A New Shadow Falls

How things have changed. We used to worry about the Shadow Banking System. Now, there is rising concern about the Shadow Housing Inventory arising from foreclosed homes that banks do not bring to market: Banks aren't reselling many foreclosed homes

A vast "shadow inventory" of foreclosed homes that banks are holding off the market could wreak havoc with the already battered real estate sector, industry observers say.

Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.

"We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You'd have further depreciation and carnage."

No, you would finally have a market price for homes, "Rick." You might not like the price, but it will be a lot more reliable than the bubble prices that you apparently want to maintain so the US can keep up appearances. 

In the Bay Area, foreclosures have mostly hit outlying areas, not wealthier SF, Marin, or San Mateo Counties. Housing remains expensive. Still, there is plenty of "shadow inventory" here, too. 

In the Bay Area, a Chronicle analysis of data from San Diego's MDA DataQuick shows that more than one-third of foreclosures are in shadow territory - that is, they are not registering in county records as having been resold.

For the 26 months from January 2007 through February 2009, banks repossessed 51,602 homes and condos in the nine-county Bay Area, according to DataQuick. Yet in the same period, only 30,823 foreclosures were resold, leaving about 20,000 bank repos unaccounted for.

There are number of reasons given. On a practical level, it's simply hard to work through the inventory. In "normal" years, there are about 160,000 a year nationwide. Now we are doing that much in 2 months. At the bank, they may be motivated by greed or fear. Greed says to keep the inventory off the market in the hope of getting a better price. Fine, but the anecdotal evidence says foreclosed homes quickly become blighted and unsellable. Fear says to defer sales so you don't take losses all at once. So, after two years worth of banks lying about their balance sheets, they are still... lying about their balance sheets! Good grief. 

We have here another example of America's new "Can't Do" spirit. Rather than take losses and allow the market to recover, the banks are keeping housing off market for no better reason than to CYA. It seems absurd to have large numbers of people getting dislocated by foreclosure, while the banks foreclosing on them are sitting on large inventories of empty houses. There isn't a mechanism we can't create to turn dispossessed owners into renters? There aren't consortia of property management companies willing to buy in bulk? 

Apparently not. Instead, zombie banks are supporting zombie homes priced at zombie prices so we can try to bring back the bubble fantasy of rapidly appreciating homes forevermore.