Time Estimates for Clearing Shadow Inventory Are Too Low

The latest estimate to clear shadow inventory is 40 months. Based on tightening credit standards and very low sales rates, this estimate is likely too low.

Irvine Home Address … 14 BLUEBELL Irvine, CA 92618

Resale Home Price …… $499,000

I'd rather kill myself than turn into their slave


I feel that I should go and play with the thunder


Cause somehow I just don't wanna stay and wait for a wonder

I've been watching

I've been waiting

In the shadows for my time

The Rasmus — In The Shadows

How many of you lurk in the shadows waiting for lenders to release their shadow inventory? Personally, I refuse to become a debt slave, so I've been watching, and I've been waiting in the shadows for my time.

Some pundits believe Shadow Inventory Signals Three Years of Falling Prices. Some think it will take much longer. I side with the latter group.

The whole reason banks have accumulated a shadow inventory is because there are not enough buyers to replace all the delinquent borrowers — at any price. It is clear that Low Interest Rates Are Not Clearing the Market Inventory, and Low Interest Rates Will Not Create Demand. There is only one viable solution: Fix the Housing Market: Let Home Prices Fall.

Las Vegas has demonstrated that if you lower prices, sales rates go up. All estimates of time to clear the shadow inventory assume sales rates will be at or near historic norms. Right now, that isn't happening. In August Existing-Home Sales Sank to Lowest Level Ever Recorded. Inflated markets like Orange County see sales rates about 20% or more below normal.

As the economy improves and people go back to work, the sales rate will improve somewhat, but until prices are lower, sales will not improve enough to clear out the shadow inventory in a timely manner.

Further, estimates of shadow inventory are static. They are not estimating how many more homes will be added to shadow inventory as other borrowers give up and accelerate their defaults. The big false assumption here is that an improving economy will eliminate the mortgage distress and people will start paying back their loans again. That isn't going to happen. The debt is far too large. Many of the people who are hanging on will eventually succumb to the debt disease. As these people give up, they will add new delinquencies to shadow inventory.

The market needs a cathartic event. The kool aid intoxicated borrowers need to puke up their debts and clear the system. Until then, the economy will sputter as the over-indebted give up their meager incomes to keep the illusion of solvency at our major banks.

Over 7 Million 'Shadow Homes' May Take 40 Months to Clear, Says Fitch

Posted by Alex Finkelstein 11/09/10 8:00 AM EST

If you thought the U.S. housing market is showing any signs of improvement, a new report by New York City-based Fitch Ratings puts the damper on that view.

Fitch says seven million homes in the "shadows" will take 40 months to clear.

Just in case you are in the "Irvine is different" crowd, keep in mind that There are 3,600+ Distressed Properties in Irvine, and There are 36,000+ Distressed Properties in Orange County. Further, Emergence of Shadow Inventory to Push Prices Lower in 2011: Altos Research, Fiserv.

The agency defines the shadow supply of properties as loans that are delinquent, in foreclosure, or real-estate-owned (REO) by the servicer. Fitch says based on recent liquidation trends, it will take at least 3 ½ years to clear this existing distressed inventory.

DSNews.com reports that according to the ratings agency, the number of months between the date of the borrower's last payment and the date of liquidation has steadily increased over the past several years, and is now at more than 18 months on average.

Fitch says that is the highest figure on record.

Thinking About Accelerated Default? The Average Squatting Time Is Up to 449 Days. .

While the volume of newly delinquent mortgages has begun to improve in recent quarters, Fitch says liquidation rates of existing distressed properties have been constrained by weak demand and expanded initiatives to modify loans for troubled borrowers, DSNews reports.

On top of that, the agency's analysts believe the recent discovery of defects in the residential mortgage foreclosure process will further extend liquidation timelines, slowing the resolution of distressed properties in the shadow inventory and preventing home prices from finding a floor.

"While the reduced volume of distressed sales since 2009 has temporarily helped home prices, Fitch believes that the extension in foreclosure and liquidation timelines is simply prolonging the housing correction underway," the agency reported.

Government Props Weakened the Housing Market and Delayed the Recovery. Notice that Fitch is talking about a temporary bottom. They see prices rolling over too.

The total number of troubled loans reached a peak in early 2010 and had begun to show some improvement prior to the most recent foreclosure moratoriums resulting from documentation issues, Fitch said.

