Housing Bubble Smackdown: Huge “Shadow Inventory” Portends Bigger Crash Ahead

Due to the lifting of the foreclosure moratorium at the end of March, the downward slide in housing is gaining speed. The moratorium was initiated in January to give Obama’s anti-foreclosure program — which is a combination of mortgage modifications and refinancing — a chance to succeed. The goal of the plan was to keep up to 9 million struggling homeowners in their homes, but it’s clear now that the program will fall well-short of its objective.

In March, housing prices accelerated on the downside indicating bigger adjustments dead ahead. Trend lines are steeper now than ever before — nearly perpendicular. Housing prices are not falling, they’re crashing and crashing hard. Now that the foreclosure moratorium has ended, Notices of Default (NOD) have spiked to an all-time high. These Notices will turn into foreclosures in 4 to 5 months time creating another cascade of foreclosures. Market analysts predict there will be 5 MILLION MORE FORECLOSURES BETWEEN NOW AND 2011. It’s a disaster bigger than Katrina. Soaring unemployment and rising foreclosures ensure that hundreds of banks and financial institutions will be forced into bankruptcy. 40 percent of delinquent homeowners have already vacated their homes. There’s nothing Obama can do to make them stay. Worse still, only 30 percent of foreclosures have been relisted for sale suggesting more hanky-panky at the banks. Where have the houses gone? Have they simply vanished?

600,000 “Disappeared Homes”?

Here’s an excerpt from the SF Gate explaining the mystery:

Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.

“We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market,” said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. “California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You’d have further depreciation and carnage.”

In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity — only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as “shadow inventory.” (“Banks aren’t Selling Many Foreclosed Homes,” SF Gate)

If regulators were deployed to the banks that are keeping foreclosed homes off the market, they would probably find that the banks are actually servicing the mortgages on a monthly basis to conceal the extent of their losses. They’d also find that the banks are trying to keep housing prices artificially high to avoid heftier losses that would put them out of business. One thing is certain, 600,000 “disappeared” homes means that housing prices have a lot farther to fall and that an even larger segment of the banking system is underwater.

Here is more on the story from Mr. Mortgage, “California Foreclosures About to Soar…Again”:

Are you ready to see the future? Ten’s of thousands of foreclosures are only 1-5 months away from hitting that will take total foreclosure counts back to all-time highs. This will flood an already beaten-bloody real estate market with even more supply just in time for the Spring/Summer home selling season . . . Foreclosure start (NOD) and Trustee Sale (NTS) notices are going out at levels not seen since mid 2008. Once an NTS goes out, the property is taken to the courthouse and auctioned within 21-45 days….The bottom line is that there is a massive wave of actual foreclosures that will hit beginning in April that can’t be stopped without a national moratorium.

JP Morgan Chase, Wells Fargo and Fannie Mae have all stepped up their foreclosure activity in recent weeks. Delinquencies have skyrocketed foreshadowing more price-slashing into the foreseeable future. According to the Wall Street Journal:

“Ronald Temple, co-director of research at Lazard Asset Management, expects home prices to fall 22% to 27% from their January levels. More than 2.1 million homes will be lost this year because borrowers can’t meet their loan payments, up from about 1.7 million in 2008.” (Ruth Simon, “The housing crisis is about to take center stage once again,” Wall Street Journal)

Another 20 percent carved off the aggregate value of US housing means another $4 trillion loss to homeowners. That means smaller retirement savings, less discretionary spending, and lower living standards. The next leg down in housing will be excruciating; every sector will feel the pain. Obama’s $75 billion mortgage rescue plan is a mere pittance; it won’t reduce the principle on mortgages and it won’t stop the bleeding. Policymakers have decided they’ve done enough and are refusing to help. They don’t see the tsunami looming in front of them plain as day. The housing market is going under and it’s going to drag a good part of the broader economy along with it. Stocks, too.

Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com. Read other articles by Mike.

13 comments on this article so far ...

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  1. lichen said on April 21st, 2009 at 8:50pm #

    Those 600,000 homes that the banks are hiding away should be put into public domain and used to house every homeless person in this country.

  2. Michael Kenny said on April 22nd, 2009 at 5:37am #

    A small aside on this. Inflation would actually be to the benefit of ordinary Americans. Their salaries would rise but their debts wouldn’t. That would get both the country and individuals out of debt quicker. The same goes for the dollar. The collapse of the dollar would make imports dearer and thereby make outsourcing uneconomic. To produce goods that people with dollars to spend can afford to buy, manufacturers would have to pay people in dollars to make them, i.e. they would have to re-start production in the US. Thus, what the financial elite is presenting as a “disaster” would be a disaster only for them!

  3. Don Hawkins said on April 22nd, 2009 at 6:38am #

    Still without a new way of thinking academic.

