When Will Shadow Inventory Be Listed?

The previous article about shadow inventory data made a good argument that the Denver real estate market can absorb the possible new foreclosures that are on the horizon fairly easily.  This graph shows that the numbers of weekly foreclosures that sell at the Public Trustee sales are not increasing yet.

Recent forclosure homes recieve Certificates of Purchase on the day of the sale. These stats are from Jill Cox, First American Title.

In fact, the number of new foreclosures notices are also holding steady.  This would suggest that huge shadow inventory has not hit the market so far.

But, what will happen when shadow inventory turns into actual foreclosures?  To answer that question we have to look at what is going on now in foreclosure sales at the public trustee offices.

When I attended the public trustee’s sale in Douglas County last year, there were about a 25 properties on the docket for sale.  Only two potential owner-occupants attended as bidders.  And, they were bidding for the same home.  The lenders who foreclose on the property generally made a bid close to the amount of the first mortgage.  The lenders, however, are not present at the sale so they cannot bid above their original bid amount.  The rest of the bidders in the room consisted of investors and fix and flip specialists.  Most of these buyers are looking to acquire the property, make minor or sometimes major repairs, and then put the property back on the market.

But even the phrase back on the market is a misnomer.  You see, properties that go to foreclosure sales are never really on the market in the sense that very few regular buyers can bid at foreclosure sales.  Buyers have to pay all cash the same day.  That eliminates most owner occupants.  Plus, these sales are never advertised or recorded in the multiple listing system, the MLS.

Whether a Bank acquires the property at the foreclosure sale or an investor does, the results are the same.  Both the bank and the investor will likely put the property back on the market within a matter of weeks or months.  That’s when the actual real estate market feels the swell of inventory. But, it doesn’t happen right away.  It takes investors time to fix up the property for sale.  And, banks do not appear to be a huge hurry to put the properties back on the market even though they rarely do any repairs.

There might be a good reason why the banks are slow to liquidate their foreclosed properties.  In some cases, the banks may be reluctant to take a write-off on their assets when they are carrying those assets at the full value they paid at the foreclosure sale.  Any further reduction in price, plus holding costs and brokerage fees, would create write-downs against their balance sheets. Some of those banks might be stalling to take their write-downs. Others, might be hung up in their own internal bureaucracy and procedures.

We will know when the inventories are about to rise with foreclosures. It won’t be when the foreclosures occur. It will likely be 1-3 months after a glut of foreclosure sales occur.