Housing Market: Shadow Inventory and Mortgage Rates

The housing market across the country has been through rough times and recent data seems to indicate that the worst may be over. But is this really the case?

There are numerous factors in play in the housing market such as supply and demand, regional economic conditions, unemployment rates, shadow inventory, and mortgage rates. The last two take on special significance in the current housing scenario. Let’s take a closer look at these to see how they are likely to influence prices in the future.

The Impact of Shadow Inventory

The term ‘shadow inventory’ refers to the homes which are kept off the market in an attempt to increase demand. Limited inventory will push up demand which in turn boosts prices. A report released by CoreLogic, a leader in information, analytic, and business services, states that as of October of 2012, the residential shadow inventory stood at seven months or 2.3 million units. This indicated a drop of 12.3% from a year ago. This figure includes properties which are seriously delinquent, in foreclosure, and those held as real estate owned (REO) by lending institutions.

Florida, California, Illinois, New York, and New Jersey account for nearly half the properties that make up the shadow inventory but this percentage has come down significantly from what it was in 2011. In simple terms, this means that shadow inventory has not had the negative impact on the housing market that many had expected. Todd Bezemos is an economist and housing credit advisor with lease to own housing aggregation service HomeStarSearch. In his capacity working directly with first time home buyers, Bezemos is afforded a unique perspective on the current housing market. He posits “the interest shown by investors in snapping up such properties, coupled with the fact that many house owners are wary of the market because they are still in the red, has prevented the market from being swamped by an excess supply of homes.”

The Mortgage Rate Factor

Mortgage rates, which are currently near historic lows, also play a significant role in determining which way the housing market will move. The low mortgage rates are majorly due to the U.S. government’s bond-buying program. Also known as quantitative easing or QE3, this is an attempt to hike the price of mortgage-backed bonds which will reduce the interest rate on these bonds. Another reason for the low interest rate is the U.S. economy. Having stayed sluggish, there are now signs of some improvement and if the economy gains momentum only slightly and it is nowhere near where it should and could be, even still, interest rates are likely to move upwards. Drawing on his expertise as an economist, Bezemos adds, “At this point, even modest growth will act as a catalyst and cause interest rates to increase by about 0.25 percentage point to 0.50 percentage point.”

Future Prospects

The foreclosure process can be a long one in many states and this supports the theory that the market will not be flooded with a plethora of bank-owned properties and sink prices yet again. As homes are gradually put on the market after they are foreclosed, there is a line of investors and eager buyers waiting to close on a fabulous and enticing deal. This ensures that the demand outpaces supply and prevents prices from sinking. Barring any kind of major political or economic setback, analysts foresee a rise in interest rates in the near future. “The main purpose of keeping interest rates low during tough times is to provide a boost to the housing market. Once this purpose is achieved, there is no need for rates to lie low,” says Bezemos who has been studying the impact of interest rates on the housing market for a while now.

In short, the shadow inventory has been shrinking over the past year and is expected to do so this year too. Thus, there is no imminent danger from this quarter to home prices. Sellers can hope to acquire a modest price considering the still high unemployment rate and rising taxes and buyers would be wise to take the plunge when interest rates are still low.

It remains a buyer’s market; at the same time, it’s a little better for sellers than the situation in 2009, 2010, and 2011.

Photo Credit: Casey Serin

Comments

  1. 1

    says

    I read last month in one of the local paper that New England housing market has not lost much. On the contrary, it has gained lately.

    Shadow inventory is done in some third world countries on a regular basis. However, it’s mostly the edibles (wheat flour, sugar, tea, coffee and other that are not easily perishables.)

    Even though shadow inventory is against the law in some Asian countries but folks do it anyway.

    United States has more rules and regulations than most others. I don’t know how shadow inventory happens in housing market.

  2. 2

    says

    From what I’ve been reading, it seems that there are two different housing markets going on simultaneously. For short sales and foreclosures, it’s a buyers market, as the difficulty in getting the sales complete and the work often needed to get a home like that in liveable condition keeps a good segment of the market away. On the other hand, move-in-ready homes that are up-to-date have a high level of demand, and it’s a sellers market for those homes, as you now will have homes in this segment staying on the market for only a few days and receiving multiple offers.

    Very interesting times.

  3. 3

    says

    I am always interested in how the US property market performs as I see it as a blueprint for the Australian market only 10 years in the future.
    I suspect it will still be quite a few years yet before any recovery starts to happen – if at all.

  4. 4

    says

    Foreclosures get snapped up pretty fast in my area in Florida if they are decently priced. I am glad we got to take advantage of the low rates with the house we are currently purchasing. I hope the market goes up from here as we will be staying put for a long while.

    • 5

      says

      I’ve been looking for an investment property in Florida and totally agree with you. I was invested there before the crash and thankfully got out on time. When I contacted my realtor again, she laughed. She proceeded to give me the down low in FL. She said the large dumping of REO and foreclosures never materialized, there are some, but nothing like it was expected.

      Get this – the banks are bundling REOs and selling them to Hedge Funds, aha the same people who brought the crash. Can you believe it? So institutional investors are at it again. She also said that houses are receiving multiple offers and that in cases when the appraisal is not enough for the loan, the buyer/investor pays the difference, sounds familiar? I do see some houses sitting for a while, but the good ones that are nicely priced are gone quick, in less than a week.

      I almost put an offer on an REO last week. Pretty little house that I know will appreciate nicely. But changed my mind because according to my realtor it takes 60 to 90 days to get a decision from the bank. You may or may not get it. But, in the mean time I’m in a bind, on a contract. If I decide not to get the property if awarded, I’ll be in default. So I changed my mind, I don’t want to wait 3 months so the bank can make up its mind and then I may not get the thing anyways.

      I’m still shopping, but getting a little frustrated. Because in the areas where I want to invest, there ins’t a lot of inventory to look at.

  5. 6

    says

    My friend is trying to buy a house in the city where I live. His realtor said that homes are selling so fast here that they rarely stay on the market more than a few weeks and sellers are getting 97% of asking price.

    He just put in an offer on a house that was on the market for 2 days, and he’s offering 97% of asking price.

    It’s a sellers market in certain areas, and I’m glad that area is where I live. :)

  6. 12

    Lisa says

    We have been shopping in Oakland, Berkeley, and Alameda, CA. Most houses are going within 3-5 days of listing. Virtually every house you would want to buy [as opposed to the ones where you would have a gun held to your head to visit] has gone to multiple offers. Very often houses are still listed on the MLS but have actually have been Pending for weeks — after going under contract in the first couple days.

    The rub is it is very hard to get lenders to lend on anything that isn’t turn-key. So often a house goes quickly to pending then comes back on the market in a couple weeks as the buyers can’t get it financed.

    What makes this all so different is the tiny housing stock in most places. When we bought a house three years ago in Sonoma, there were about 60 houses for sale at the same time. Today, there were 12 altogether including houses priced over $1 mil.

    Where there ARE a lot of houses up for sale is Oakland. And considering the property tax there [about 1.4% +$800-$1,400 or so in special assessments] and what you get for it, that’s not too surprising. But on small multi-family [3 units or less] there is no rent control for owner-occupied, so it still makes sense for a small investor if you can find one in a neighborhood you like.

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