Historia

RealtyTrac, CoreLogic Confirm Housing Bear Thesis: 85-90% of REO Being Held Off Market, Meaning “Tight” Inventories Are Bogus
We’ve been mystified with the housing bull argument that things really are getting better. While real estate is always and ever local, and some markets may indeed be on the upswing, there are ample reasons to doubt the idea that an overall housing recovery is in. Forinstance, the recent FHFA inspector general report stated:

Further, general distress in the housing sector will likely continue to result in elevated REO inventories. For example, the Enterprises’ financial data indicate that, as of the end of 2011, more than 1.1 million mortgages held or guaranteed by the Enterprises were “seriously delinquent,” i.e., were 90 or more days past due. At that time,the volume of seriously delinquent mortgages was more than six times the size of the Enterprises’ REO inventories

Reader MBS Guy noted:

My rough calculation of their REO and delinquency numbers would indicate that they will have about 300,000 new REOs (acquisitions, in their parlance) per year for the next three years, assuming their isn’t a surge in new defaulters from their portfolio (ie –just using the loans currently seriously delinquent). They also report 179,000 properties currently in REO (end of 2011).

If they maintain their 2011 rate of REO dispositions at 353,000, the pipeline would be largely cleared in about 3 years. If they are able to increase the pace a bit, perhaps the inventory clears in 2-2.5 years.

Either way, it is very likely that about 1 million REOproperties will be disposed of by the GSEs over the next 2-3 years. Over the last 3 years, they have disposed of about 833,216 REOs.

What will the impact on home prices be in the rate of REO disposition in the next 3 years matches or exceeds the rate of disposition of the last 3 years? I’d expect that it will be pretty negative.

Remember, that’s ONLY Fannie and Freddie mortgages. Recall that 1.1million figure, serious delinquencies in their portfolios. Top housing analyst Laurie Goodman puts the total across the market at 2.8 million.

So why are we seeing so much housing cheerleading? One big “proof” is that housing inventories are supposedly shrinking. If you recall the classic supply/demand chart, if a price is higher than the market price, you expect to see big inventoriessomewhere. Conversely, if inventories are falling below a “normal” level (there are always some buffers in a system), that’s a sign of strengthening demand.



But we’ve seen so much evidence that the inventories that the commentators are looking at are misleading it isn’t funny. Banks were attenuating foreclosures even before the robosigning scandal broke. In the states with real housing distress,banks will take foreclosures up to the stage of actually taking title from the owner, and let it sit in limbo for a protracted period. But in addition to delays in real estate being taken into REO, there is also evidence of banks simply not putting real estate owned by securitizations, the GSEs, or the banks themselves, on the market, thus keeping it out of visible inventories. For instance, numerousNC readers report they see vacant homes, want to make an offer, and can’t find out who to contact to do so. That is a pretty strong sign that those homes are also not in official REO inventories.

And let’s consider the implications of that chart, again: if there ARE large inventories, that’s means supply is being constrained and the resulting “market” prices are above where they’d be based onfundamentals. So any price improvement is based not on improving conditions, but the manipulation of supply.

We finally have some official confirmation of our thesis. From AOL’s Real Estate blog, “‘Shadow REO’: As Many as 90% of Foreclosed Properties Held Off the Market, Estimates Suggest“:

As many as 90 percent of REOs are withheld from sale, according to estimates recently provided to...