Turn On The Lights, Watch The Roaches Scatter, Part 33

Today's Foreclosuregate story comes from big Barry Ritholtz's place.  Like a dam about to break, the flood of foreclosed homes waiting behind the Foreclosuregate logjam will drop home prices like a rock by inundating the market.  So even if the banks get their way and resume foreclosures, the sheer number of them will still drive home prices down like a 20-pound sledgehammer on an eggshell.  This "shadow inventory" of foreclosures measures in the millions, folks.

It is very important to understand that this enormous shadow inventory of distressed properties that will eventually be thrown onto the resale market is heavily concentrated in a limited number of metros.  According to data provided by Lender Processing Services, 52% of the nationwide 90 day delinquencies and 58% of the defaults are concentrated in 25 major metros.  The following table shows this concentration.



If you look carefully at the distressed property figures for the top four metros, you’ll see that the number of residences which will be pouring onto their housing markets in the next 1-2 years is enormous.  Anyone who thinks that prices have bottomed in the Miami, New York, Los Angeles or Chicago metro areas had better take a good, hard look at these statistics.

That number is nearly a million properties in just New York, Miami, LA and Chicago.   There's another million and change in other metro areas.  There's close to 600,000 just in Florida's major cities of Miami, Orlando, Tampa and Jacksonville, and that's not including other cities in the state.

Oh but it gets worse folks.  Much much worse.  How many shadow inventory foreclosures are coming in 2011 and 2012?

An incredible 14% of the nearly 54 million first liens in the country are now either delinquent or in default.  This chart from the Calculated Risk blog shows the steady growth since 2005.



To come up with a total for the shadow inventory, let’s first add the total number of loans in default to those delinquent 90 days or more since we know that these loans are headed for foreclosure or a short sale.  That comes to 4.5 million properties.  Based on the cure rate for loans delinquent at least 60 days, we will add 95% of those 60-day delinquencies.  That is an additional 723,000 residences.  For the same reason, we will add 70% of those delinquent for at least 30 days – 1.25 million properties.

And, of course, let’s not forget the REOs that have not yet been placed on MLS listings by the bank servicers.  We’ll be conservative and estimate them at 500,000.

Adding all of these together, we come up with a total of roughly 6.97 million residences which are almost certainly going to be thrown onto the resale market as distressed properties at some point in the not-too-distant future.  This massive number of homes will put enormous downward pressure on sale prices.  To believe that prices are firming now is to completely ignore this shadow inventory.  Ignore it at your own risk.

Seven million foreclosures yet to be worked through on the other side of that Foreclosuregate mess, folks.  Seven.  Million.  We're nowhere near the bottom of the housing market.  Nowhere close.  We've got a long way to fall still...and that's going to create even more foreclosures down the road as more homeowners end up underwater.

And that's if the whole thing doesn't blow due to Foreclosuregate.  Or hell, both may happen.

Have a nice day.