Shadow foreclosures, especially in the hardest hit neighborhoods around the country, could keep a lid on any price recovery in residential real estate for much longer than estimates currently expect. These are properties that remain unlisted and unsold long after the foreclosure process has run its course. According to RealityTrac, an Irvine, Ca. company that lists foreclosed properties, the inventory of unsold homes currently sits at 3.8 million which would take about ten months to deplete at today’s rate of home sales. They state that an additional 700,000 foreclosed homes are not being included in that inventory number. Those numbers are expected to increase, at least over the near term, as the number of delinquent mortgages continues to grow on a monthly basis.
Policy changes enacted from both the public sector and lenders have kept the foreclosure rate relatively stable over the same period but that stability may be fleeting. A glimpse at how serious the situation may become was recently revealed by a study that showed that 50% of loans modified in the first half of 2008 were back in default by the fourth quarter of the same year. The troubling aspect of the study was that these loans ended up in default even after monthly mortgage payments had been reduced, in some cases drastically, yet the homeowners still couldn’t keep up. These numbers would indicate that the financial health of homeowners across the country is still deteriorating.
If that is the case, expect the foreclosure numbers to start picking up speed over the second half of 2009 as lenders will have to ultimately take these non-performing properties in to foreclosure at some point. How many end up as shadow foreclosures is anybody’s guess but as a more listed properties in neighborhoods around the country go unsold the motivation for lenders to keep additional properties off of the market will continue to persist. A “for sale” or “in foreclosure” sign on every other house on the block makes selling anything in the vicinity a lot tougher. By keeping those houses in shadow foreclosure status and the signs off of the foreclosed properties, the chances of selling something may improve, even if only by a small measure.
Eventually these shadow foreclosure homes will go on the market and, as in life, timing will be everything. While not the usual course for real estate markets, Wall Street sees these situations every day in stocks that have taken precipitous losses. Shareholders that have stayed with the stock all the way down eventually start looking for an exit. Should another wave of selling hit the stock, shareholders “capitulate” and start selling at whatever price the market will bear, fundamentals be damned. The same thing is possible with shadow foreclosure houses should lenders decide to get out any price. It’s also the reason that some prognosticators feel that real estate prices could drop another 30% in some areas. The second scenario that could play out would be a gradual recovery in prices that gives sellers a chance to get a little bit of their money back while selling at a slightly higher price than where they previously sat. When enough sellers are doing this at the same time it’s called “upside resistance”. This resistance caps price increases because each time a buyer comes in with “demand” a seller meets him with “supply” thereby preventing prices from going up. Should lenders decide to unload their “shadows” in the same manner, housing prices will remain stagnant for years to come.
|
