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Shadow Inventory – Will it sink prices in Naples Real Estate? Maybe not.

Posted on Saturday, October 08, 2011

You know the story. Banks may be “sitting” on distressed properties and “waiting” to flood the market, increasing inventories and pushing down prices. Maybe.  Let’s take a look at some facts in the local Naples real estate market and see what is going on.

First, we have this recent report from CoreLogic estimating shadow inventory on a national scale based on a clever way to estimate what might be lurking out there – the number of distressed properties not currently listed on multiple listing services (MLSs) that are seriously delinquent (90 days or more) – properties most likely to become bank-owned listings (REOs). Properties not yet delinquent aren’t included in the estimate of shadow inventory. Their analysis is encouraging and follows in the bullet points”

• The shadow inventory of residential properties as of July 2011 fell to – – 1.6 million units, or a five-month supply, down from 1.9 million units, or a six-month supply, as compared to July 2010
. Of the 1.6 million properties currently in the shadow inventory, 770,000 units are seriously delinquent (2.2-months’ supply), 430,000 are in some stage of foreclosure (1.2-months’ supply) and 390,000 are already in REO (1.1-months’ supply).

• As of July 2011, the shadow inventory is 22 percent lower than the peak in January 2010 at 2 million units, an 8.4-months’ supply

• The total shadow and visible inventory was 5.4 million units in July 2011, down from 6.1 million units a year ago. The shadow inventory accounts for 29 percent of the combined shadow and visible inventories.
• The aggregate current mortgage debt outstanding of the shadow inventory was $336 billion in July 2011, down 18 percent from $411 billion a year ago.

In the Naples real estate market we have seen a significant reduction in real inventory combined with trailing 12 month prices increases giving confidence to the market (see past blogs and NABOR data). What if the Naples market followed the national market (it may not) and we took all of the 29% shadow inventory an moved it to real inventory?  This 29% would add downward pressure to prices but given the demonstrated inventory-absorbing-power of the local market over the last twelve months it might be possible to absorb all or most of this shadow inventory in twelve months.

And what about local anecdotal evidence – what are we seeing here on the ground in Naples?

1) The airport “foreclosure” bus(es) are still n operation, meaning we have a stream of investors still buying up foreclosed properties. Local affordable housing non-profits are finding it tougher to buy and turn foreclosed properties.

2) My plane rides up north still feature folks on the plane speaking about foreclosed properties they bought and in fact made the trip down to Naples for the expressed purpose of buying these properties – so more investors and more inventory reductions.
3) we have clients on the hunt for foreclosed properties and they are finding it tougher to find candidates – and frequently we see multiple bids when we find these properties.

In short, we cannot predict the impact of the shadow inventory on local properties BUT many indicators (Core Logic, Local Observation, Local Inventory decrease trends from NABOR) seem to tell us the risk may be overblown. We will see.

What do you think about the price risk of shadow inventory?