Midwest is the only region that continues to see REO-only price declines on a year over year basis. While REO-only price growth has led the other regions into broader based growth, the Midwest has yet to receive assistance from this sector on overall progress. It's worth noting that the Midwest's REO saturation levels are still the highest of all the regions. As such, price weakness in the REO-only segment has been harder for the market to shake off, resulting in sustained declines at the broader level, as seen in overall yearly declines of 3.1%.

However, each of the three regions now seeing gains in REO-only prices, first saw long term reductions in REO saturation rates. And while the Midwest continues to face declines, it has achieved a reduction in its REO saturation rate over the last several years, from a high of 45% in 2009, down to 37% in May.

So while the West, South, and Northeastern regions have been able to find their way into positive territory, the embattled Midwest also appears to be on the path to recovery, but just running a bit behind schedule.