Fitch says for judicial foreclosure states, such as Florida, it is expected to take longer than the national average of 40 months to resolve the distressed loans, while for non-judicial foreclosure states, like California, the inventory will likely be resolved faster.

The agency points out in its report that the market's ability to absorb the supply of distressed homes has been affected by limited demand for home purchases, DSNews reports.

While interest rates are near historical lows and affordability has improved, fewer potential buyers can qualify for new loans due to the heightened credit standards, Fitch says.

Fed: Banks expect tight lending standards for foreseeable future. "In general banks have stopped tightening standards (they are already very tight), and demand has stopped falling (there is little demand for loans). …[A] special question asked banks whether their current level of lending standards remained tighter than the average level over the past decade and, if so, when they expected that standards would return to their long-run norms, assuming that economic activity progressed according to consensus forecasts. For all loan categories, substantial fractions of respondents thought that their bank's lending standards would not return to their long-run norms until after 2012 or would remain tighter than longer-run average levels for the foreseeable future."

Banks will never return to the standards to the 00s unless they want to lose a trillion dollars again. What we now consider tight standards — 20% down and conventionally amortized loans — were the standards prior to the housing bubble. All we are doing is returning to what works and what's stable.

Additionally, high unemployment, weak consumer confidence, and uncertainty about the future of home prices have prevented some potential buyers from entering the market.

"Recent concerns about the title-transfer process for foreclosed homes could further weigh on demand," Fitch noted.

The agency says at this point, it is still unclear how much the foreclosure process will be extended specifically due to document defects.

Should You Fear You Won’t Get Clean Title to Real Estate? .

However, even prior to recent developments, Fitch assumed the ultimate resolution of the backlog of distressed properties would result in further home price declines and prevent sustained home price increases for a number of years, DSNews reports.

"Fitch is currently assuming approximately a further 10 percent home price decline nationally, with the majority of the adjustment occurring by the end of 2012," the agency says.

"However, the timing of the adjustment will be affected by the timing of the distressed inventory resolution."

Absolutely correct: How The Lending Cartel Disposes Their REO Will Determine the Market’s Fate.

How long will it take? I estimate it will take five to seven more years before this mess is behind us. For three to five years, the foreclosure machines will be operating 24/7 at the maximum rate the market will absorb. After that, it will take another two to four years of elevated foreclosure volumes to finish the job. It's a bit like draining a bathtub when your drain is partially clogged. It's going to take a long time, and there isn't much that can be done to speed the process.

The Squatter's Lair

I first profiled today's featured property back in September of 2009 in the post Bluebell, and then I profiled it again in One Defaulting Owner’s Free Ride: Three Years and Counting.

  • The owner of today's featured property paid $465,000 on 10/23/2003. She used a $372,000 first mortgage, a $93,000 second mortgage, and a $0 down payment.
  • On 12/30/2004 she refinanced into an Option ARM for $486,500.
  • Two months later on 2/3/2005 she opened a HELOC for $67,000.
  • Total property debt is $553,500 plus 3 years of missed payments, negative amortization, and fees.
  • Total mortgage equity withdrawal is $88,500.

Foreclosure Record

Recording Date: 02/08/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 12/03/2008

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 08/28/2008

Document Type: Notice of Default

Foreclosure Record

Recording Date: 08/08/2007

Document Type: Notice of Rescission

Foreclosure Record

Recording Date: 05/25/2007

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 01/24/2007

Document Type: Notice of Default

First the bank lost a great deal of money, and now a flipper is going to lose money too.

This property was purchased by a flipper (Mamo Properties Inc.) on 8/23/2010 for $470,000. I don't know what they thought they could sell this for, but it looks like they spent about $20,000 fixing the place up, and with the other costs and fees, they are likely in this for over $500,000. Unless this is a no-cost listing, the flipper is going to lose money.

While I was raising money for the fund, I told many people that I was hesitant to buy in Orange County because in July and August, I was watching flippers pay what I thought was too much, and I believed prices were going to roll over. So far, both my observations have proven correct.

How much do you think this flipper will lose on this property?

