One broad trend across the country has been a consistent and steady decline in shadow inventory. There is already a shortage of visible inventory. So a shorter shadow – those properties with serious mortgage delinquency or in some stage of the foreclosure process – will not help relieve the inventory situation. With new home construction still sluggish the housing inventory shortage could last longer. Home price increases in many parts of the country are nearly assured as a result. The price gains in some cases will be too fast and not good for the overall health of the local real estate market.
The shadow made up 4.5 percent of all mortgages, down from nearly 10 percent few years ago. In terms of foreclosure starts, the latest figure of 0.46 percent is essentially back to normal. Due to the thinning out of the shadow as well as from rising home values, the share of distressed property sales is now hitting the single-digit percentage. This means, home prices will strengthen (since there will be fewer deeply discounted properties). It also means that those practitioners who specialize in foreclosures or short-sales need to start thinking about a change in business models to normal home buyers and normal positive-equity home sellers.
Like politics all real estate is local. Some states still carry a large dark shadow. New Jersey and New York are two examples. Home prices as a result will only rise very slowly in these states with long shadows.
Since shadow inventory will not turn into visible inventory in the future, what must occur to relieve a housing shortage? Investor-owned properties through a flip could show up on the market. However, most institutional investors who bought a few years ago are indicating a long-term hold to get rent gains which have been nice and profitable. The only true source of more supply is from homebuilders. Unfortunately, they are still not ramping up production to meet the market needs. Consequently, home price gains this year could be too fast for the country, easily rising double or triple the rate of income growth.
Subprime lending and the consequent huge rise in mortgage delinquency rates almost took down the whole financial system and the global economy back in 2008-2009. Lending to people with little known credit history proved to carry huge downside risks. There is, however, one lending program similar in terms of lending to people with virtually no credit history that has been working well. It is microcredit lending for small-time entrepreneurs in poor countries. The sum is very small like $100 so that a person can buy cooking oil and a cart to do a ready-to-eat vendor business. After observing re-payment patterns, this micro-lending is now mostly concentrated to only one group: women. Unlike men, nearly all women repay the borrowed money. Men perhaps are more prone to rolling the dice or drinking away the borrowed money.
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.