  4. obstruksion said on April 22nd, 2009 at 7:25am #

    yeah, cuz homeless people have the income to maintain a house…

    look at detroit to see what would happen if the houses were turned over to people with no incomes. the banks would never let it happen.

  5. David A. Smith said on April 22nd, 2009 at 7:50am #

    For Michael – Unfortunately, higher inflation and a weaker dollar does not mean that salaries necessarily rise. You are correct that IF salaries rise, debt as a portion of income goes down. But there is no mechanism to force companies to raise pay scales to match inflation. The unions used to try to do this, but their pretty toothless now, and we all know that the minimum wage is meaningless.

  6. lichen said on April 22nd, 2009 at 11:24am #

    Housing is a human right; so is employment, and if someone lacks both, you give them both.

  7. Jeff said on April 22nd, 2009 at 5:25pm #

    Look around Detroit, homes foreclosed from the seventies and the abomination of the early eighties still abound.

    The stench of the rot has taken taken hold. Kansas, Cincinnati, Little Rock to name a few.

    Those few are TOO many.

  8. lichen said on April 22nd, 2009 at 6:15pm #

    Yes, the homes are better taken care of when there are occupants; and since the US is a signatory to the universal declaration of human rights, they are obligated to provide housing to everyone, and if the politicians fail to, they should be tried at the hague.

  9. Trevor said on April 23rd, 2009 at 2:50am #

    Demonizing the homeless as being unable to care for a home is a shallow analysis. One must analyze the economic system that impoverishes so many people here as well as all over the world (80% of the world’s people toil for less than $10 per day as they produce the goods upon which the global capitalist system rests).

    It isn’t that “damned homeless people would destroy homes and neighborhoods, by God.” Rather it is that capitalism cannot provide for the working class people in a sufficient manner. The result is a glut of empty, overpriced homes along with increasing homelessness combined with an economic crisis that the capitalist elite are seeking to resolve by handing over trillions of dollars to criminal bankers and by increasing the already continuing assault on the wages and benefits of working class people. Those attacks on labor seem only to exacerbate the problem. But that isn’t quite accurate. It exacerbates the problems facing the underclass, but more severe exploitation of the working class is exactly the solution that the capitalists seek. The housing industry will take it on the chin to be sure; but it is being sacrificed in order to save the capitalist system for the lucky few.

  10. yo said on April 24th, 2009 at 10:58am #


    if you don’t believe what we tell you about detroit, just do a little research on what housing did in the ussr.

    if that doesn’t convince you that public housing rots all the way to the core, then you are one of those folks that only sees what you want to see. in other words, a liberal.

  11. Marcus said on July 10th, 2009 at 11:04am #

    An economics professor at a local college made a statement that he had never failed a single student before, but had once failed an entire class.

    That class had insisted that socialism worked and that no one would be poor and no one would be rich, a great equalizer.

    The professor then said, “OK,
    we will have an experiment in this class on such.

    All grades would be averaged and everyone would receive the same grade so no one would receive a poor grade and no one would receive a great grade.

    After the first test, the grades were averaged and everyone got a B.
    The students who studied hard were upset and the students who studied little were happy.

    As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little.
    The second test average was a D!
    No one was happy.

    When the 3rd test rolled around, the average was an F.

    The scores never increased as bickering,
    blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.

    All failed, to their great surprise, and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great but when government takes the reward away, no one will try or want to work to succeed.

    If housing and employment are a human right, simply sit back, relax, and wait to be handed both.

  12. bozhidar balkas vancouver said on July 10th, 2009 at 3:36pm #

    we swim in a common genetic pool.
    no one can know which wigler wld be the first to enter an ovum. Of the hundreds or even thousands of wiglers just one gets in.
    and that one cld produce a genius or a person with very low intelligence. We get no choice.

    your example rests on the ancient notions that people who are poor, less energetic, or of low intelligence, etc., are that way because they want to be that way.
    it is largely the genetic pool that determines how tall, handsome, smart, energetic, jovial, sad, mad a person will be.
    and it takes mns of people to produce a genius. It is such people we owe all progress.
    and two ‘morons’ cld give birth to a genius and two geniuses cld give birth to a ‘moron’.
    nobody wants to give birth to a child which wld be deaf, short, fat, blind, ‘stupid’, fearful, tired, etc.
    but the nature says otherwise. To nature, we are all OK, but not not to you nor clero-politival ‘elite’. Well, nature made you. However, nature never makes the same mistake twice. Isn’t that good news? tnx

  13. Marcus said on July 10th, 2009 at 11:43pm #


    Preach to the wiglers , the gene pool, and nature. Or even the gods of fate if you will.
    As for the actions of humans, that has been proven empirically.
    Just as the class failed, so will such a society.