Remember all the stories a few months ago forecasting that Banks would depress real estate prices by listing lots of “Shadow Inventory” in the Denver MLS? While this was true for many large cities in the US, it wasn’t true in the Denver real estate market. First, let’s define Shadow Inventory.
Exhibit 1: Shadow Inventory and other types of troubled properties in Denver.
Note 1: These are properties that are 90+ days late on mortgage.
Source: Your Castle Real Estate analysis, MLS data.
Shadow inventory circled in Exhibit 1 and is either:
- Real Estate Owned (REO) by a bank, or
- Consumer-Owned that is more than 90 days late on their loan.
If it is REO, that troubled property could be…
- Actively on the market, available for purchase today
- On the market, but under contract
- Not actively on the market – a part of Shadow Inventory that has to be sold eventually.
If it is a consumer-owned property, property could be …
- Actively on the market, available for purchase (as a short sale or regular sale)
- Under contract or pending bank approval of short sale terms
- Not on the market – but likely to get a loan modification
- Not on the market – but likely to be sold as a regular sale or short sale soon, in an orderly way
- Not on the market –the owner is in denial, and the home will eventually become a foreclosure. This is part of the Shadow Inventory.
The rest of the article explains how we estimated the size of the Shadow Inventory and what it might mean for people buying and selling Denver real estate. There are three reasons why Denver does NOT have exposure to this problem.
Reason 1 – Homes in Denver are more likely to have positive equity and not be underwater.
The Denver market has fallen 16% from its peak. Prices have been stable or slightly increasing for three years. Many cities in the US had much more dramatic gains and falls. As a result, if you look at the average equity gain over the last three years, Denver is the best among the largest thirty cities in the US. Las Vegas has suffered the most. Foreclosures are much more of a problem in a market where prices are still declining.
Exhibit 2: Average Three Year Equity Gain (as of 12/31/11)
Source: National Association of Realtors, Your Castle Real Estate.
Reason 2 – As a result, the number of homes owned by banks is very low in Denver.
Because Denver’s home prices didn’t appreciate as much during the bubble and began the correction before most markets, Denver has already processed the majority of its REO (real estate owned by banks) inventory. Only San Antonio and Kansas City have smaller REO inventories. Miami has the most REO inventory.
Exhibit 3: Number of Homes Currently Owned by Banks, 30 Largest Cities (12/31/11)
Source: NAR, Core Logic, Your Castle Real Estate analysis, MLS data
Reason 3 – The number of late mortgages in Denver is less severe than most markets.
Notice how severe the problem is in Miami, compared to Denver. In Denver, we have about 29,500 homes that are 90+ days delinquent on their mortgages but are still owned by the consumers. What will happen to them?
- According to NAR (National Association of Realtors), 2500-3500 homes in Colorado receive a loan modification each quarter. We might expect that 10,000 of these delinquent loans are cured by modification.
- Some of the homes have equity and can proceed thru a normal sales process. That might be another 5,000.
- Some of the homes do not have equity. Pro-active sellers will conduct a short sale, and avoid foreclosure. That might be another 5,000.
- Finally, some of the homes will go all of the way thru the foreclosure process. That might be another 9,500. However, it’s just an estimate – it could be anywhere from 5,000 to 15,000. Regardless of the number, these Shadow homes probably won’t hit the market for 3 to 12 months.
We estimate the total Shadow Inventory to be about 16,000 homes in Denver. The question is: over what time period they be brought to the market?
Exhibit 3: Total Number of All Mortgages, 90+ Days Late (as of 12/31/11)
What does it mean for Denver’s Real Estate Market?
We don’t think the likely size of the Shadow Market poses a threat to home price appreciation in Denver. Here’s why. Exhibit 4 shows you the average inventory of homes and condos for sale over the past twenty years.
Exhibit 4: How REO and Shadow Inventory could impact the Denver Market (as of 3/31/12)
Notes: As of 4/1/2011
Source: Inventory: Gary Bauer, Metrolist. Shadow range: YCRE analysis and estimates
You can see that our inventory in 2012 is at the lowest point in about a decade. On a per capita basis, we’re near the lowest inventory we’ve ever had. Of the 9,500 REO properties, we estimate that 3,000 are currently on the market. It’s likely that about 2,000 are under contract and 1,000 are active (and thus in the 10,325 active homes). Among the 29,500 seriously delinquent properties, we’d estimate about 2,000 are currently listed as short sales and are pending approval from the banks. Another 1,000 are active on the market.
If you review Exhibit 1, there are 16,000 Shadow Inventory properties. We estimate these properties will come to market over the next twelve months – around 1,000 per month. In Exhibit 4, you can see how the available inventory would increase in such a scenario. In a crisis situation, we might assume that around half of those troubled homes all get dumped on the market at once. That is the upper line estimate in Exhibit 4. Even in this crisis scenario, you can see this only increases the number of active properties on the market to the level we were at in 2010. This isn’t an issue. We currently have a shortage of inventory at most price points under $450,000. Bringing these homes on the market would be a good thing for buyers – particularly first time buyers, and investors that want to bring rental properties to the market.
The Shadow Inventory is a significant problem in many markets – especially Miami, Las Vegas, Chicago, and many parts of Arizona and California. However, in Denver, our housing market never got into as much trouble as these speculative markets – and we’re reaping the benefits now as a result.