Wednesday, August 12, 2009

Glimpses of deflationary recognition

(A faint glimpse of recognition in the MSM. -AM)

via Some Assembly Required
By: Diana Olick
CNBC Real Estate Reporter
Thursday July 23rd, 2009

So what's bothering me?


For the past few months I've talked a little bit about so-called "shadow inventory." These are the homes that banks have taken back after foreclosures (known as REO properties). In normal times banks immediately turn REOs around and up them up for sale, but that's not happening at a very fast clip these days. The Realtor's chief economist, Lawrence Yun, called it a "business decision" by the banks:

"I believe that many banks including Fannie and Freddie, who are also holding onto some properties, are releasing foreclosed properties in a measured way so as to not to flood the market which they perceive then perhaps could lead them to even more drastic price cuts. So they are releasing properties on a measured pace as a business decision to minimize losses."

So what exactly is the size of this shadow inventory?

Hard to say, but estimates are that it could be around 700,000.

This of course does not include the foreclosures that are still in process, which builder analyst Ivy Zelman refers to as "the pig in the python." Builders are concerned that if these properties suddenly flood the market, their new high hopes could turn right back around.

The good news and the bad news is that investors are back.

It's good because they're sucking up all the foreclosed properties. It's bad because they are turning around and renting them, driving down rental prices and competing directly with entry-level home builders, who really need to catch a break.

Moody's predicts there will be 6.5 million foreclosures between now and 2012. If they dribble slowly out onto the "for sale" market, then they will be absorbed quickly, but if not, they could throw a real wrench into recovery

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