The Shadow Inventory Myth is Dead

A little over a year ago, I wrote a series of posts in which I argued that “shadow inventory” (foreclosed homes held off the market by the banks) was nearly non-existent.

Despite all of the data I brought to the table to support my claims that shadow inventory was a non-issue, there were still many commenters who chose to believe that banks were in fact sitting on large amounts of foreclosed homes that would spill out on the market any day now.

At the time I wrote those posts in late 2013 King County was seeing around 550 notices of trustee sale and roughly 250 new MLS-listed foreclosed homes hit the market each month.

If there was ever a time for banks to unload a bunch of foreclosed homes they’ve been sitting on for years, now would be that time. Inventory is at its lowest level on record, home prices are nearing their previous peak levels, and buyer demand is still strong.

As yet, over the past 30 days there have been just 147 newly-listed foreclosed homes (via this Redfin search). As of December, King County saw a little more than 300 notices of trustee sale. That’s a 45 percent decline in foreclosure notices and a 41 percent decline in MLS-listed foreclosed homes since late 2013. The foreclosure pipeline continues to chug along just as you would expect it to with zero evidence of any bank shenanigans.

If we couldn’t put the “shadow inventory” myth to bed before, I think it is 100 percent safe to do so now. Sorry if you were holding out hope that home prices would collapse again when a flood of bank-owned homes finally hit the market. We all have to give up our fantasies eventually.


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

19 comments:

  1. 1
    Kip Wallbanger says:

    I see a tremendous amount of foreclosures in South King County and Pierce County. Should I not be using Zillow? How long can these homes stay in foreclosure and pre-foreclosure? I am surprised on some of the delinquency amounts on some of these homes. Have some of the people never paid their mortgages?

    What am I missing?

    Could one argue that there is a substantial volume of blue collar workers when heading South? Are these trends hinting at problems with the manufacturing and transportation sectors?

    Or are this many homes always in this process?

  2. 2
    Kip Wallbanger says:

    Please, also weigh in on Tacoma when you get the chance.

    I still think Tacoma is the diamond in the rough, but it looks like it is being decimated.

  3. 3
    UrbanDweller says:

    But Ray Pepper said they are all coming back. He is always right.

  4. 4
    sleepless says:

    I have already said that, but will repeat myself. I have a dump across my office in Kirkland, it is a pretty prime area, but still, it is been empty for at least two years now, and it is literally crumbling apart. Who owns it? Here, check it out :)

  5. 5
    The Tim says:

    RE: sleepless @ – I could tell you who owns it and whether it’s had any public documents filed on it if you gave me the address.

  6. 6
    Mike says:

    Once the subprime market disappeared in early 2007, there wasn’t a whole lot of financing available to people experiencing financial distress. Between the time subprime disappeared and the government stepped in to help people stay in their homes, some areas had already plunged into a severe downward spiral. Areas where the values fell further and stayed down got stuck in a self-perpetuating cycle of foreclosures and walk-aways, which then encouraged (or forced) more people to throw in the towel.

    Why South King and Pierce County? Those were the last “affordable” areas as prices rose, so they attracted a disproportionate number of poorly qualified buyers late in the real estate cycle. As these loans defaulted en-mass, even long term owners found themselves in homes worth less than they paid a decade prior. It’s difficult to split out how much of the problem was caused by relatively new buyers vs long term owners cashing out their equity. The later ‘rise’ in values probably also lead to more bad re-finances in addition to bad purchase loans. Then you have investors who cashed out the equity in their higher priced homes and bought a handful of cheap starter homes to flip in lower cost areas. In general, a lot of the problems from the bubble era converged in lower cost areas. The case-shiller tier data shows this with the low tier plunging far further than the high tier.

  7. 7
    David B. says:

    Don’t expect True Believers to be swayed by hard evidence.

  8. 8
    MM says:

    Finally the shadow inventory myth is (officially) dead. So lets focus on another phenomenon where there are so many people desperate to buy a home, who would fight for their place in bidding wars, who would escalate the price and pay with cash, who would make an offer on the first day, who would eventually lose and give up on theirs dream home.

    I call it the “shadow demand”. Some people gave up and stopped looking for the home because it’s pointless for them. Either the price is out of their range or they can’t find anything decent. They want to (or have to) wait until the house market condition changes or their financial status.

    This is another reason why you shouldn’t expect a drop in house prices soon.

    PS. I’m thinking if there would be a way to estimate the shadow demand. I mean how many more people would buy a home if prices were 5%/10%/20% lower than today.

  9. 9

    By MM @ :

    PS. I’m thinking if there would be a way to estimate the shadow demand. I mean how many more people would buy a home if prices were 5%/10%/20% lower than today.

    I don’t think you need lower prices to increase the sales volume (although that would increase demand). You just need more inventory. With more inventory there likely would be more buyers in the market, and there would clearly be more sales. So no change in “demand” but a change in volume.

  10. 10

    RE: Kip Wallbanger @

    Yes Kip

    Washington’s Foreclosure Fairness Program is slowing the foreclosures, but the empty bank owned units in my SE King County neighborhood, about 2-4%, out numbers the listed for sale.

