The presence of real estate owned (REO) properties held by lenders and not yet on the market, known as the shadow inventory, is a constant reminder to those in the real estate business that the real estate market still has a way to go before it normalizes. To build a market and get out of this real estate limbo, REOs must first be resold to owner-occupants or income property investors, not speculators, even though the possible REO deluge will likely have an observable but temporary adverse effect on home prices.
However, with so many banks, speculators, trusts and government-controlled entities holding REOs using different methods to report their foreclosed home holdings, it’s difficult to ferret out the exact number of REOs that remain to be placed on the market. This wildcard creates a quandary for brokers and agents looking forward to the day real estate prices finally stabilize and then begin their annual upward rise — probably limited to the rate of inflation for the next few years into 2015.
What reports do exist indicate that REO inventory is rising as banks are beginning to initiate more foreclosures on those homebuyers who are not eligible for loan modifications or who re-default after modification. So where are the REOs taken in by lenders on foreclosure, and how long will it take them to show up to the party?
The “missing REO” phenomenon is a symptom of a bigger problem, and it’s not the destabilization of prices by putting the REOs on the market immediately after foreclosure. Here’s what the banks aren’t talking about when explaining the slow trickle of REOs onto the market: when they sell an REO, they must then for the first time report the loss (as all REOs currently are supporting an unreported loss) on the lender’s books. It doesn’t take a mathematician to figure out that these massive losses could topple the solvency of any bank that may be on shaky ground — and many of them, even the largest ones, are.
Thus, we probably won’t see a flood of REOs any time soon. Banks are biding their time, holding onto the REO losses and waiting for the economic recovery to see them out of their difficulty.
By Giang Hoang-Burdette • Apr 29th, 2010, first tuesday Realty Publications, Inc.
Mega-investor Warren Buffett and a group of top corporate leaders are weighing in on a key issue that’s crucial to a sustained real estate recovery: How long will the good economic news we’ve been getting lately continue? Are we going to be let down later in the second half of the year, or is the current, slow-moving national economic growth pattern a long term trend? Buffet told his annual stockholders gathering in Omaha that, the economy is showing “significant” and persistent improvement for the first time since the financial crisis broke in 2008.
Other top business leaders polled by the Conference Board — and quoted last week by the Wall Street Journal – said they are now “confident that the U.S. will see sustained growth through 2010″ – with moderate gains in employment, consumer spending and consumer confidence.
That’s hugely important for housing of course – and offers a strong answer to economic doomsayers who predict a sharp drop in home sales and real estate activity following the expiration of the tax credits. The latest housing and mortgage numbers certainly look encouraging:
Pending home sales jumped by more than five percent in March and another 10 percent in April, according to the National Association of Realtors. That’s 21 percent higher than the previous year for the same months.
New applications for loans to purchase houses took another big jump — up 13 percent over the previous week, according to the Mortgage Bankers Association. MBA vice president for research, Michael Fratantoni, said that last week’s FHA and VA share of home purchase applications soared above 50 percent — the highest it’s been in more than two decades.
The U.S. economy is likely to recover more quickly after this recession than it did after the previous two recessions, predicts researchers for the Federal Reserve Bank of San Francisco.
“I see no signs of a double dip,” said John C. Williams, director of research at the San Francisco Fed. “The economy continues to gain momentum, and consumer spending and business investment continue to improve.”
The prediction goes counter to what many analysts believe, but Williams pointed to surveys that show home, car, and retail sales are up. “It’s kind of a natural part of the process — you cut back for a couple of years, and then you need to replace things eventually,” Williams said.
Source: Los Angeles Times, Alana Semuels (05/18/2010)
