Shadow inventory is composed of delinquent mortgage holders who still occupy the houses they are not paying for. Many in shadow inventory have been living payment free for years, and many will continue living for free for several more. So why did banks do this? Ordinarily, banks would foreclose quickly to get their capital back to loan it profitably to someone else. What was their benefit in allowing so many to squat for so long?
In mid 2008, house prices were crashing hard, particularly in subprime dominated markets which were the first to implode when their toxic mortgages required higher payments. Lenders quickly realized prices were crashing because they were flooding the MLS with inventory, and the available buyer pool couldn’t absorb it at bubble-era prices. A certain amount of price correction was inevitable because prices were too high, but many markets began to overshoot to the downside under the weight of so many foreclosures.
For the banks, continuing to flood the MLS with foreclosures was reducing the value of the collateral backing their loans and increasing their losses. It was in their best interest to stop and maintain as much bubble-era pricing as they could. New England witnessed the extreme of delinquent mortgage squatting as the legions of delinquent loan owners were not foreclosed on. As a result, their prices are still artificially inflated, and many copycats defaulted on their mortgages to obtain the same free housing benefit.
The national economy also benefited from this arrangement. Since millions of loanowners no longer made house payments, their income was freed up to spend on other goods and services. The squatter stimulus is huge, and politicians won’t complain about anything which stimulates a weak economy. Both banks and politicians supported a policy that enabled millions of delinquent mortgage squatters.
These benefits don’t come without a cost. First, supporting artificially high house prices reduces real estate transaction volumes. realtors are blind to this obvious fact, and they consistently endorse any policy designed to support inflated prices, particularly relaxing lending standards which they see as an impediment to more transactions. realtors would generate more commissions if prices fell further and more people could afford housing. Further, inflated house prices force new buyers to pay more than they should. If these buyers paid less, they would have more disposable income to stimulate the economy. Low interest rates have offset this problem to some degree but not enough to prompt enough buying to clear out the overhang of distressed inventory.
The weakness in the economy we experience today is partly due to the lack of disposable income, but it’s also caused by a moribund homebuilding industry. A significant sector of our workforce is unemployed. A short, painful correction was inevitable, but this has dragged on for five years now because rather than clearing out the overhead supply, lenders have been metering it out slowly which directly competes with builder supply. Though improving now, homebuilding will continue to sputter until the competing REO are washed through the system.
Another cost of shadow inventory is less obvious but perhaps more pernicious. We are creating a generation of borrowers who have no compunction about over-borrowing when times are good because they know they will be given years of free housing if there is a collapse. This moral hazard is sowing the seeds of the next housing bubble and crash. Plus, the gross unfairness of the distribution of these rewards is infuriating, particularly to those who must pay for it with a variety of government bailouts. The costs of these problems are difficult to quantify but no less real.
Despite these costs, the banks, government officials, and realtors all want to see shadow inventory persist because it serves to sustain inflated bubble-era prices and it provides a needed economic stimulus.
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Proprietary Irvine Housing News home purchase analysis
118 SEQUOIA TREE Ln Irvine, CA 92612
$529,900 …….. Asking Price
$635,000 ………. Purchase Price
6/3/2004 ………. Purchase Date
($105,100) ………. Gross Gain (Loss)
($50,800) ………… Commissions and Costs at 8%
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($155,900) ………. Net Gain (Loss)
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-16.6% ………. Gross Percent Change
-24.6% ………. Net Percent Change
-2.2% ………… Annual Appreciation
Cost of Home Ownership
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$529,900 …….. Asking Price
$105,980 ………… 20% Down Conventional
3.55% …………. Mortgage Interest Rate
30 ……………… Number of Years
$423,920 …….. Mortgage
$105,761 ………. Income Requirement
$1,915 ………… Monthly Mortgage Payment
$459 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$132 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$225 ………… Homeowners Association Fees
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$2,732 ………. Monthly Cash Outlays
($300) ………. Tax Savings
($661) ………. Equity Hidden in Payment
$121 ………….. Lost Income to Down Payment
$86 ………….. Maintenance and Replacement Reserves
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$1,978 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$6,799 ………… Furnishing and Move In at 1% + $1,500
$6,799 ………… Closing Costs at 1% + $1,500
$4,239 ………… Interest Points
$105,980 ………… Down Payment
============================================
$123,817 ………. Total Cash Costs
$30,300 ………. Emergency Cash Reserves
============================================
$154,117 ………. Total Savings Needed
The property above is available for sale on the MLS.
Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
Cost of Ownership Analysis
Are you ready to make an offer, but you are worried the cost of ownership is really more than you can afford? Don't make a mistake that might cost you the family home, your life savings, and your good credit! Get the advice of a seasoned professional. Contact us at info@ochousingnews.com today!
