Real Estate

What happened to the scary shadow inventory?

By From page C2 | October 05, 2012

After a few weeks of looking at nearly every home in her price range, she told me, “I’m not finding the type of home I’m looking for. Maybe I will hold off buying something until there are more homes to choose from.”

That’s a valid complaint I frequently hear from folks shopping for a home. The housing market is improving because more buyers are chasing fewer homes. A quick search of our MLS reveals there are only 650 homes showing up as active listings, about half the number of homes for sale at this time last year. With monthly home sales averaging 225 or better, our supply of homes is less than three months. Two years ago our supply of available homes was 10 months. Entry level buyers looking for a home priced less than $300,000 only have 250 in our county to choose from. The lack of available inventory is slowing down sales and driving prices up a bit.

Some potential buyers, frustrated with the shortage of selection, are rethinking their commitment to buying a home at this time. They plan on waiting until they have a more favorable selection. With the benefit of instant replay, putting off buying a home in 2006 when the median selling price was at $500,000 was probably a pretty good idea. Property values dropped like a rock, finally hitting bottom this year. Delaying a home buying decision while waiting for the arrival of a greater selection of homes may not be such a good decision. Inventory will likely remain well below historical averages for many years.

High expectation levels are partly to blame for the large number of frustrated buyers not finding the right home. Their perception is that sellers are giving away houses that should be in immaculate condition, in lovely neighborhoods and sellers should gladly pay all the buyer’s closing costs. What most shoppers are discovering are average conditioned homes, located in average neighborhoods and sellers who are unwilling to pay buyer’s closings costs or accept a buyer’s request for repairs.

It’s understandable that some buyers feel that way when for the past five years all they have heard and read is how bad the real estate market has been. Their expectations are that sellers are giving away houses, banks will take any offer on their REOs and it’s a buyer’s market.

Today’s buyers are also more averse to risk. They have watched as friends, neighbors and family have lost their homes over the past few years. They know sellers who have been unable to sell their home. Today’s buyers are more sensitive to the burden of debt and the importance of equity in a home. They vow not to become trapped in an undesirable home that cannot be sold quickly in case the unexpected happens. Subsequently, any home they would consider must be a combination of low price, excellent condition and in a preferred location. The reality in this market is that most homes are not meeting their expectations.

Is there any sign that inventory will significantly increase and give buyers more selection opportunities? Not so much.

There are hundreds of homeowners in the county who would like to sell but can’t. They owe more money on their mortgage than their home is currently worth. They’re stuck. Half of all county homeowners with a mortgage are underwater. More than that wouldn’t have a 10 percent down payment left over to buy another home if they did sell. It will take a few years of steady appreciation before property values increase sufficiently to allow these homeowners some mobility. Until then …

Don’t look for new home construction to add significantly to our supply of homes especially not homes priced less than $300,000. Building permits, impact fees and utility hookups can costs up to $75,000 on a 2,000-square-foot home. The median price per square foot for a re-sale three-bedroom home in El Dorado Hills is $189 a square foot. A new home of comparable size would be $225 a square foot with HOA dues.

What about all the shadow inventory?

At this time last year, most agents were preparing for the next title wave of REO inventory; called “shadow inventory.” Shadow inventory refers to real estate properties that are either delinquent, in foreclosure or homes that banks already own and are delaying putting on the market until prices improve. If those homes hit the market all at once, housing would be in serious trouble. Our expectations were that lenders would dump hundreds of new foreclosures on the market, resulting in lower property values and another delay in the market’s recovery.

The frightening aspect about shadow inventory was that no one really knew how many homes were in the foreclosure pipeline. Some estimates, if true, would at best delay the market’s recovery for another three years and at worse, plunge the country into another recession. In 2010 Barclays Capital estimated there were 4.5 million mortgages that were at least three months delinquent. That’s an entire year’s supply of home sales. Since then the number has dropped to 1.5 million and continues to decline.

As it turned out that barrage of new listings never happened, offset by improved demand, particularly from short sales and investors. Loan modifications likely helped a half-million homeowners avoid foreclosure. The scheduled auctions by Fannie Mae to sell off blocks of foreclosures to investors will further insure low levels of available inventory.

Ken Calhoon is a real estate broker in El Dorado County. He can be reached through his website at

Ken Calhoon

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