Mike Orr loves his numbers, even more than I do. Last week he published an interesting article on “shadow inventory” on his subscription site, www.CromfordReport.com.
While I could add my two cents to Mike’s analysis, I think he’s done such a thorough job that I’ll include the full article.
Shadow Inventory?
Some analysts have written about a so-called “shadow inventory” of lender-owned property. They speak in dark tones of an ominously vast number of properties which have been foreclosed but are not being marketed. The banks are supposedly hoarding these homes to avoid flooding the market. The implication is that when the banks finally unleash these properties onto the market we will be overloaded with supply.
This is palpable nonsense.
Let’s look at why the shadow inventory is relatively insignificant:
First, we need to establish how many properties have been foreclosed but not yet sold to a third party. It takes much time and effort to establish this, particularly because government entities are not required to file an Affidavit of Value when they deed property. They get an “A-3″ exemption. However Tom Ruff of the Information Market is up to the challenge and has counted all the trustee sales, searched for subsequent sales to third parties, accounted for all the A-3s and produced a spreadsheet of shadow inventory counts by ZIP code within Maricopa county. There are a total of 18,386 homes within Maricopa county in REO status.
How many of these are in the ARMLS system as of this morning?
- 5,213 are active
- 7,170 are pending (i.e. in escrow)
- 477 are temporarily off market (in many cases because multiple offers are being negotiated)
Thus there are 12,860 accounted for. So the “shadow inventory” of REOs not currently being marketed through ARMLS for Maricopa is 5,526. No doubt many of them will be listed in the next few weeks.
Is this number likely to cause a flood? Absolutely not. This represents less than 1 month of supply based on the current rate of purchase of REOs through ARMLS (which is 5,556 as of today). In fact if this is the only new supply, the inventory of active REOs will fall over the next month, just as we expect. The trustees would have to increase the rate of their sales substantially to keep up with the current market demand for REOs.
So is the vast hoard of shadow inventory hiding in Pinal county? Well to be honest we can’t count REOs with such accuracy in Pinal due to the delays in recorded documents becoming available. What we can say is that in the ARMLS system this morning, among the lender owned properties:
- 549 are active
- 951 are pending
- 40 are temporarily off market
Thus there are 1,540 accounted for and we know the current monthly sales rate is 779. It would appear that Pinal’s supply is about 10% of Maricopa’s and Pinal’s demand is about 13% to 14% of Maricopa’s. As a result we would estimate that shadow inventory in Pinal is about 550, representing about 3 weeks supply.
So we can conclude, at least for Greater Phoenix, that shadow inventory is a fake issue.
QED
(By the way, the RealtyTrac analysis of these shadow inventory numbers seems to be flawed. They appear to have excluded pending and temporarily off market MLS listings in their analysis and only counted REOs listed “for sale” (active). Thus we believe they may have over-estimated the shadow REO inventory across the whole country.)
What I can add to Mike’s commentary is that:
- I have one lender-owned property that is not on the market yet, but will be. I’ve already been approached about its availability, but do not have a price yet to share.
- Most of Phoenix area REO properties that I have listed and are now under contract have received multiple offers. It’s been the norm, rather than the exception. For the most part, properties are selling very close to list price, or over.
- And just this past week, I called on a new lender-owned listing in Pinal County. This foreclosed property had been on the market 4 days, and the listing agent said she had 15 offers, 10 were cash, and the highest offer was 30% over asking price.
Times – they are a changing.
