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Pace of shadow inventory becomes real estate’s top story

Sun., Dec. 30, 2012, midnight

Marty Linsky, a faculty member at the Harvard University’s Kennedy School of Government and co-author of the book “Leadership on the Line,” has popularized a line about how much consumers can handle in their day-to-day lives:

“Leadership is the art of disappointing your people at a rate they can absorb.”

That’s because when you are pushing against what people expect, they can only absorb so much. If it’s a win-win situation, then it’s a sign that nothing important is at stake. Leadership is about the distribution of losses.

Given the turmoil in the mortgage markets the past several years, lenders in this country should never be confused as being “leaders.” However, the rate at which they have been doling out foreclosures and other distressed properties has made sense and has had a lot to do – perhaps more than other single component – with rising home prices in many areas.

The flow of foreclosures to the market coupled with the managing of the absorption rate is the residential real estate story of the year for 2012.


Had the infamous “shadow inventory” of distressed homes been dumped on the market all at once, many neighborhoods would still be reeling – not only from a poorly maintained inventory of homes but also from a larger number of sellers-in-waiting who are current on their loans yet wanting to sell for a figure higher than their purchase price.

Shadow inventory is defined differently by different organizations. It often refers to homes with mortgages at least 60 days late, homes already in foreclosure, or homes owned by the bank but not yet on the market. This number decreased by 1.2 million properties in the first six months of 2012, according to a study by JPMorgan Chase. That leaves about 5 million homes still in the shadow category. Totals are not in for the second half of the year.

Chase said the clearance of properties was the result of a combination of factors: fewer homes foreclosed on by the banks, more short sales completed, and more loan modifications approved.

With workout solutions fairly systematic at most major banks and with more homebuyers in the market, researchers expect the second half of 2012 to be as healing as the first, doubling the number of homes removed from shadow status by the end of the year.

The most current indicator was the October “first look” into mortgage statistics from Lender Processing Services. The company reported that delinquency rates were down but the number of properties that were 30 or more days delinquent or in foreclosure totaled 5.3 million.

Two major incidents have analysts scrutinizing the flow of foreclosures to the market more than ever: the detrimental effects of a possible “fiscal cliff” and the upward revision of shadow inventory by a California research firm specializing in distressed properties.

At press time, there was little clarity about how our representatives in Washington, D.C., planned to handle the fiscal cliff, the term given to the challenges brought by the implementation of the Budget Control Act of 2011. The impact could be positive or negative, depending on how government spending reductions and tax cut expirations are handled. The goal is to lower the national debt by $7.1 trillion over the next decade.

Some analysts believe that if lawmakers take a restrained approach – extending the residential mortgage interest deduction and most tax cuts – the impact on housing would be positive. However, other observers believe if lawmakers charge hard and push everything over the edge at the same time – including the once-untouchable mortgage interest deduction – the economy could falter and the housing market could suffer.

That would mean more foreclosures, additional shadow inventory, and more would-be sellers waiting for things to calm down. Some may not want to wait – again. The last thing we need is another set of sellers tossing house keys to their lender.

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