Zombie Subdivisions and "Pig In The Python" Shadow Inventory

The Atlanta Journal Constitution is reporting fire-sale prices on some lots have dipped to 20 to 30 cents on the dollar as the Volume of 'subdivision' vacant lots overwhelms banks.

You think it’s hard selling a house these days? Try unloading a subdivision. And not just any subdivision, but one with few if any completed homes and a weedy patch where the swim-and-tennis center was planned.

That’s the reality many Georgia banks find themselves in amid a foreclosure crisis that has claimed not only individual homes but also entire failed developments.

These idled, “zombie” subdivisions can be found across metro Atlanta, but they’re most prevalent in outer-ring suburban areas. Selling them has proven tough, with some properties sitting on the market for months on end without even a nibble. In the past year, 16 Georgia banks have failed, more than in any other state, largely because of residential real estate losses. Dozens more are struggling.

To say the market has been sluggish would be an understatement. The main problem is sheer volume – a staggering 150,000 vacant housing lots across metro Atlanta are available, more than a decade’s supply at current absorption rates.

The flood of distressed subdivisions is unprecedented and has given banks numerous headaches.

Is it more cost-effective to complete half-finished homes before selling or to put them on the market as-is? Should they sell lots in a distressed market or hold onto them until prices rebound?

Complicating matters, subdivisions often were financed by more than one bank. And different lenders frequently disagree on what steps to take when problems arise.

Shadow Inventory Is "Pig In The Python"

RealtyCheck asks the question How big is the Shadow Housing Inventory?

For the past few months I've talked a little bit about so-called "shadow inventory." These are the homes that banks have taken back after foreclosures (known as REO properties). In normal times banks immediately turn REOs around and up them up for sale, but that's not happening at a very fast clip these days. The Realtor's chief economist, Lawrence Yun, called it a "business decision" by the banks:

"I believe that many banks including Fannie and Freddie, who are also holding onto some properties, are releasing foreclosed properties in a measured way so as to not to flood the market which they perceive then perhaps could lead them to even more drastic price cuts. So they are releasing properties on a measured pace as a business decision to minimize losses."

So what exactly is the size of this shadow inventory?

Hard to say, but estimates are that it could be around 700,000.

This of course does not include the foreclosures that are still in process, which builder analyst Ivy Zelman refers to as "the pig in the python." Builders are concerned that if these properties suddenly flood the market, their new high hopes could turn right back around.

Shadow Units Cast Pall

Here is an article I picked up from Calculated Risk. Crain's New York is reporting Shadow units cast pall.

New York City's condominium market may be in even worse shape than the commonly used yardsticks show.

In Manhattan in the first quarter, sales were halved from year-earlier levels even as more apartments flooded onto the market, leaving it choking on an 18.6-month supply of units. Meanwhile, in the recently red-hot neighborhood of Williamsburg in Brooklyn, sales in the period plummeted by 70% as even more units expanded the property glut there.

As bad as those figures look, they may actually overstate the health of the market. Industry experts point to a growing mountain of so-called shadow inventory that is not reflected in the data. This includes units that are held by developers in soon-to-be completed buildings, as well as those kept off the market by banks and by individual owners who are waiting for conditions to improve before they tack up “For Sale” signs.

Flawed inventory count

“We are undercounting the housing stock,” says Jonathan Miller, chief executive of appraisal firm Miller Samuel Inc. “And when you have more inventory than the market can absorb, it places pressure on prices.”

“More inventory will continue to lower rents,” says Marc Lewis, president of Century 21 NY Metro, who believes that Manhattan vacancy rates are closer to 5% than the 2% reported by most industry players.

Given the dismal market and a lack of financing, few new buildings—if any—will be started in coming months. But scores of properties that were already under construction before the credit crisis of 2007 will hit the market in the next few years.

“It is hard to keep steady watch on how much shadow there is in the city,” explains Mr. Miller. “The number is constantly moving.”

Pent-Up Demand To Sell

The above articles represent one kind of shadow inventory, condos, homes, and lots held off the market in fear of overwhelming demand. There is another kind of shadow inventory at stake: those who do not need to sell and do not have their units for sale officially or unofficially, but would sell if prices started rising.

Please consider "Shadow" inventory lurks over U.S. housing recovery.

"The number of homes listed officially on the market, while still at historically high levels, might be only the tip of the iceberg," said Stan Humphries, chief economist at real estate website Zillow.com in Seattle, Washington.

According to Zillow's latest Homeowner Confidence Survey, 12 percent of homeowners said they would be "very likely" to put their home on the market in the next 12 months if they saw signs of a real estate market turnaround, 8 percent said "likely," while 12 percent said "somewhat likely."

Survey results could translate into around 20 million homeowners trying to sell their homes, a startling number given that the Census bureau indicates there are 93 million U.S. houses, condos and co-ops, Humphries said.

According to the National Association of Realtors, the market is currently on track to sell 4.89 million homes annually.

"At this pace, it would take about four years to run through this amount of backlogged inventory," he said.

"Shadow inventory has the potential to give us another leg down on home prices during the second half of the year," said Steven Wood, chief economist at Insight Economics in Danville, California.

Fundamental Factors Affecting Housing

• Tougher lending standards: no more liar loans, bigger down payments, closer look at incomes, etc.
  
• Tougher appraisal standards
• The difficulty of finding jobs
• Wage and benefit cuts shrinks affordability for those who do have a job
• Huge bank-owned shadow inventories
• Huge developer shadow inventories, especially in condos
  
• Consumer willingness to "walk away"
• Rising delinquencies and foreclosures due to rising unemployment
• Rising taxes
  
• Overleveraged consumers
• Pent-up demand to sell in a "please get me out mentality" if prices rise just a bit
• The upcoming boomer retirement downsizing event
  
• A change in consumer attitudes regarding housing as an investment
• A new frugality in consumer attitudes towards debt in general

Every market is different, but in general, the odds of a huge nation-wide rebound in home prices is slim given that backdrop. Housing prices will likely remain depressed for several more years at least. In "real terms" I expect prices will decline for another decade.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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