  11. 11
    Erik says:

    You were right tim and I was wrong on this topic. It seemed probable that we were being lied to again by the banks after America was cheated so badly by the banking system. I think that makes us even since you were wrong about inventory catapulting into the stratosphere.

  12. 12
    Deerhawke says:

    Maybe another myth that needs debunking is the current received wisdom about why there is no inventory.

    Lets call this “shadow underwater owners’ inventory”.

    Basically when I ask people who are supposed to be some kind of experts on the topic, why there is no inventory, they tell me that too many people are underwater on their mortgages and so they can’t sell. This sounds plausible on some level.

    But whenever I actually meet one of those people who are inclined to sell, but are not willing to sell right now, this is not their explanation. They tell me they are not going to sell until their house appreciates another X percent, or the sale can net them another Y dollars for their retirement. They see the market moving in their favor and so they are in no particular hurry to sell. No particular hurry at all.

    The other reason that it is hard for me to believe anything about this theory is that not a day goes by when I do not get solicited by someone who wants to refinance my mortgage. The rates are completely absurd. They have lower APRs these days than the VA mortgage my parents got on their $100-down brand-new-home in 1958. The terms do not sound that onerous, although these days you actually have to get an arms-length appraisal and document some kind of income. But if you got a mortgage in 2006 or 2007 and paid a bit too much, for the property then you could refinance and cut your payment in half.

    So in that case, you might think to yourself…hmmm…why sell? Why not stay? Let’s just refinance and watch the market a bit.

    That, I think, is the real basis of this inventory problem in a nutshell.

  13. 13

    By Deerhawke @ :

    But whenever I actually meet one of those people who are inclined to sell, but are not willing to sell right now, this is not their explanation. They tell me they are not going to sell until their house appreciates another X percent, or the sale can net them another Y dollars for their retirement. They see the market moving in their favor and so they are in no particular hurry to sell. No particular hurry at all.

    That’s also why when a stock hits a new record high that it’s likely to go even higher. Fewer people want to sell it, because of the trend, but the trend also attracts people to buy it.

  14. 14
    Shoeguy says:

    By Kary L. Krismer @ :

    By Deerhawke @ :

    But whenever I actually meet one of those people who are inclined to sell, but are not willing to sell right now, this is not their explanation. They tell me they are not going to sell until their house appreciates another X percent, or the sale can net them another Y dollars for their retirement. They see the market moving in their favor and so they are in no particular hurry to sell. No particular hurry at all.

    That’s also why when a stock hits a new record high that it’s likely to go even higher. Fewer people want to sell it, because of the trend, but the trend also attracts people to buy it.

    Which is exactly why you had the Dot Com bust and the Housing Bubble bust. Crazy valuations with no basis in reality, fueled by mass public delusion.

    We seem eager to dive right back in, too.

  15. 15

    RE: Shoeguy @ – We’ve been “diving” into speculative bubbles for nearly 400 years. I daresay it is human nature to inflate a bubble. And it is the role of the government – uh oh, this might be going too far in this venue! :-) – to regulate the market and take steps to prevent bubbles from inflating. Because they always collapse and cause substantial harm.

  16. 16
    Blurtman says:

    Chatted with my neighbor yesterday. She expects her home to hit $1 million at which point she will sell. It’s currently in the high sixes. Limited inventory from what people say, great schools, and the nagging nester – to the moon!

  17. 17
    Macro Investor says:

    Tim, I don’t think you’ve explained anything. The argument was always that the banks WERE REFUSING TO FORECLOSE because it made their balance sheets look bad. The properties were still owned by the homeowner. Perhaps there were loan mod and/or short sale discussions going on. These would only show up in bank delinquency rates, but that too can be manipulated if need be.

    That was a few years ago. I agree that times have changed and it is logical for the banks to have foreclosed and cleared inventory into a better market. But this too is guess work.

    At the time you wrote those articles, I pointed out that foreclosure radar showed a huge glut of off-MLS distressed properties. You chose to ignore that data as well. So, a little less smugness would be nice particularly since you are not nearly as open minded as you think.

  18. 18

    RE: Macro Investor @ – One thing to note is that banks have always been rather slow to foreclose, although I have seen larger delinquencies in more recent years than were common before. But part of that might be the newpre-foreclosure stuff they have to do and the stuff owners can do to slow them down.

    I think there are stats on how many people are delinquent XX days, and that would better show what you are looking for (or show what Tim is trying to prove).

  19. 19
    whatsmyname says:

    RE: Macro Investor @
    It’s probably just me, but I can’t tell whether you are challenging Tim’s most recent conclusion or offering a bad tempered capitulation.

    If the former, I think the problem is because your perception that, “The argument was always that the banks WERE REFUSING TO FORECLOSE because it made their balance sheets look bad,” is mostly wrong. There are a half dozen reasons why this is so, that are buried in the comments of the three threads Tim linked into. These are neatly capped by one poster’s conclusion, (post 12 on Nov.5, 2013), that, “Once invested in a decision, it’s very hard to accept non supporting data.”

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