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September 27th, 2011

Shadow inventory, high rents: Prolonged crisis, yet deals abound

by Peter Miller


Bank Owned Sale SignHow many additional foreclosures are likely in the pipeline during the next few years?

The answer is as many as 10,367,515, according to Laurie S. Goodman with the Amherst Securities Group.

Speaking before a Capitol Hill subcommittee, Goodman said:

Distressed loans are moving very slowly through the delinquency/foreclosure pipeline. These loans weigh heavily on the residential real estate market, and are often referred to as shadow inventory. In addition, many of the borrowers that are not delinquent on their loans have a tainted credit history and/or are seriously underwater, suggesting more defaults to come. Thus, there are many distressed homes that will need to change hands over the next 5-6 years.

The foreclosure mess is hardly over

The shadow inventory of distressed and foreclosed homes is likely to be with us for the next few years, and unfortunately that means lower home prices, persistent unemployment and a continued drag on the overall economy.

But there’s a solution

With home prices down and mortgage rates sliding south of 4 percent, I believe the solution to the shadow inventory problem is fairly simple:

Let homeowners and investors buy up lender-owned properties so to reduce the size of the shadow market.

HUD does it, why can’t we?

We allow community housing organizations to buy HUD homes at a discount so they can be improved and added back to the housing stock, so why not do the same with properties held by private lenders?

One reason concerns the inability of many to obtain mortgages.

Goodman said:

Mortgages are becoming increasingly difficult to obtain. Overall credit availability is tightening and the pool of qualified mortgage applicants is shrinking dramatically. A large number of borrowers who are delinquent on their current mortgage, and do not have the financial means to purchase another home, are likely to convert to renters. Despite this cloud surrounding the mortgage market, we see housing as very affordable by most traditional measures.

Homes are affordable but few qualify

Actually, housing today is astonishingly affordable compared to recent history because home prices are down and mortgage rates are at record lows.

But to be “affordable,” people need income and credit.

Income and credit

Income is a problem because we have millions of people who are unemployed and/or underemployed. They do not have the means or the disposition to enter the housing market as owners. Moreover, people who have lost their homes to foreclosure are not going to get a mortgage anytime soon.

Rental options abound

The saving grace of the situation–one of the few–is that renters abound.

For investors, this means that in many markets the demand for rental units is considerable.

In fact, Reis, Inc. reports that apartment rents in 2010 and 2011 have consistently risen while vacancy rates have fallen.

For instance, the typical asking rent for an apartment in the fourth quarter of 2009 was $1,026–a number which increased to $1,052 by the second quarter of this year. (Notice that the price is moving upward—not a trend we’re used to seeing in real estate these days.)

There are deals for the taking

With sizeable discounts on distressed real estate and rental prices moving upward, both the backlog of shadow inventory and the booming rental market present quite a number of bargains for would-be investors and consumers alike.

“The average sales price for homes in foreclosure or bank owned was 32 percent below the average sales price of homes not in foreclosure,” according to RealtyTrac.

So while the foreclosure crisis will grind on for some time to come, qualified borrowers should realize there are a host of deals for the taking.

One Response to “Shadow inventory, high rents: Prolonged crisis, yet deals abound”

  1. Dodd Frank Summary Says: December 30th, 2011 at 11:55 am

    And the fact that rent prices are moving up certainly comports with this idea. Of course, investors are shying away from real estate not just because of the psychological impact of the housing crash, but also because they’re not sure whether the market will continue to slide.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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