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Nearby Foreclosures
Gain a competitive advantage over other buyers. By locating distressed properties -- before they hit the MLS -- you can discover where tomorrow's REOs and short sales will appear. Most of these properties are not listed on the MLS, but they will be soon. Research properties in advance and get a jump on your competition. Don't miss out on another deal because you couldn't act quickly. Use this tool to your advantage! The red properties are already bank owned. As soon as REO asset managers prepare them for sale, they will be on the MLS. Get ready! The green and blue properties have owners who are not paying their mortgages. They may be offered as short sales, or they may go through foreclosure and become REO. Either way, they will also likely be available on the MLS soon. Find your next home! Be prepared to offer on these properties by researching them in advance or risk losing out to buyers who are have done their homework. Start your research today! To find distressed properties, enter your desired location and press search. Scroll through list by pressing "next."Comparative Market Analysis
Are you ready to make an offer, but you are worried you will either (1) underbid and miss the property or (2) overbid and pay too much? Don't make a mistake and miss your dream home, or worse yet, overpay for it! Get the advice of a seasoned professional. Contact us at info@ochousingnews.com today!
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Reports are available for properties in the Southern California MLS coverage area, and are generally delivered within 24-72 hours. If you wish to receive multiple properties, please contact us at info@ochousingnews.com, and we will prepare the reports for you.
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$555,000 25 RACING WIND |
0.4 miles 3 bd / 2.5 ba 1,571 Sq. Ft. |
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$599,500 10 SENISA |
0.47 miles 3 bd / 2.25 ba 1,741 Sq. Ft. |
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$489,900 4042 GERMAINDER Way |
0.73 miles 3 bd / 2 ba 1,495 Sq. Ft. |
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$625,000 3 HAZELNUT |
1.16 miles 3 bd / 2.5 ba 1,587 Sq. Ft. |
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$615,000 25 ALMERIA |
1.18 miles 3 bd / 2 ba 1,361 Sq. Ft. |
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$969,000 5031 ALCORN |
1.23 miles 4 bd / 2 ba 1,935 Sq. Ft. |
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$579,000 35 ALEXANDRIA |
1.27 miles 3 bd / 2.5 ba 1,560 Sq. Ft. |
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$895,000 5062 BEREAN Ln |
1.31 miles 4 bd / 2 ba 1,942 Sq. Ft. |
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$699,999 6 HAGGERSTON AISLE |
1.38 miles 3 bd / 2.5 ba 1,730 Sq. Ft. |
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$640,200 27 SHEARWATER |
1.6 miles 3 bd / 2 ba 1,538 Sq. Ft. |
To Rent or Own: How Consumers Decide Between the Two
In a study to examine what factors would drive a person to rent or own in their next move, Fannie Mae found that a mix of demographics and attitudinal drivers were key, while negative housing events appears to do little to thwart would-be buyers.
The study categorized respondents into three groups: renters, those with a mortgage, and outright homeowners.
After gathering demographics for the three groups, the study found that renters tended to be younger and fall into the low income category. For the survey, 46 percent of renters were in the 18 to 34 age group, and 43 percent of renters had an annual income under $25,000. Renters also tended to be single (41 percent) and employed part-time (47 percent).
Homeowners with a mortgage, on the other hand, were more likely to be in the 35-49 age group (41 percent), married (77 percent), and employed full-time (64 percent). They also tended to have a higher income, with 23 percent earning more than $100,000 and 39 percent earning between $50,000 to $100,000 thousand.
Those who were outright owners of their home tended to be 65 and older (46 percent) and retired (49 percent).
The study explained that traditionally, research has focused almost exclusively on demographic factors when trying to dissect the own-rent decision process.
But, based on the survey, attitudes toward housing and finances also had a significant influence on individual decisions to rent or own. The groups most affected by attitudinal drivers were renters and those with a mortgage.
The housing attitude that was found to be the most influential is the belief that “owning or renting makes more sense financially over the long term.” This is what drove all three groups to behave accordingly, depending on their situation.
One attitude that affected renters and discouraged them from buying was concern with affordability and housing maintenance.
An individual’s existing homeownership experience, whether it was positive or negative, was a primary driver of the own-rent intention for a mortgage owner, but not for those who owned their home outright. According to Fannie Mae, the results suggest that once consumers buy a home and have a positive ownership experience, they want to continue being a homeowner rather than consider renting.
For renters and those with a mortgage, the belief in homeownership and aspirations to own a home one day was important in determining whether one expected to own or rent in the future.
For outright owners, demographics, rather than attitudes, determined housing choice preference. According to the study, this is probably due to the fact that the upside financial possibilities are less likely, considering most outright owners are retired and past their income peak.
The study also found that troubles in the housing market over the years did not prevent people from aspiring to buy. Even factors such as exposure to mortgage default, perceived home value appreciation/depreciation, and self-reported underwater status were not significant in predicting intentions to own or rent.
The study analyzed full year 2011 data from the Fannie Mae National Housing Survey and incorporated 12,014 individuals.