The Shadow Inventory is a MYTH
Shadow Inventory Myth
Hello, welcome to Todd Miller TV. I want to do an update today on the shadow inventory and it is sort of spell disbelief that there is this— that there is something here that hasn’t always been there. You are probably saying, “Well no there hasn’t always been a shadow inventory?” “Well yes, there has.” What shadow inventory is? It is just a house that is not on the market yet.So in this current climate where there is a lot of foreclosures what that means is we are talking about a house of default that is going to be foreclosed in sometime in the future more than likely and it will come on the market so everyone has been waiting for the hammer to fall and all these homes to come on the market and this whole idea of a shadow inventory has been around now for 2 years and it is a myth.Your price is saying well no, it is not a myth because we know these houses are coming. Well the truth is of course they are coming, but they are coming out at the same rate that people are buying them. This is why? Do you remember 2003 and 2004 when prices were sky rocketing, guess what, there was a shadow inventory. You would probably say, “No, there wasn’t, there was no houses being foreclosed. No, there wasn’t.”But there was a shadow inventory so imagine this. You’re a homeowner. You are in your house and you are saying to yourself, you know what in 6 months I’m going to get a job transfer and we are going to move. So in 6 months we will be putting our house on the market. Well technically you are part of the shadow inventory. It is a house that is going to be sold in the future, but it is not yet on the market and those happened all the time, no matter what the market is.So the fact that we just have identified that we know there are some houses coming on the market are replaced by the fact that there are no people like that who are just going, oh, I’m just going to sell my house 6 months because most people can’t. They don’t have the ability just to sell the house. Now, here is the second thing some of those houses. The shadow inventory, they are already on the market. They are on the market as a short sale so it is not really a shadow inventory they are already on the market.What is going to happen is that house is going to get, it will either sell or it won’t sell. If it doesn’t sell it is just going to get foreclosed and turn back into an REO. So the inventory is not going to increase it is just going to flip over from short sale to an REO and if you look national at the number short sales listed you know which is like you know almost half a million properties and then you look at the shadow inventory of like half a million properties or whatever.There is no difference. They are just going to change status. So if you are waiting for like the flood of properties to hit the market you probably have been like those people who 2 years ago about this time in 2009 and said oh yeah there is going to be a huge flood in 2010 and then in 2010 it is going you know 2011 is going to be the year. Just write a report 2012 is going to be the year and you know they are coming out and they are being absorbed so anyway I just wanted to share that with you.I think shadow inventory is kind of a myth because they are just replacing normal sellers and short sales, but there is nothing fancy about them. There is no magical flood of properties that are going to hit the market and any properties hit the market at least in Las Vegas are getting absorbed like immediately. Anyway, that is my update for today and I hope to see you on another video. Thanks.
There is much being made about the alleged “shadow inventory” of homes being held by banks that are in some stage of foreclosure. Advocates of the “the shadow inventory is ‘out-there-lurking-and-ready-to-dump-new-inventory-on-the-market’ obviously have no idea about the disincentives for banks to do that.
In addition to the mistake of perhaps selling too soon into a rising market, banks have a very important reason not to sell their property at a loss. If a bank sells a property at a loss, they must immediately show that loss on their books and every loss affects their stock, their loss ratio and their P&L sheets. Analysts of banks look very carefully at loan loss coverage ratios and it has a major effect on the market reputation of the bank as well as how the investor community sees that bank.
This issue was seen during the financial crisis of 2008/09 when many securities held on banks’ balance sheets could not be valued efficiently as the markets had disappeared from them. In April of 2009, however, the Financial Accounting Standards Board (FASB) voted on and approved new guidelines that would allow for the valuation to be based on a price that would be received in an orderly market rather than a forced liquidation. Starting in the first quarter of 2009, banks were allowed to not “mark-to-market”. This ruling fixed an accounting problem which had been causing many banks to appear undercapitalized when in fact they were not.
When a bank has to write down an asset on its books, it not only has to take the loss, but also has to beef up its reserve of cash to cover its declining asset base. The net result is a black eye and less money to lend— even if the bank plans to hold the asset until indefinitely or until maturity. So basically, there is no incentive whatsoever for a bank to rush onto the market any properties subject to foreclosure. Those who fail to understand the internal workings of banks are still believing the myth of “shadow inventory” rather than the fact that the FASB accounting rules allow banks to hold troubled real estate assets without having to write down their value. Maybe these “believers” should come out of their own shadows and see the light of day.