Glut of shadow properties could hurt housing prices

Expert says 'Pipeline of default coming'
By Alejandro Lazo and Tiffany Hsu • LOS ANGELES TIMES • December 20, 2009


A supply of 1.7 million homes headed for sale because of foreclosure or delinquency looms over the U.S. housing market, which could dampen progress toward recovery should the Obama administration fail in its efforts to aid struggling homeowners, researchers said.

A variety of measures to keep discounted bank-owned properties off the market — including moratoriums on foreclosures by major lenders and federal initiatives aimed at keeping people in their homes with mortgage payments they can afford — has helped to increase a backlog of so-called "shadow inventory" by 55 percent in the year ended Sept. 30, according to a report Thursday from First American CoreLogic, a Santa Ana, Calif.-based real estate research firm.

These shadow inventory properties are homes that have not been tallied into official inventory numbers tracked by Realtors and other real estate professionals. They include homes taken back by lenders through foreclosures and similar actions, as well as those homes where borrowers are at least 90 days delinquent on their mortgage notes. A year earlier, the pending supply of homes not yet up for sale totaled 1.1 million.

A debate among real estate professionals and market watchers has emerged as to how big an impact such shadow properties will have on housing prices and sales if they emerge as part of the total mix of homes for sale next year.

Some argue that lenders, concerned over potential losses, will spread out the pace of repossessions to avoid depressing the market. Others say efforts by the government won't be able to keep up with the sheer number of defaults brought on by unemployment and depressed home values.

"One of the key questions is the timing, and a lot of the timing issues are really related to the administration's HAMP program," or Home Affordable Modification Program, said Sam Khater, a senior economist for First American. "If many of the loans that are delinquent are able to be successfully modified, and those loans perform, then that should alleviate this issue of the pending supply and shadow inventory."

Such success is proving elusive. Data released last week by the federal government showed banks are doing poorly turning the growing number of temporary mortgage modifications into permanent ones. Only 31,382 of more than 700,000 mortgage modifications under the federal program had been made permanent by the end of November.

"Our forecast is that (home) prices will drop," Khater said. "We are basically expecting that the program will continue to proceed as it has in the recent past; there might be a slight improvement, but it is a drop in the bucket relative to the size of the pipeline of default that is coming up."

In California, home prices and sales have shown steady improvement in part because foreclosure properties have made up a smaller slice of the for-sale housing mix in recent months.

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