Housing might be in worse shape than we think.
There is probably even more excess housing inventory gumming up the market than current statistics indicate, thanks to a wave of foreclosures that has yet to hit the market.
The problem: Many foreclosed homes and other distressed properties that are now owned by banks have yet to be listed for sale. The volume of this so-called ‘ghost inventory’ could be substantial enough to depress already steeply falling prices when it does go on the market.
“That’s not good news,” said Pat Newport, an analyst with IHS Global Insight. “[Excess] inventory is the biggest problem in housing these days, and it leads to lower housing prices, which leads to more foreclosures.”
RealtyTrac, the online marketer of foreclosed properties, recently discovered that it has far more foreclosed properties listed it its database, which the company compiles using courthouse records, than there are listed in the multiple listing services (MLS) maintained by real estate agents.
“Either lenders are overwhelmed and can’t get these properties back on sale quickly” said RealtyTrac spokesman Rick Sharga, “or they’re deliberately slowing down.”
The chief problem is probably system overload: Lenders are just not prepared to handle the sheer numbers of foreclosures that they have on their books. Banks took back about 860,000 in 2008 – more than twice the number in 2007 – according to RealtyTrac. Before the housing crisis hit, it took only about a month to get a bank-owned foreclosure on the market.
Lenders still insist they try to act as swiftly as possible. According to Tom Kelly, a spokesman for Chase (JPM, Fortune 500) Mortgage, their goal is to cut their losses on these homes, which are expensive to maintain, as fast as possible.
But banks might hold back listings in areas where they already have lots of homes for sale in order to avoid flooding the market, according to Michael Youngblood, a financial analyst and founder of Five Bridges Capital, an asset management company.
“If lenders have a significant number of properties in a limited area, they may want to stagger putting them back on the market,” he said.
Bank-owned properties are in worse condition than ever because the foreclosure process is taking longer than ever. As much as a year can pass between the time a borrower first misses a payment and the final auction sale, according to Youngblood. During that time, houses often deteriorate because owners have neither the money nor the incentive to maintain them. Some disgruntled homeowners may even deliberately damage homes before they leave.
“According to our servicing folks, it’s taking more time for lenders to get properties in saleable condition,” said Mechem.
The phenomenon of a growing ghost inventory doesn’t promise to get better anytime soon, as long as the rate of foreclosures continues to ravage the market. There were more than 3.1 million foreclosure filings in 2008, according to RealtyTrac.
Said Sharga: “I don’t see how we can avoid another 3 million in 2009.”