Housing’s shadow continues to shrink

By G.U. KRUEGER / FOR THE ORANGE COUNTY REGISTER June 15th 2012

Where did the shadow go — and why does that bother hedge fund managers?

Shadow inventory is thought to be the pending supply of distressed homes, which can create uncertainty in U.S. housing markets. CoreLogic reports that by its math the nation’s shadow inventory tumbled 15% year-over-year in April to a four-month supply. Since peaking in January 2010 at 2.1 million units, the shadow inventory has fallen by 28 percent to 1.5 million units.

The trend and the size of these shadow supply numbers must be greeted with some trepidation by Wall Street hedge funds. They found it easy to raise over $6 billion for plans to buy and rent foreclosures. But these money managers may have difficulty spending it as the supply of troubled properties shrinks.

The Calculated Risk blog pointed out that there are numerous measures of shadow inventory. Some estimates are larger — and more soothing to hedge funds — than CoreLogic’s data. CoreLogic counts seriously delinquent properties; properties in the bureaucratic foreclosure process (notices of default); and properties that are already owned by lenders. But CoreLogic adds a twist to their estimate by trying to eliminate distressed homes already listed for sale or already sold in the short sale process. Obviously, those properties have already come out of the shadows into the light of day.

Many people, myself included, appreciate CoreLogic’s approach. It separates “better visible” from “invisible” supply than other estimates. It also avoids making the idiotic assumption that anything that looks distressed — such as 30-day delinquencies — inevitably will become visible foreclosure supply at some future date.

But even if one adds up everything that crawls and breathes in the distressed mortgage space, one cannot but notice that these shadow supply estimates are a moving target – a downwardly mobile target actually. This might mean that the foreclosure-happy hedge funds may be coming a little late to a party that already has been well-tilled successfully by smaller investors.

Take California as an example. If you add up all the housing distress data for California by the Mortgage Bankers Association (MBA), such as 30-day, 60-day, and 90-day delinquencies, and homes in foreclosure, you get 542,252 properties. Furthermore, if you make an adjustment to reflect that not all mortgages are captured by the MBA you end up with 637,944 distressed properties, a big and some might say bogus shadow supply number.

Still, this number is down 43% from its peak of 1.12 million homes. Father time apparently may not be able to help much with the “under-accumulating” problems mentioned above.

Shrinking supply is good news for all but hedge funds, who have other challenegs to profiting from foreclsoures.

Gaining access to bulk sales from government mortgage handlers or banks may be stymied by political oposition from Realtors, for whom distressed sales are a life blood.

Furthermore, home prices are recovering in distressed geographies like Phoenix. That makes bulk sales less necessary.

Why auction off bulk to Wall Street for a discount, when you can take advantage of the auctioning process for the masses?

The $6 billion that hedge funds want to be on foreclosures smacks like a questionable business model, at best. And at its worst, it’s a potentially unproductive market distortion.

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