Calculating Washoe County’s shadow inventory

We hear the term “shadow inventory” referenced frequently in the media. People continually want to know, “how much exists?”, and “is it a problem?” But what we don’t often hear is a number, or the answers to those questions.

Recently, Steve Schiller, President of Northern Nevada Regional Operations for Ticor Title of Nevada, was asked to give a presentation of the 2013 Residential Forecast for Washoe County. As part of his presentation, he was asked specifically to address and estimate the amount of shadow inventory in Washoe County.

I attended Mr. Schiller’s presentation and was impressed with his attempt at quantifying a concept that until now I had seen only a few take a guess at. Mr. Schiller prefaced his presentation by saying that his calculations, too, were only an estimate; however his analysis was the most thorough I have seen, and seemed to make sense.

Mr. Schiller has provided the slides from his presentation to me and allowed me to share them with the readers of this blog. [Thank you to Steve Schiller and Ticor Title] The presentation slides along with accompanying notes can be found here: Washoe County 2012 Residential Review ~ Shadow Inventory ~ 2013 Residential Forecast

To determine shadow inventory Schiller looked at three components of the potential shadow market:

  • loans that are in some stage of the foreclosure process, which means, the lender has filed the NOD but has not completed the foreclosure, by crying the sale.
  • loans that have been foreclosed, but the lender has not resold the property. Typically this would be the vacant properties held by the banks that for various reasons have not been put back on the market. Or, REO inventory not yet listed.
  • delinquent loans that have not even started the foreclosure process, primarily due to government intervention, for example, AB284 & National Mortgage Settlement.

What followed were calculations that ultimately lead to an estimated shadow inventory equivalent to a 17-months supply.

Take a look at his approach and numbers. What do you think? Does 17 months sound realistic? Too high? Too low? I would love to hear your thoughts. Steve Schiller is also interested in hearing your feedback.

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About Guy Johnson

I am a licensed Nevada REALTOR® (lic.# S.0075262.LLC) living and working in fabulous Reno, Nevada. I cover Reno, Sparks, Incline Village, Carson City, and beyond. Give me a call at 775-722-4011 and I will be happy to assist you with your real estate needs. I'm your Guy!
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20 Responses to Calculating Washoe County’s shadow inventory

  1. Avatar Stanton says:

    Hey Guy,
    How many houses does 17 months of inventory comprise? I think what would be most helpful to know is: how many houses are out there in shadow inventory? Got a number for us?
    Thanks.

  2. Avatar Perry says:

    Looks like about 12,000 houses to me.
    That sure sounds worse than saying 17 months of inventory, doesn’t it?

  3. Avatar Guy Johnson says:

    Stanton, in Steve Schiller’s notes (see link in post above) you’ll see his calculations arrived at 11,967 houses comprising potential shadow inventory.

  4. Avatar SMcGuire45 says:

    Thanks for posting this very informative presentation! Steve’s estimation seems quite reasonable, and certainly seems like the most effective calculation of the potential “shadow inventory” I’ve come across. I’m curious why in his 2013 Forecast he’s expecting a decrease in Refinances?

  5. Avatar E.Edward says:

    Ill bet its twice that amount… at least! Yep… nothing has been fixed, just a bunch buyers drunk with low interest rates!

  6. Avatar jacky says:

    for those interested.. Lewis corp has purchased phase 2 from Casoleil condominiums and plans to build 75-100 single family homes. It will be a separate community from Casoleil.

    We are exciting about our new neighbors and feel this will make casoleil a more exclusive neighborhood with only 110 units instead of the planned 220.

  7. Avatar BanteringBear says:

    I think the number may be a bit low. Nonetheless, it is a horrific figure when you stop to consider it. Worse yet, builders are still building. This is why Bernanke is punishing savers (grandma) using criminally low interest rates to try to drag every last buyer and investor into the market to clear these homes while maintaining higher prices. Ultimately, however, he will fail, and the housing market will crater in a fashion most people never thought possible- AGAIN. Current prices are in a massive bubble. There is nothing attractive in the current market, neither from an investor’s perspective, nor an owner occupant.

  8. Avatar Sully says:

    Since I’ve been busy trying to throw a wench into the Buffet takeover of Heinz, I didn’t catch this post until today. As usual BB covered most of my thoughts, however I will add that we are just one recession away from this “house of cards” collapsing.
    High government debt.
    High credit card debt.
    High public pensions.
    High unemployment.
    A president that deems it more important to bellyache at town hall meetings about the unrelenting opposition rather than staying at work to resolve the budget conflict.

    I overheard a conversation the other day by an apparent Obama supporter that claimed he will go down in history as our best president ever. Since I’m independent, I see no need to refute this comment – however I can’t seem to stop laughing…….

  9. Avatar fella says:

    Any of you negative guys put ur money where ur mouth is? by that i mean have you sold property in last 3-6months in anticipation of this inevitable bubble crash?

  10. Avatar MikeZ says:

    Looks like reasonable mathematics and a credible number. The big question I have is: when will they come out of the shadows and onto the market and how fast?

  11. Avatar MikeZ says:

    RE: “a bunch buyers drunk with low interest rates!”

    That’s the primary worry I have as a home shopper … low interest rates are nice but … what happens to prices when interest rates come back to reasonable levels, 5, 6, 7%? 8% Prices would have to fall 25% or so for the mortgage payments to equalize, and that means they probably will fall, by about that much.

