Shadow Inventory: 7 Million Homes in Default

by | Dec 16, 2009 | Headline News | 4 comments

Do you LOVE America?


    Real estate analysts predict continued gloom for Las Vegas, and pretty much the rest of the nation as we approach Mortgage Meltdown: Wave Two.

    From the Las Vegas Review Journal:

    While the “subprime tsunami” brought the first wave of foreclosures to Las Vegas, the next wave is coming from more credit-worthy borrowers in higher-end homes and from homeowners who’ve lost their jobs or have negative equity in their homes and can’t sell.

    The Mortgage Bankers Association is reporting some 7 million home loans in default, creating what some analysts have called a “shadow inventory” of foreclosures being held by banks.

    “We’re looking at numbers that are somewhat hyperbolic, certainly breathless,” Sharga said. “Of the delinquent loans, the ones that will probably go back to the bank are somewhere in the neighborhood of 2.5 million. That’s the shadow inventory that will gradually be making its way to the market over the next three years.”

    Rick Sharga is the senior vice president of Irvine, Calif.-based RealtyTrac, so he is a pretty good source for the legitimacy of the numbers cited above.

    Of the 2.5 million homes that will likely be returning to the bank because of non-payment, about 2.5 million will be absolutely worthless. When we talk about toxic debt, this is what we are referring to. Once a homeowner defaults on their payments, the banks are earning no revenue whatsoever from the loan. In fact, they may be losing money on the defaulted loan because of property taxes and up-keep of the property that they now own. And even though a real estate agent lists a particular foreclosed home at a specific selling price, that home is worth exactly $0 until a buyer is willing to pay for it. The asset is toxic. Incidentally, this is what the big hooplah was about regarding  mark-to-market (what it is actually worth) and the concept of mark-to-fantasy (what the banks, Fed, Treasury, and the White House say it is worth). In the interest of self preservation, mark-to-fantasy was the model chosen in April of 2008 (and what a book we’ve had since then!)

    In Real Estate Crash: The Sequel, Aware Brain discusses the housing market dilemna:

    These homes need to be absorbed by the marketplace at some point. How will that affect home prices and the economy? Well if 2 million extra houses in 2007 had the devastating effect we already have seen, what will 8 million extra homes have?

    Let’s see what the experts think:

    “Eight million homes with delinquent mortgages represent a staggering 300% of the normal supply of existing homes for sale. With 3.63 million units now on the market, one million above the long-term average, an inundation of foreclosures represents a fatal death blow capable of inflicting brutal damage on the largest financial market in the world,” says Seeking Alpha.

    Pete Flint, CEO of, predicts that home prices will drop, inventory levels will creep back up, and mortgage rates will increase _ all leading to the continuing struggle of the housing market. “I hate to be a naysayer but we still have a long road ahead of to reach a healthy market,” Flint said.

    An interesting and scary proposition.

    Note that there are 7 to 8 million homes in default currently (i.e. the shadow inventory). But with mortgage resets ready to start hitting in the second quarter of next year and throughout the following 12 – 36 months, we can expect an even higher default rate.

    This begs the question: what will happen to real estate prices?

    There is, of course, a debate about whether or not housing prices have bottomed and are now in an up trend, or if they will continue to decline further. In Mortgage Meltdown: Wave Two, we opined:

    Some estimates have forecasted that real estate is set to decline another 10% to 15%. But, what if the next wave collapses our real estate market another 30%, or even 50%? Doesn’t sound possible does it? For non-believers, we direct your attention to the Japanese real estate bubble of the 1990’s compared to the USA through 2008.

    Most people find it difficult to believe that a decline in real estate could be so severe that homes and land actually lose 70% or 80% of their real value in a crash. Believe it, because it has happened in the past and it can happen now.

    Recommended Reading: A Forecast for Real Estate by Martin Armstrong


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      1. Dang! This koolaid is just really starting to taste bad! Here I thought recovery was just around the corner.

        No, really, I knew that housing had to drop another 30-50% before we were back to the 110k norm that has been historical. But, 80%? Wow! I’ll need to stuff some money in gold and, well, as gold goes up, I’ll cash it in and buy land!

        I mean, we are talking TEOTWAKI economics, here.

        Good thing I got a book coming to help me with that!



      2. I live in a motorhome ,  I can pick up and go. I have been mobil now for 4 years , its not always easy , you have limited space for example but I have the ability to move fast if I have to .  I think it will not be long before more people are doing the same as me .

      3. I guess what makes this whole grim scenario even worse is the demographic realities that need to be added on top.

        Not only is there just simply not enough people in the population at the age and point in their lives where they are ready/will soon be ready to buy their first homes and/or start families…those who are in this sector are some of the most hard hit by the economic down turn as a whole. Hoards are ending up right back with Mom and Dad…sometimes into their 30’s. A trend not likely to change anytime soon.

        As Harry Dent states, it won’t be until the mass of these echo-boomers are in position to start absorbing all this excess inventory that things will truly start turning around. I believe he estimates this to start occuring in the area of 2018-2023.

        And when you consider that many of these folks are currently in or soon will be in college and you account for all that comes with that these days, as discussed in the previous article (debt load, lack of opportunities upon graduation, etc) we have quite a major sh*t storm abrew here.

        Maybe we need to form a mega-sized “Chindia” Property Mgt. Corp. by somehow enticing those folks to dump all their dollar holdings back into our economy by buying up all the excess inventory. Housing prices would stablize and they would then become “Americas landlord (slumlord?)”

        At least the food offered in all the new hoods that emerge might be better than Mickey D’s 😉

      4. This is not  encouraging, but in comparison to John Williams Shadow Government Statistic report about where he thinks our nation is headed, it is very mild.

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