'Shadow inventory' concern for property: experts

Posted On Friday, 25 November 2011 02:00 Published by
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The overhang of residential property's 'shadow inventory' is massive and will likely weigh on market dynamics for the next 18 to 24 months, according to analysts surveyed by Auction Alliance.


Rael LevittThe company defined the shadow market as properties which were in mortgage distress and would still hit the market.

It said even by its cautious measure, it was quite clear that a very large number of homes would be joining the visible inventory of distressed houses at some point, which already held in excess of about 10,000 properties for sale.

According to property economist Erwin Rode, "bank spokespersons have often stated that they are not in the business of repossessing houses. Thus, one can assume that they will try postponing the evil day as far into the future as possible. Nevertheless, with only about 7,000 properties transferred per month, any sizeable overhang of non-performing properties constitutes a threat to an already vulnerable market. This threat is in addition to the already bearish outlook for residential prices".

Measurements of soon to be repossessed and foreclosed homes that have yet to hit the market ranged from 10,000 to as many as 50,000. Rael Levitt, CEO of Auction Alliance said, "We believe that the number of houses which are to be foreclosed on over the next 12 months is around 25,000. Much of the discrepancy stems from the different calculations used and how they determine which loans will inevitably default and sink into the shadows."

The analysts at Auction Alliance factor into their equation the number of properties that are distressed and are not yet on the market. They also include homes that are already going through the foreclosure process and those where the borrower is at least 90 days in arrears.

Levitt said at current rates of sale, it would take more than 18 months to clear both the visible and shadow inventory. "Many banks have been as resolute as their debtors with foreclosure avoidance and we have thus seen a levelling off of distressed properties at auctions in recent months, but that doesn't mean mortgage distress has gone away or that these debtors will not be foreclosed on in the future".

Rode indicated that, "it stands to reason that banks would feed the market these distressed properties only gradually because a collapse in the market resulting from a big-bang approach is in nobody's interest. Hence, the most likely scenario is a long term depression of prices, no collapse".

While a deliberate and calculated release of the shadow inventory limits the likelihood of a detrimental price shock to an already weak market, Levitt said the bad news was that the problem appeared likely to be with us for the next two to three years, suggesting future price appreciation may be slow.

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