    A 3% mortgage isn’t much help if you suddenly lose all your equity.

  12. Avatar Heath says:

    12,000 (or more) houses in shadow inventory slowly working their way to market. 70% of all sales in 2012 were distressed, either bank repos or short sales. All the “gain” in 2012 was nothing more than cash investors scooping up the overcorrected inventory at the absolute bottom end of the market. Half of all sales are less than $180K. The “move-up” buyer does not exist in this market. The median, even after last year, is still down 50% from 2006. This market is still very sick.

  13. Avatar Andrew says:

    Fella

    Not bantering bear.. He’s been paying for other people’s mortgages for years now…

  14. Avatar Norman says:

    Excellent point Mike Z. When people have to pay for mortgage money at something horrible like 6% or 7%, and the payments on the same amount of money borrowed are twice what they are today……..what happens to prices?

    Of course, we can always bring back the nothing down, no-doc, 105% LTV, 2% teaser rate, neg-am loans to enable the totally unqualified to keep the party going, right?

  15. Avatar skeptical says:

    The permabears just don’t get it. Bubble collapses don’t last 6 yrs. There was a bubble, and it burst, and now we are on our way back to a reasonably normal market. The time to buy was in the darkest hours of 2011. Since then the massive pent up demand has driven prices up substantially from the lows of the bust.

    Yeah, there is “shadow inventory”, but it don’t matter. It was a myth all along that shadow inventory was the big bugaboo that would double whammy the bottom fishers brave enough to wade into the dangerous waters of the bust.

    New families making a decent income looking for a house (and there are many), don’t want a 35 yr old place that’s in foreclosure and needs tens of thousands of dollars of rehab to make it liveable. They want turn key places. Most of the shadow inventory ain’t turn key. That inventory doesn’t affect the current flaming hot market near or above median that would make a family of four happy.

    Yes, there will continue to be thousands of places in some stage of foreclosure, possibly with “owners” still living there. And it will be the case for many years to come. And it doesn’t make a hill of beans worth of difference to anybody currently looking for a house to live in.

  16. Avatar Hudson says:

    It matters. A lot of purchases in the second half of 2012 are hopeful flippers. If the flips aren’t selling in january and feb at their ridiculous asking prices, things will come down some. Some folks are thinking they got great deals on short sales, but i think they will find they paid market and another dip here over the next couple of month will scare the hell out of them.

  17. Avatar Sully says:

    Skeptical,

    There is no time limit for a bubble to bust. The NASDAQ was at 5043 in Mar/2000, by Sep/2002 it hit low of 1200. In Oct/2007 it was back to 2800 and down to 1293 in Mar/2009. At this point I can see it reverting to 1800 in the next three years down from its current level 3169. The bust is generally over when price reverts to the mean. The Reno housing market certainly met that criteria in Jan/2012 and actually went past it somewhat. However, the 30% gain for the year was an over correction created by lack of inventory. I can see the median coming back to the 150K area. What you call “pent up demand” I consider an opportunity. Low prices combined with all time low interest rates – what reasons were there for not buying?

    As far as shadow inventory goes, that would depend on the actual number of houses and how soon and frequently the banks release them to the market. I don’t think the banks will dump thousands of backlogged REO’s on the market in a short time frame. It wouldn’t make sense for them to compete with themselves. At least not while interest rates are so low.

    I checked the current Reno/Sparks listings (175 – 250K range) and found 78 out of 361 houses that were still available (not pending) and of those some weren’t exactly turnkey. So less than 20% of the market is available to make a family of four happy, but I’m not sure about their value at this time since the market has increased so much over the past year. According to a few realtors I’ve talked to lately, it seems like houses are automatically priced around 30% higher at listing, then they would be normally. I’m not really sure what normal should be, but I’ve noticed some exuberance in pricing on quite a few houses I’ve looked at recently (these were outside the median range though).

    So I have to question your statement about this market being reasonably normal. Increase the inventory and resume “normal” interest rates and then we’ll see if we still have a flaming hot market.

  18. Avatar E.Edward says:

    Well, I guess it just comes down to this…and here’s the 16 trillion dollar question..

    How long can these artificially low rates continue?
    How long can the fed pretend there’s no inflation that will ultimately force rates up?
    How long can the fed continue purchasing{85 billion each month} in treasury and mortgage backed securities with money that doesn’t exist?
    How long can the 11 of the hardest hit foreclosure states continue chocking off inventory with these robo singing moratorium laws before the flood gates are finally opened?

    I have yet to see ANY of these “Perma real-estate bull experts” make a realistic case for a stable market under these fantasy conditions….Why? …Because there isn’t one! Its all hype and greed!!

    Myself.. there’s other yields out there…I’ll wait this dog with fleas out!

  19. Avatar Sully says:

    I meant to say $30,000 not 30% at listing – got a bad keyboard! 🙂

  20. Avatar MikeZ says:

    RE skeptical: “Bubble collapses don’t last 6 yrs.”

    The last big downturn in real estate, starting in the late 1980s, lasted about 10 years, and that was without 3% interest rates and the other stimulating measures that are in place right now, helping to push sales and prices upward.

    See Shiller’s home values chart here: http://www.nytimes.com/imagepages/2006/08/26/weekinreview/27leon_graph2.html

    As you can see the collapse downward from the peak was 4-5 years, then prices skipped along the bottom for another 5-6 years.

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