Is the Bank’s “Shadow Inventory” Casting a Cloud on the Real Estate Market?

Hey Peachtree City & AR....has anyone noticed that a number of foreclosed homes seem to be just sitting for months on end with no visible effort going on by the banks to actually resell them? It really did not hit me until a client expressed interest in a foreclosed home in my own neighborhood. When I approached the sales broker for the neighborhood he informed me that the builder had gone bankrupt and the house was going into foreclosure in a few days. "Call me back", he said. "The house will probably a better buy once it comes out of receivership and is back on the market."

Okay, that made sense to me. So I kept making calls to the broker who kept informing me that the home was not available yet. Well, a period of about 3 or 4 months has gone by and the house is still just sitting....vacant! Then OMG it hit me like I was suppose to have a V-8 or something....lenders gotta just be sitting on thousands of foreclosed homes!

Why would I come to that conclusion you say? Okay, normally, foreclosures go on the market about a month or two after the banks take title. Most foreclosures are also priced to sell pretty quickly. Some properties even sell within days of the listing. The bottom line is that the process from listing to offer to closing is easily no more than 90 day. So what's really going on?

My research should provide some insight regarding this issue. These properties know in the industry as "shadow inventory" may be a proverbial time bomb for the real estate market. For example, what would happen if all of a sudden these inventories flooded the marketplace. The disaster would result in further depreciation sparked by the existing glut of foreclosures in the marketplace. So what is the real logic for the banks holding on to all these distressed properties?

First, and probably the most obvious is that the banks are slow to move this inventory because they would have to reflect the losses on their books. Having to reflect these loses on their balance sheets would put further stress on the banks. In a previous post, Bank of Georgia Receives "Cease & Desist" from FDIC! I brought an awareness to the fact that Georgia already has a huge problem with the amount and rate of bank failures with more expected.

Secondarily, banks may be holding inventory to allow for a slower free-fall of prices. Market recovery may also bring about increasing assets! Still another variable may be that it just takes a good deal of time and money to get a foreclosure cleaned up and ready to be marketed. Folks, Georgia now ranks sixth for total number of foreclosures for the first half of the year with 56,391 as identified by RealtyTrac's Midyear US Foreclosure Market Report. That's a staggering one foreclosure for every 70 households!

The real problem I foresee could correlate to the timing of dumping these inventory on the market place. If banks are forced to bring these distressed properties to market before an assumed bottom is reached it will undoubtedly push housing prices even lower. Should banks wait until the feel they see recovery then it could actually stall real recovery. Further, there has been serious discussions regarding what could be another wave of foreclosures as the Alt-A and Option ARMs reset.

Is this really a problem that should make Georgians catch a case of insomnia? I'm sure that depends on who you ask. However, the only way to keep folks in their homes is to keep them employed!! Right now unemployment is over 10% in Georgia! Georgia has lost 251,000 over the past two years and in June paid out $167.2 million in unemployment benefits. With that being said, if the recession is nearing an end, Georgia must not only find a way to cope with increasing unemployment numbers but we must also deal with the over 67,000 folks that have already lost their jobs, hope, and maybe their homes.

Lastly, let just be honest......Most folks are not looking for a hand out......but a hand up!!!