Perhaps you’ve heard the term “shadow inventory.”
The Charlotte region, hit by the housing downturn like virtually every market in the country, has its share of these homes. Estimates of the number vary widely. Shadow inventory is tamping down appraisals and discouraging some buyers from entering the marketplace despite attractive home prices.
Nonetheless, Realtors® are seeing hopeful signs about how shadow inventory is playing out in the region, say economists and others.
Based on CMLS data, the market appears to be working its way through these properties as they come on the market. And the ones that remain in “shadow” are expected to gradually come into view in a variety of ways.
“Not all distressed properties will even reach the MLS,” says Jennifer Frontera, president of the association and CMLS. “Some will be donated to nonprofits or sold through special programs, and some will no longer be distressed if homeowners obtain mortgage assistance or loan modifications.”
Furthermore, the ones that enter the MLS are not projected to hit the market all at once or in massive chunks — which could further depress prices.
“There will not be any strategic dumping of ‘shadows’ on the market,” says Dr. Lawrence Yun, chief economist and senior vice president of research for NAR. “First, banks are said to be releasing REOs (bank-owned properties) as soon as that it is possible (with all the proper documentation processing, unlike robo-signing). Second, it is not in the interest of banks or HUD or Fannie and Freddie to dump it all at once.”
An additional measure to address distressed properties will likely materialize this year, possibly this spring, says Wells Fargo senior economist Mark Vitner.
He foresees the federal government encouraging programs that allow private equity firms to buy distressed properties from Fannie Mae and Freddie Mac. Once the firms buy them, the firms would then rent the homes back to the homeowners for a period of time, say five years — in effect, keeping the properties from reaching the market for that time and helping stabilizing prices.
“This would help clear up where a lot of the shadow inventory is,” Vitner says. “It would provide a better idea of how much is out there, will remove some homes (from being distressed) and reduce the number of homes expected to come on the market in the near term. And that might help normalize appraisals.”
Appraisals have been conservative, Vitner says, because of shadow inventory. “Once we get an idea of how much ‘shadow’ is out there, I think we’ll move past it pretty quick,” he says.
And the fact is, the Charlotte region’s home market is already showing promising signs. The “months of supply” for homes has dropped dramatically since April 2011, when it stood at 13.7 months. By December 2011 and January 2012, it was down to 9.3 months and 8.8 months, respectively.
“As long as visible inventory is falling, that is a good sign for the market,” says NAR’s Yun.
Yun says the critical factor in that decline, as well as in the continued absorption of distressed properties that come on the market, is having enough demand, or buyers.
“Home purchases have been rising such that the overall visible (MLS) inventory has been falling even with shadows becoming visible,” he says. “Looking forward, this trend will continue since the shadow itself has been diminishing. So as long as there are ready buyers of homes, particularly the REOs (bank-owned properties), the shadow is a less of a factor for the market.”
The government’s recent $26 million settlement with a handful of the nation’s largest banks over mortgage issues should also help some consumers.
“The settlement will help reduce principal balance for some homeowners and thereby reduce the number of distressed homeowners,” Yun says. “So it is a positive for the housing market. But lenders also took a hit, and excessively tight underwriting standards may be in place for a longer period.”
Given the many ways that shadow inventory is dispersed, association/CMLS president Frontera likens it to a pipeline with holes in it.
“Someone’s economic situation can change; they can refinance or get a loan modification,” says Frontera, a longtime specialist in bank-owned property sales. “They may be able to get a job and catch up on their payments. Some properties are donated to nonprofits or are bought and sold through neighborhood stabilization programs.
“There are a lot of holes in the pipeline,” she says, also noting that there are a lot of positive signs in CMLS data at the moment. She encourages readers to check out her President’s Letter in this issue for more on her views on the market.