Shadow Inventory: Luckily, Here It Comes

One of the biggest challenges to the housing industry throughout the rest of the year will be the increase in discounted properties coming unto the market. There is a glut of foreclosures that have been delayed by the court systems in many states while paperwork was corrected. The banks are rectifying their paperwork and processes. Now, more and more states are clearing the way for the banks to resume repossessing these properties.

As these properties find their way to the market, the prices of non-distressed properties in the region will be adversely impacted for two reasons.

  1. There are a finite number of homebuyers in any market. A portion of these buyers will purchase the distressed properties new to the market because they can get them at discounted prices.
  2. As these distressed properties sell, they will become comparable sales used by appraisers to establish value on all homes (both distressed and non-distressed) sold in the future. Since these properties are sold at a discount, they will have a negative impact on other valuations.

A Perfect Example: New Jersey

As an example, let’s look at New Jersey. According to the National Association of Realtors, New Jersey’s percentage of distressed properties to overall home sales (20%) has been less than that of many other states (30-70%). However, the reason for this is the New Jersey court system has prevented banks from foreclosing on many homes for over a year. During that time, the months’ supply of ‘shadow inventory’ of distressed properties waiting to come to market in New Jersey has climbed to over 50 months, the largest number in the country.

Last week, New Jersey Superior Court Judge Mary Jacobson cleared the way for the top-four banks to resume foreclosures in the state. The impact this will have on the number of distressed properties can be clearly seen in these statistics reported by Housing Wire:

In October, New Jersey had the 24th highest foreclosure rate in the country, with servicers filing roughly 5,200 foreclosures that month, according to RealtyTrac. By July, the Garden State’s foreclosure rate dropped to 42nd with just 1,112 filings last month.

New Jersey serves as an example for many states that will see a dramatic increase in the number of distressed properties coming to the market in the fourth quarter of 2011 and the first quarter of 2012.

The Good News

The housing market will not recover until we clear this shadow inventory. The speed at which these properties come to market and are sold will determine the speed at which the housing market recovers. The latest S&P Shadow Inventory Report shows that the months of shadow inventory already is decreasing. The report explains that the number of families falling 90 days behind on their mortgages has decreased dramatically. That means that as we clear these distressed properties there will be much less of a backfill. The end to the housing crisis is finally within sight.

If you are thinking of selling your home in the next twelve months, selling sooner rather than later will probably get you the higher price. However, in 18-24 months, the market will return to historic appreciation norms.

Information compliments of the The KCM Crew on August 24