Sunday, May 15, 2011

Shadow inventory of solds?

We’ve all heard about the “shadow inventory” of foreclosures that is supposed to hit the real estate market. But could there be a “shadow inventory” of sold properties? Last week, L.A. Times published an article which states that real estate sales and home prices are not so hot for the Southland. Here’s the link if the title won’t link. As always, I’m not going to argue with statistics, but I don’t know that they tell the whole story. Yes, the early part of 2011 was slow, but I think there could be another reason for low numbers.

IMO, the sales numbers may be skewed by the sheer number of short sales out there. Here’s how it works. A regular home lists, attracts offers, and the buyer and seller enter a contract. The house usually closes escrow 30 to 90 days later and the sale is reported in both the multiple listing service and to the county tax assessor. That’s where all the data comes from. But with short sales, the buyer and seller can be in contract for four to eight months before the bank even approves the sale. During the time period, regardless of the agreement between buyer and seller, the house must be listed as “active” on the mls (the banks in their wisdom mandate this.) And then it can take a month or so to close. (For example, I had one last year that went eight months before it closed, and another one cancel after four months before the bank even got around to approving it.) Not to be Pollyanna-ish, but considering that a high percentage of homes on the market are distressed sales, I think we may be experiencing more of a time delay in reporting actual sale transactions, than in actual sales. What do you think?


  1. I think that this argument would have been valid several years ago when we first started dealing with short sales. I think it is less valid now because short sales are closing.
    The fact that short sales show as active for a longer period of time is reflected in the higher "months of inventory" statistic. However, the fact that a property is a short sale should no longer impact the number of sales since short sales that started 8 months ago should now be closing. So looking strictly at the change in the number of sales from period to period would no be altered because there is an abundance of short sales, unless there are new regulations introduced that increase or decrease the time it takes to get them done.

  2. sfvrealestate7:09 PM

    Ray, thanks for commenting! And, from your lips to God's ears about decreasing the time it takes to get short sales done. But my experience has been that it's taking longer than ever to close these short sales. The very first one I did closed in a month. That was three years ago. Now...who knows? So I think there may indeed be an element of timing going on here. But, after all, if I didn't think that, I wouldn't have written the post.

  3. TonyM8:40 AM

    While I get the vibe of what you are saying I don't fully agree or I'm misunderstanding. It's irrelevant how long it takes a property to close for the sales data. It's not a sale till it closes, period. Otherwise multiple offers on single properties would quasi count as "possible sales".

    I get the frustration level with banks dragging their feet on short sales, but they don't have much motivation to rush through them either. They are working with practically free (extremely low interest) money. Much lower rates than a individual could get. Mark to market accounting rules having been changed benefits them - on a accounting book level, not reality - to hold the property at most recent loan value rather then record the loss of the marked down short sale. The current rules do not benefit the individual buyer, but lean heavily towards the financial system.

    Sales are historically low and I think will remain so for some time. There isn't much confidence in future of the market, nor is there much stability in jobs. On top of that eventually mortgage interest rates will have to go up. Might take years or even a decade, but they will go up and that will effect peoples ability to qualify for a loan and could also put downward pressure on prices.

    It's a very confusing time for the traditional home buyer. First time or move up buyer (though there are few of those these days).


  4. sfvrealestate7:13 PM

    Tony and Ray just about have me convinced that I'm wrong. But I still say that lots of properties that show "active" in the mls are really under contract and just waiting to close. I'll do some math later; my brain is hurting from all this now.

  5. TonyM8:36 AM

    I don't think you're wrong per say. I don't know the procedures of when a property gets removed from mls active listing. But...if all properties (non short sales) stay listed as active until actual close vs under contract then there is nothing unusual going on. But..if traditional sales get removed from the active listing status once under contract and short sales don't, well you are onto something. What? I don't know, as the whole situation reeks of a giant shell game anyhow. :)

  6. sfvrealestate12:43 PM

    TonyM, that's exactly what happens. A regular sale gets listed as "pending" or "backup offer" once it's under contract, and is no longer on the "active" list. A short sale stays "active" for all the months a bank takes to approve an already in-contract sale, and doesn't list as pending until the bank okays it to close.

  7. TonyM2:14 PM

    That's odd that they process them differently. I'm sure they have a reason >rolling eyes< :) I'm still notl on board with it skewing the sales number though, sorry. It's not a sale, and shouldn't be reported as such, till it closes.