Bubbles, Bubbles Everywhere

How temporary is the current rise in housing prices?  Could we see a repeat of 2008 in the near future?

The answer to both questions is a rounding “we don’t know.”  Betting on the mortgage market or on rising housing prices isn’t a safe bet.

Nor are car loans.  Jamie Dimon of JPMorganChase indicated auto loans as the next problem area in financial services (Wall Street Journal, 3 June 2016).  However, if auto loans crater first, the housing market may not be far behind.

A popular term in the financial pages in 2013 and 2014 was “shadow inventory.”  Those are homes that were foreclosed and never re-sold.  Some were held off the market pending an increase in housing prices.  Some were held off because banks may have been reporting them on their balance sheets at exaggerated values and didn’t want to take the hit on the books or in their reports to the Fed.

Just a few doors down, we have a townhome that was foreclosed perhaps 6 years ago and never resold.  To my knowledge, it hasn’t been on the market in years and would require substantial investment to put it back into shape.  At the time of foreclosure, comparable units were selling for $400,000.  In its current condition, the market value is less than $280,000.  What is the financial institution showing on its books?

No one knows how large this shadow inventory is.  Estimates available from commentators range from 1.7 million to 5.5 million housing units. The National Association of Realtors reported that 4.5% of mortgages nationally represented shadow industry in 2015, with wide variations between states.(2)  However, properties that have been foreclosed aren’t necessarily included in that percentage, so the volume of housing units involved might be much higher.

Something as simple as another round of Fed tightening controls on bank reporting could flood the market with inventory, dropping home prices and creating a  new crisis in underwater mortgages (mortgage debt that exceeds the value of the property).

The shadow  inventory has largely dropped out of the news.  Realtors aren’t worrying, since there has been no impact on priced thus far.(3)  However, per the standard caution on investing, past performance is no guarantee of future results.  After all, the Titanic was unsinkable until it sank.

The shadow market still exists and remains a peril for homeowners and lenders.

What can you do?

(a) If you own your home, enjoy it, but don’t count on it as an asset for retirement or anything else.  It’s a home and its future long term value is unknown.

(b) If you don’t own, think twice about whether you want to buy one or continue to rent.  If you do buy, don’t over pay.

(1) Fleming, Mark.  “A New Source of Shadow Inventory.”  http://www.corelogic.com/blog/authors/mark-fleming/2014/05/a-new-source-of-shadow-inventory.aspx#.V1Hc1b6PtSA

(2) Yuh, Lawrence.  “Disappearing Shadow Inventory,” http://economistsoutlook.blogs.realtor.org/2015/04/24/disappearing-shadow-inventory/

(3)  “Taking inventory: What ever happened to Reno’s shadow housing market?” The Reno Gazette-Journal.  9 November 2015.



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