Shadow Inventory - The latest real estate "buzz word"

As we continue to find ways to cut costs and survive through these lean budget times, all of us that worry about city budgets continue to monitor the indicators that let us know when we might expect to see property taxes and sales tax begin to increase. For property taxes, the most important indicator is foreclosures--which don't seem to show any signs of abating.

Foreclosures continue nearly unabated at record levels, with San Joaquin County still ranking in the top five counties nationwide nearly every month (we were 2nd last month). Two current trends demonstrate that we'll be continuing to see high rates for quite some time. The first indicator is the current delinquency rate for mortgages. According to a recent L.A. Times article:

For the first quarter ever, the number of homes in foreclosure with mortgages serviced by U.S. national banks and savings and loans topped the 1-million mark, according to figures released Monday by the Office of Thrift Supervision and the Office of the Comptroller of the Currency...and

The percentage of prime borrowers whose loans were 60 or more days past due doubled from the July-to-September period a year earlier. And more than half of all homeowners whose payments had been lowered through modification plans defaulted again.

Of the mortgages serviced by national banks and thrifts, only 87.2% were current and performing. It was the sixth straight quarter that the quality of those home loan portfolios had slipped.

"Mortgage performance continued to decline as a result of continuing adverse economic conditions including rising unemployment and loss in home values," the report said.

Seriously delinquent mortgages -- loans 60 or more days past due and loans to delinquent borrowers who have filed for bankruptcy -- rose to 6.2% of the servicing portfolio. That's a 16.7% increase over the second quarter and a 73.8% increase from a year earlier, the report said.

Of those seriously delinquent loans, the number of homes in the foreclosure process reached 1.09 million, about 3.2% of all the loans surveyed.

The report highlighted some troubling trends as the housing market continues to struggle despite increasing sales and prices in many areas. Difficulties increased for holders of prime mortgages, with the percentage of those loans that were 60 days or more past due increasing to 3.2%, up almost 20% from the second quarter and more than double the rate of a year earlier.

These numbers are absolutely stunning. Another L.A. Times article adds piles on additional troubling news. It talks about the new banking buzzword "shadow inventory".

Shadow inventory properties are homes that have not been tallied into official inventory numbers tracked by Realtors and other real estate professionals. They include homes taken back by lenders through foreclosures and similar actions, as well as homes whose owners are at least 90 days delinquent on their mortgage payments.

The article notes that one of the reasons that price drops have been less drastic this year is due to the number of homes being held off the market by lenders. The article estimates 1.7 million in shadown inventory -- a 55% percent increase in the last year.

Thus, one would postulate that even after foreclosures finally wane, there will be another 1-2 years worth of shadow inventory to sell off. I find this a good news, bad news scenario. The good news is that the lenders are doing everything they can to keep market values from dropping further. The bad news is that we can expect little or no appreciation in real estate in the middle of the upcoming decade.