Irvine Home Address … 14 BLUEBELL Irvine, CA 92618

Resale Home Price … $499,000

Home Purchase Price … $470,100

Home Purchase Date …. 8/23/2010

Net Gain (Loss) ………. $(1,040)

Percent Change ………. -0.2%

Annual Appreciation … 24.1%

Cost of Ownership


$499,000 ………. Asking Price

$17,465 ………. 3.5% Down FHA Financing

4.21% …………… Mortgage Interest Rate

$481,535 ………. 30-Year Mortgage

$94,234 ………. Income Requirement

$2,358 ………. Monthly Mortgage Payment

$432 ………. Property Tax

$150 ………. Special Taxes and Levies (Mello Roos)

$83 ………. Homeowners Insurance

$160 ………. Homeowners Association Fees


$3,183 ………. Monthly Cash Outlays

-$371 ………. Tax Savings (% of Interest and Property Tax)

-$668 ………. Equity Hidden in Payment

$26 ………. Lost Income to Down Payment (net of taxes)

$62 ………. Maintenance and Replacement Reserves


$2,232 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$4,990 ………. Furnishing and Move In @1%

$4,990 ………. Closing Costs @1%

$4,815 ………… Interest Points @1% of Loan

$17,465 ………. Down Payment


$32,260 ………. Total Cash Costs

$34,200 ………… Emergency Cash Reserves


$66,460 ………. Total Savings Needed

Property Details for 14 BLUEBELL Irvine, CA 92618


Beds: 2

Baths: 2 full 1 part baths

Home size: 1,508 sq ft

($331 / sq ft)

Lot Size: n/a

Year Built: 2000

Days on Market: 31

Listing Updated: 40484

MLS Number: S635284

Property Type: Condominium, Residential

Community: Oak Creek

Tract: Acac


Quiet, Cul-De-Sac location. This beautiful home shows like a model featuring maple hardwood floors, new upgraded carpet, gourmet kitchen with granite countertops and new appliances. Great floorplan with dual master suites: Oversided garage, one suite with full bath on ground level and one suite with loft/office on top level. Tropical Oasis backyard with palm trees. Enjoy resort-style amenitities such as pool and spa. Walk to shopping, dining and more!

Oversided? amenitities?

43 thoughts on “Time Estimates for Clearing Shadow Inventory Are Too Low

  1. winstongator

    We had price increases that were very local, and will have time-to-clear-the-shadows that are local also.

    I also don’t like the term ‘heightened credit standards’. Standards are tighter than they were before, but really during the bubble there were no standards – think the ninja loans.

    I would say that the 40 months is pretty close. There’s a street in my in-laws’ town, all new homes built in 2007 by a builder/developer whose already gone through bankruptcy and come out. Lots of specuvestors. I expected every property to get sold again within 5 years – either foreclosure, short-sale, or the seller bringing a giant pile of cash to closing. Almost half the street has already been reo sold, foreclosed, or the loss-sale taken. That’s 2 years. Say another 2 – 4 years and you get pretty close to 40 months.

    I thought in 2008 that every mortgage written in Florida in 2005/6/7 had problems. Either people paid too much for a home or heloc’d the heck out of it. Now, I would imagine that every bubble-year vintage mortgage left in FL is problemed. Many have already been foreclosed, many are in default, and many more, the ones who could, have refinanced. The enormity of the problem struck me – every 2006 loan would need to be reworked.

  2. Jiji

    It all comes down to Job’s, I would say a few months after the economy starts to create Jobs in an amount to bring the unemployment below 5 to 6 %, the house downturn will be over, then hold on to your boots, your in for a big surprise. When will that happen ??
    Don’t know.

    They’re not building anything but they still make babies.

    1. Kelja

      5 to 6% unemployment? In what time frame? Haven’t you heard – high unemployment is the ‘new normal”? Unless the Chinese or Indians decide to hire Americans, high unemployment will be with us for a long time.

      What’s going to happen as the 99ers roll off the unemployment rolls?

      1. Planet Reality

        Are we still talking about Irvine? Sometimes this blog is not clear on whether we are talking the nation, Las Vegas, or Irvine.

        If we are talking Irvine I wouldn’t look at overall unemployment. The single biggest impact would be a major company moving a HQ or expanding here. For example google expanding would impact Irvine significantly. You are right unemployment will be high for a long time, but unemployment was/is mostly concentrated in lower paying jobs.

