When a homeowner stops making mortgage payments, there is a period before the bank seizes the property.
Before becoming available for sale on the market, these properties hang in limbo, and as such, have been dubbed “shadow inventory” by members of the housing industry.
Rutherford County has an estimated three-month supply of shadow inventory waiting to be released for resale. While it may seem like a high number, it doesn’t compare to the October national average of five-month supply, according to data recently released by CoreLogic, a provider of information, analytics and business services.
“This was down from October 2010, when shadow inventory stood at 1.9 million units, or seven-month supply, but approximately the same level as reported in July 2011,” according to the report. “Currently, the flow of new seriously delinquent loans into the shadow inventory has been offset by the roughly equal flow of distressed (short and real estate owned) sales.”
Florida, California and Illinois account for more than a third of the shadow inventory, and the top six states, which would also include New York, Texas and New Jersey, account for half of the shadow inventory, the report continues.
A healthy housing market should have less than one-month’s supply of shadow inventory, which would be an easily absorbed stock of distressed assets with little or no discernable impact on house prices, unless the inventory was geographically concentrated.
“The shadow inventory overhang is a large impediment to the improvement in the housing market because it puts downward pressure on home prices, which hurts home sales and building activity while encouraging strategic defaults,” said Mark Fleming, chief economist for CoreLogic.
That said, one local real estate agent pointed out that money lost in a home sale might be made up for in a purchase.
“Many existing homeowners are willing to take a loss on their home to make it up on the purchase of the new home because the home prices are so low,” said Chris Day, a Realtor with Prudential Rowland Real Estate. “The market offers great opportunities for homebuyers on the purchasing power and record low interest rates.”
The average list price for homes in Rutherford County is $211,248; however, the median sales price is only $135,000, according to a Rutherford County Market Analysis.
When banks release shadow inventory into the market, those homes are typically sold at a lower cost, simply because banks don’t want the hassle of dealing with the properties’ upkeep. This allows a homebuyer to more easily price shop. Such a gradual release of inventory creates instability in the market because inventory is looming in the shadows.
“I would not encourage anyone to sell their house to test the waters; that’s now what this market is for… They’re going to lose a lot unless they own the house outright,” Day said. “But, you can make it up big time on the other end when you buy, and a lot of people look at it that way, as ‘I can get a good deal and cut my losses.’”
Good news for homebuyers
With great mortgage rates and low home prices, potential homebuyers have the upper hand. To add even more incentive, Fannie Mae announced an aggressive lending initiative for buyers to purchase bank-owned property.
“HomePath financing, available only on Fannie Mae-owned properties, offers great benefits — low down payment, no mortgage insurance, expanded seller contributions, and more,” according to homepath.com.
“HomePath Mortgage is available for move-in ready properties while HomePath Renovation Mortgage provides both the funds to purchase and to renovate in one loan. You also can use the financing of your choice from any lender, such as your local bank, credit union or other financial institution.”
The program also offers initiatives for investors to purchase property, either individually or via pool sales, with as little as 10 percent down.
With 97 percent financing, no appraisal fees, no mortgage insurance and a downpayment of at least 3 percent, this deal sounds too good to be true.
Local licensed mortgage banker Shawn Kaplan of Access National Mortgage said this could be an indication that a surge of shadow inventory will hit the market soon.
“That is telling me that there’s quite a bit of inventory, and it leads me to believe there’s quite a bit they’ll be releasing,” he said.
This program allows a borrower to purchase a Fannie Mae-owned property with a low down payment, flexible mortgage terms, no lender-requested appraisal and no mortgage insurance.
Expanded seller contributions to closing costs are allowed.
• Low down payment and flexible mortgage terms
• Fixed-rate, adjustable or interest-only rate
• Down payment can be funded by the borrower’s own savings, a gift, a grant, or a loan from a nonprofit organization, state or local government, or employer
• No lender-requested appraisal
• No mortgage insurance
• Ask about cost details on loans without mortgage insurance
• Expanded seller contributions for closing costs allowed
• Available for primary residences, second homes and investment properties
• Many condominium project requirements are waived
For more information, contact a HomePath Mortgage lender.