Foreclosure Rates vs. Shadow Inventory…The Great Disconnect

Westcoe Realtors, Riverside California…In today’s Business Section of the Press Enterprise, it is reported that for the eighth straight month, foreclosure activity for a large part of the Inland Empire declined.  On it’s face, this is great news, and it would be nice if we could leave it at that.  However, for the last 12 months or so, our industry has been buried in reports and comments about a massive “shadow inventory”…shadow inventory being defined as a glut of foreclosed or almost foreclosed houses just waiting to hit the market. 

So…in this great debate, which is right?  Are foreclosures down, and therefore the shadow inventory is merely a myth, or is the other shoe getting ready to drop heavily on our declining foreclosure rates?

Since we get asked this almost daily by our clients, here is our answer…We haven’t got a clue.

While there is no denying that indeed the foreclosure rates have fallen, the $64,000 question is why?  Are they down because the market is recovering and people are doing better and making their house payments?  Or are some of the government programs designed to help actually helping?  Or are these same programs only delaying the inevitable, and therefore the other shoe will drop when the government help stops?  Or have the banks fallen so far behind that the drop is simply because they haven’t gotten around to dealing with all the delinquent home loans?  Or have the banks taken the foreclosure process right to the last step, and then stopping so they can choose exactly when to foreclose for their own accounting purposes?

We really don’t have the answers to any of the above questions…and neither does anyone else.  Right now all we can say is that the number of repos that hit the market for sale has fallen drastically.  Not that long ago, bank repossessions accounted for, by our estimate, approximately 90% of the market inventory.  Now, they account for only about 33% of the listings for sale.  Granted, another 33% is “short sale” listings, which are really repossessions waiting to happen, but even then, that leaves the remaining 33% of homes for sale as regular, seller owned, standard sales…and that is a huge increase from only 1 year ago.

As we have said many times on this blog, our Riverside/Inland Empire area runs almost opposite of what is happening in the overall country.  Many times, much of the negative national housing news has no bearing on what is really happening in our backyard, but on this issue, we simply cannot tell.  “Experts” have been chatting endlessly about this shadow inventory for quite some time with no actual evidence that it exists.   These bad loans and their accompanying foreclosures have to be somewhere, but as of yet, they have not shown their ugly face.

So what happens now? What are we to think?

All we can suggest is that you do what we do…ignore that which is foretold, and simply deal with that which is on your plate at the moment.  Right now, the repos are not the dominate force in sellers they once were, regular sellers are entering back into the marketplace, and lenders are more open to working with short sales before they become repossessions…and all of that is a good sign.

In fact, if it were not for all the chatter about “shadow inventory”, we could easily draw a conclusion that our real estate market was definitely on the rebound.  Only time will tell on this one, but until proven wrong, we’ll roll with the positive news that is in front of us…and not stress about what may not come.

 Take care.