        1. Patience

          A tech company expanding in the US? There has to be good reason – like Google’s deal with NASA Ames. Why would it expand in Irvine rather than overseas like the rest of them?

          I did see Latisys is planning a data center expansion in Irvine. But how many employees does a data center take?

          1. Patience

            That’s a pretty small segment of the job seekers they are chasing. And that’s in Silicon Valley – last time I checked that was a bitch of a commute from Irvine.

            If you go to Google’s website to look for jobs their Irvine location isn’t even in the top 5. Looks like they have 2 tech positions currently open there – kudos to them for hiring in the US. But I don’t think 2 positions is likely to trigger a housing boom.

    2. HydroCabron

      We’d need more than just jobs to end the downturn. We’ll also need crazy neg-am and 0% financing, which does not look likely.

      Even given 5% unemployment, a return to 33% DTI lending with 20% down payments will not sustain current prices.

      1. Planet Reality

        Current pricing has been sustained in Irvine without 5% unemployment or creative financing.

        Either would lead to a return in bubble pricing.

        Current pricing is sustained by real incomes,quantitative easing, and accounting rules. That’s been the case for the past 2 years.

        1. tenmagnet

          Meanwhile other areas have got crushed.
          Look at the successful response to all the new development that’s taking place
          Without the intense demand, TIC wouldn’t be successful.

      2. Alan

        “Banks will never return to the standards to the 00s unless they want to lose a trillion dollars again.” From what I can see, the banks (financial industry companies) are still largely decoupled from the people running them. Pay and bonuses are still great! Less cash up front (but still loads of it, especially compared to other industries) and more deferred or locked up for 5 years, but the incentive is still enormous to do whatever to get a big bonus. The successful examples of guys like Mozilo are way too attractive, compared to grinding out a small fraction of that in manufacturing or service industries.

    3. MegaCynic

      At 5% to 6% unemployment there will still be a huge number of unqualified buyers, because significant numbers of potential buyers have had their credit impaired by all of the games that have been played.

  3. Jiji

    Hmm seems to me OC lost a lot of finance, escrow, banking etc.. job’s as well.
    Oh well.
    It’s kind of a chicken and egg thing,
    Only they shot the chicken and they are trying to conjure up an egg.

    So maybe they will just settle for inflation but they don’t know how to get you a 50% raise.

    1. Planet Reality

      Finance jobs could knock unemployment down 1% in Orange County over the next few years. Those are high paying jobs, so that would have a major impact on Irvine.

      To analyze specific regions you need to be very surgical in the data that you use.

    2. IrvineRenter

      “So maybe they will just settle for inflation but they don’t know how to get you a 50% raise.”

      That is exactly the problem. They will print money and lower everyone’s standard of living by making the cost of everything go up. With persistent high unemployment, this inflation will not go into wages which would support future price increases.

      1. Planet Reality

        You are crazy if you think inflation won’t lead to wage inflation in higher income jobs in demand.

        I agree the median income may not go up and umployment may go up, but wage inflation certainly will occur as it has over the past decade for jobs in demand.

          1. matt138

            Eventually, it will push wages up – although not as high as Planet REalty bullishly thinks. Wages will not keep pace with price of goods and the end result is a reduced standard of living.

            The most relevant item is affordability. Affordability must increase.

          2. awgee

            This inflation is currency driven cost push, not demand driven. No one in our generation or a few generations in the US has experienced this, so people do not have the correct reference. The more correct references are Argentina, the Weimar Republic, and Zimbabwe.

          3. Planet Reality

            Bottom line:

            With inflation both cost and revenue for companies inflate.

            With that comes wage inflation for the productive segment of society with talent in demand.

            I’m not saying this is good, but you need to recognize wage inflation will happen even if median income is stagnant and unemployment goes up.

          4. bltserv

            I think awgee is correct. I recall the crazy 70`s
            and the instant inflation of that era. Everything just got 20% more expensive in the course of a year or two. And I had a great job at the time. My income sure as hell did not go up 20%. In fact with the Inflation business got tougher. I was in Electronics back then as now. Everything was on allocation and back order. Business sucked. But Gas went from 70 cents to over $ 1.00 instantly.
            Just wait till Gas is $ 4.00 again. Wages will trail all the inflation by years.

          5. Planet Reality

            Awgee, I’ll let you in on a little secret:

            One companies cost in another companies revenue, and so on, and so on

            Try not to share with everyone, ok?

