by Catherine Reagor The Arizona Republic Mar. 20, 2010 11:06 PM
Phoenix area home prices could experience another drop in value because of tens of thousands of properties that could flood the market in 2010.
This shadow inventory, located across metropolitan Phoenix, is threatening the recovery of the real estate market and overall Arizona economy.
It includes an unknown number of pending foreclosures, bank-owned homes bought at foreclosure auctions by investors who might try for a quick sale, thousands of homes foreclosed on by banks that have not yet put them up for resale and homes that will go into foreclosure after their owners abandon them and walk away from their mortgages.The housing market has an inventory of homes for sale. But the shadow inventory is the number of additional, bargain-priced homes that could be added to the market anytime this year, a number of homes beyond any regular turnover in home ownership. These new listings - most tied to foreclosures - could flood the market and further drag down values.
Economists and housing analysts are worried that if this inventory of what would become bargain-priced homes enters the market in the coming year, it could cause another drop in home prices in Arizona. Phoenix home prices began to tick up during the second half of last year after recovering from the first round of cheap foreclosure homes dumped on the market.
California, Nevada and Florida also face an oversupply of shadow inventory.
What also concerns market-watchers is that no one can accurately predict how big the shadow inventory is or when any of these houses will hit the market.
Shadow inventory is the most feared and misunderstood term in the real-estate market now, even more than "bubble" during the housing peak.
"Phoenix's shadow inventory is very real and very scary when you think about all the homes that could flood the market," Arizona housing analyst RL Brown said. "Some people are in denial about the area's shadow inventory, but by being informed on what could impact the market, we can all make better real-estate decisions."
Phoenix's shadow inventory includes the following:
• Homes lenders have taken back. More than 5,000 homes that have been taken back by lenders have not yet been listed for resale.
• Homes that homeowners lose. The homes of thousands of homeowners who have unsuccessfully tried to obtain loan modifications could soon fall into foreclosure. Another wave of homes bought with adjustable-rate mortgages also will start resetting this year, forcing still more foreclosures.
• Homes that homeowners abandon. Anywhere from 30 percent to 50 percent of homeowners now owe more than their homes are worth. Many can still afford their mortgage payments but may choose to walk away. Potentially, thousands more homes could be listed for sale by homeowners who aren't underwater but are still giving up on the market.
• Homes investors may try to flip. More than 50,000 inexpensive foreclosure homes were bought in the past 15 months by investors, who could try to resell them anytime.
Phoenix's shadow inventory could cause more damage to the area's already struggling housing market. How much depends on the pending actions of the key players involved.
Market psychology
Part of the reason the shadow inventory is so feared is that it's so uncertain. There's no way to tell what current homeowners - residents, lenders or investors - might do next.
Among the residents, many are pursuing loan modifications that could keep them in their homes, but those are far from a sure thing.
"Loan modifications aren't working like the government expected," said Arizona economist and real-estate investor Elliott Pollack. "Investors bought up a lot of foreclosure homes last year, but those homes will soon be back on the market."
What looms larger for Pollack, however, is the uncertain number of people who may just walk away from their mortgages. "The real fear factor though is how many homeowners will give up."
A growing number of homeowners who can afford their mortgages but now have loans far higher than the value of their homes are frustrated and considering walking away. Some cannot refinance or sell. Others run the numbers and see little value in sticking with their mortgage in this market. The scale and impact of this group of the shadow inventory is causing the most concern because it is impossible to predict.
Among the lenders, many are bogged down with an overload of foreclosures and requests for loan modifications. Those backlogs of homes constitute a large part of Phoenix's shadow inventory. What they do with these homes could help the market or further damage it.
So far, lenders are opting for foreclosure over loan modifications in most cases. Recent federal figures showed only 15 percent of the homeowners eligible for loan modifications have received one. A wave of adjustable-rate and negative-amortization loans taken out during the boom that will begin resetting this year will add to the growing list of homeowners facing foreclosure and asking for loan modifications. Some of these borrowers will see their mortgage payments climb by as much as 50 percent this year.
Any homeowner who doesn't receive a loan modification or can't sell the home through a short sale can be one more foreclosure in the making, adding to the shadow inventory.
Lenders know they can take back Phoenix homes through foreclosures and get them off their books quickly by slashing prices and reselling them to investors. They have been doing this for the past 15 months.
Uncertainty about what those investors will do with the more than 50,000 foreclosure homes they already have bought also stokes fears about a shadow inventory. Most foreclosure homes bought by investors have been turned into rentals. Now, there are so many rental properties competing for tenants, rents are falling. If new investors find they can't make money off rentals, some are likely to try to resell those homes to try to make a quick profit.
But Phoenix real-estate data analyst Tom Ruff of the Information Market doesn't think investors will dump too many homes on the market this year because most of them paid cash for the foreclosure homes and don't have to count on high rents to make money.
"I don't think Phoenix's shadow inventory will cause another crash," Ruff said. "But the housing market's recovery is going to take longer and will be more drawn-out than many expected."
Looming decisions
The danger of Phoenix's shadow inventory can be averted through some key decisions by lenders, investors and homeowners.
If banks complete more government-backed loan modifications and refrain from selling the homes they take back through foreclosure all at once, it would keep another glut of low-priced homes from flooding the market.
If investors who paid cash for foreclosure homes can rent the properties and hold onto them for at least a few years, it would allow more of Phoenix's inventory of foreclosure homes to sell first so prices can moderate and even start climbing.
What some homeowners decide will depend on how much help they get from their lenders. If a large number give their homes back to the lenders, that could have the biggest effect, driving prices down even further. But if lenders work with more homeowners who are underwater, either by helping them refinance or by cutting some of the loans' principal, it could convince more people to stay and continue to pay their mortgages.
The number of homes listed for sale is already climbing. There are about 42,500 homes on the market in metro Phoenix, according to housing analyst Mike Orr's Cromford Report. That is up from 40,000 in December. Metro Phoenix's median home-sales price has been hovering around $130,000 during the second half of 2009, but it has started to fall again. The area's median sale price is now about $127,000.
An additional 50,000 inexpensive homes - the number of pending foreclosures in Phoenix - dumped on the market could drag a home valued at $125,000 down to $120,000, said national housing analyst Tim Sullivan of San Diego.
Still, the shadow inventory doesn't have to mean more market damage, if residents, lenders and investors commit to helping the market instead of hurting it.
"If a bunch of foreclosure homes aren't dumped on the market at once, and the current inventory of foreclosure homes can continue to slowly move through the system," Sullivan said, "then prices will continue to level out."
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