More Trouble Lurking in the Real Estate Shadows?

How many homes are on the verge of foreclosure? Pinning down the number is tougher than you think

It’s real estate’s burning question for 2010: How many foreclosures are lingering as “shadow inventory,” those homes and condos not yet on the market? And will we see a flood of homes put up for sale at once, further driving down our home values?

Experts’ estimates for shadow inventory figures range from about 10,000 to more than 50,000. There are several reasons for this variance. The lower number reflects the Las Vegas Valley homes and condos that banks own but do not have listed for sale on the Multiple Listing Service, and this is the true shadow figure, says Larry Murphy, president of Salestraq, a local real estate research service.

But there are Las Vegas pessimists that “bake in” other figures to their projections, says Rick Sharga, vice president of RealtyTrac, which monitors foreclosures nationally. Also fueling negative speculation are the cases of “underwater” residents who have not been paying their mortgages—nobody knows how many there are or when these homes will hit the market.

There were nearly 78,000 notices of default (NOD) on condominiums/townhomes and single-family homes in the Valley in 2009, according to research compiled by John McClelland, director of research for Coldwell Banker Premier Realty. He is hesitant to add NODs to shadow inventory figures, as he speculates that only about a third to half may actually be taken over by the banks. But he also acknowledges a growing number of residents are “milking the situation” and living in their homes without making payments, waiting months before their bank, swamped by delinquent loans, sends a default notice in the first place. At that point the 120-day foreclosure process finally begins. McLelland cites a September claim by website, which states Las Vegas shadow figures are topping 52,000, as a possible example of lumping defaults, bank-owned homes and other situations that have yet to be played out into a formal figure.

“We’re looking at notices of default and [bank-owned] properties that will ultimately be in the inventory as well,” McClelland says. “But there’s a lot that’s unclear in terms of what else could be added.”

Meantime, high shadow inventory projections have doom-and-gloomers concerned about a possible glut of houses released onto the market at once, sending values plummeting further.

But Sharga expects a “steady stream”—not a tsunami—of foreclosed homes to come onto the market over the next three years. His reasoning? Banks continue to battle high foreclosure volume with limited staffs and they are weighing how high the volume of losses they should report at once. Too high a loss could erode stock values. An example of that steady stream could be seen in Bank of America’s recent announcement to put about 500 bank-owned homes per month on the market throughout 2010. Sharga also says banks understand the “collateral damage” that comes with potential price drops because of too many houses flooding the market at once.

Lately, it seems the strategy has been working. “With bank-owned homes, you’re already seeing people bidding them up above the asking price, which suggests in markets like Phoenix and Vegas that they may have overcorrected,” Sharga says. “Foreclosure prices are a little more expensive than they were a year ago.”