        1. Eat that!

          I don’t see inflation causeing higher income jobs salaries to rise. What I have seen is pay cuts, budget cuts, and increases in out of pocket benefits costs. Plus, we have a looming state budget crisis that will absolutely require higher state taxes and the coming problem of increased commodity prices (gas, food etc) due to QE2. Add in, increased costs of College education (15% CSU in one year!) and we are looking at a perfect storm of family budget problems. Not everyone in Irvine is a DINK.

          1. Anonymous

            In Irvine, I am seeing a few people on bikes now not just out on recreational rides. They have baskets front or back and are making trips to the grocery store. The price of gas plus recessionary incomes is starting to change a few people’s transportation habits.

  4. Soylent Green Is People

    No one yet has found what the way forward will be for the next income boom. In the 80’s it was defense contracting, the 90’s was the Internet boom, in 2000’s the FIRE economy, but for 2010 forward what will it be? It’s not green jobs, or government jobs. The County of Orange believes the greatest growth of employment for the next decade will be in the “service industry”. Not really the kind of employment that can support an average $450k median priced home.

    Should inflation rise (not gonna, IMHO) then mortgage rates must rise (not gonna, IMHO) which will then keep buyers out of the market until pricing comes back to reality (not g.. you get the picture).

    Income and property price flatlining is the new normal.

    Soylent Green Is People.

    1. matt138

      we will have high inflation and high interest rates.

      what else could possibly be the result of all this borrowing and spending? a declining dollar will make things cost more. Yet i do not see this as being bullish for real estate.

      1. IR_Fan

        what spending are you speaking of? The net spending by governments of all types are flat if not down because local/state government spending decrease is more than offsetting federal spending increased spending. Also, discretionary spending is under 8% of federal budget. The rest is entitlements, interest payments and defense spending.

        So not sure what big increase in spending that you speak of.

        As for bullish on real estate, I would point to what is happening in Hong Kong which have now surpassed 1997 “never in our life time again” bubble prices as Chinese money floods into that market.

        It will happen in Cincinnati? Probably not. Could it happen in prime locations in major coastal cities in the US? Never say never as HK has proven.

    1. awgee

      It is a good time to buy if it is right for you and yours. If you are asking about price appreciation, no, there will be no price appreciation for awhile and then it will only be in nominal dollars, not real inflation adjusted dollars.

      1. IR_Fan

        does it matter if it is nominal dollars since your mortgage is also in nominal dollars and (hopefully at a fixed rate) and this is a levered purchase?

        With 20% down, even if nominal prices increased by just 2%, your rate of return on initial investment down payment is 10% in nominal terms and 8% in real terms.
        (yes I am making simplistic “for arguments sake” assumption that after tax interest, property taxes and other cost of ownership are equal to utility/housing the home provides.)

  5. awgee

    I do not know how to post a graph here so I will refer to another blog that has the graph:


    The Fed has printed trillions, historically the most a central bank or government has ever created, and pushed it to the member banks and the federal government and all it has done is created a bubble in treasuries, an inflated value for the equities markets, cost increases in commodities, and yet wages have declined.

    Maybe I am crazy, but all the necessities will cost more, and wages will continue to decline, especially on a real vs. nominal basis.

  6. Jiji

    Temecula Valley I think would be OK if your not going anywhere for the next ten years.

    Don’t think there is a lot of downside left out there.

    You can only be flattened so much after you been ran over with a steam roller already.

    1. IrvineRenter

      Thanks. I have fixed the problem in this post. I will get Zovall to see why that is happening. I am cutting and pasting these links from the library, so that probably has something to do with it.

  7. foolishrenter

    Inflation makes people feel rich while their purchasing power goes down.
    I really don’t see wages going up faster than general price increases. FDR used very high min. wages and no selling below certain prices to jack up inflation. Better spend before the prices when up or the last one sold. Stores could buy and hold for a sale or higher price. I don’t foresee a reoccurance of federal govt jailing people for selling or doing services below the govt/corporate set price. At least I hope not.

    Govt is supporting high house price to transfer liability of the bad loans to “new owner” and to the GSE/taxpayers. Someone has to be stuck holding the bag and it won’t be the investment bankers. SS/retirement at 75 y.o.?

Comments are closed.