Real Estate “Shadow Inventory” Lurking in our Midst……

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Filed under Private Money Articles

by Tim Krulia – Private Money Blueprint CFO

As part of our quest here at PMBP to give you the single best resource on the financial aspects of growing your real estate investing business (aka, we help people find private money quickly, easily, and abundantly)… here’s an article I found that explains the different fluctuations in today’s market and why it’s going to struggle again before getting better…

Four great topics are discussed in this article:
1) Post tax credit prognosis
2) 4 strong negatives dragging on the market
3) What the heck is Detroit doing!?!?!
4) “Shadow Inventory” Dun, dun, dun!!!

Two friends of mine (newlyweds) closed on their first house on Monday. They were super stressed out to make sure that they had the house under contract and closed by the specified cut-off dates of the tax credit policy. They are perfect examples of folks who got up off their behinds and bought now rather than later because of the tax credit expiring. They had plans to buy a house sometime in the next year or so but jumped now for the $.

Real Estate Market Hangover Effect

The author of this week’s article hits the nail on the head when saying that the tax credit’s effect has “borrowed buyers” from later months and now it’s time for the hangover effect. Meaning, the supply of buyers was potentially pre-maturely depleted a good bit from our government’s incentive plans leaving the next few months or so to suffer from the reduction of supply of buyers.

The author gives 4 great reasons why the market (although had a great recent short term – thank you tax credit boost!!) is going to start to struggle again. During the early 2000’s refi-boom, equity in houses was leveraged to the hilt with high LTV and CLTV loans. When I was originating mortgages, it seemed like everyone and their mother either bought their houses with 0% down payment or opened a second mortgage to super high CLTVs.(i.e. only leaving a small amount of equity in their homes).

In the past few years as home prices fell, many Americans had to stand by and watch as the values of their houses fell below the amounts they owed for the house. These underwater swimmers are what the author is referring to in the article. It makes total sense what the author is concerned about and the remedy (well one anyway) is appreciation. If there is enough equity in a house, it can just be sold if the owner loses their jobs, moves, has a divorce, etc. If a house is underwater, the number of choices is limited as to what the owner can do and well, we’ve seen that foreclosure has been the poison of choice for the masses the past few years.

Detroit Michigan Real Estate Being Demolished

Detroit, Michigan, ouch……sorry man. Even as a loyal Ohio born and bred Buckeye it makes me feel awful for what’s going on up there. It’s just too bad that all those houses might just be destroyed. Coming from a background of personally overseeing about 50+ real estate rehab projects (and seeing first hand what can be done to bring a house back to life & how awesome that really is to watch), I wish there could have been a tax base in place from somewhere to commission thousands of out of work contractors in the Mid-West to rehab these houses & bring them back to life. Maybe these neighborhoods have really got into such bad condition that this is really the best route to take. After watching the video in the article, I sure wouldn’t want to be talking a stroll though some of those neighborhoods at night……or even in the daylight for that mater!

Last, but certainly not least, “Shadow Inventory.” What a great name for these houses! I don’t know if the author made the name up for this article or what, but it’s catchy nonetheless. Ok, but what the heck is the author talking about? Basically, there are lots of home owners that want to sell their houses, but have decided that they will just stick it out until the housing market comes back first before putting their property up for sale. Well, logic would lead one to believe that as this lull in the real estate market continues grow in time, there is probably some relatively similar proportional growth of home owners that are falling into this category.

Let’s just say that IF all the markets were doing great again (employment, stocks, real estate, foreign trade, etc.); all the people that wanted to sell their houses would put them on the market and try to get a good sales price. The problem is simply a supply and demand issue. Over the past few years the supply has been so much greater than demand that it became a main driver of the prices of homes depreciating in value.

If a huge number of home owners are waiting for a rebound in the real estate market to sell their homes, as soon as they hear that the markets are rebounding it’s a very real possibility that a ton of houses will slam onto the market thus pressuring depreciation again. The author of the article makes note that if these “Shadow Inventory” homes keep popping onto the market every time things start to look a little better, the supply increase from shadow inventory will pressure the market negatively again and again. I hadn’t thought of that segment of the market like that before but my parents fit that description to a T. They are baby-boomers. I wonder how many others in that cohort are standing in the same shoes as my parents. If it’s a significant number, as I’m afraid it may be, that’s a BIG hindrance on any substantial short-term recovery of the real estate market!