In the Shadows: Is the Shadow Inventory a Threat?
Investors the world over were taught to exercise caution and use reasonable due diligence to discover threats to investments. Since the fall of Enron, AIG and so many other companies we’ve learned about “Off-book” threats. Also called Off book debt, counter-party risk, derivatives, and the shadow market. It seems that in a the age of transparency, bolstered by instantaneous news and gigabytes of data to research on the net, things are less transparent than ever.
We are in the housing business. Our competition for customers “renters” is more diverse than ever, and yet less trackable. We use the term “Shadow Market” to refer to all those homes, condominiums, hotel rooms, mobile homes, spare bedrooms, and units that we can’t track/qualify as competing rentals in our studies.
What scares us the most is that we don’t know home much of it is out there, who controls it and when it can or will be released. Arizona ARMLS tracks how many listings are on their MLS system and the news out this week is that there are far fewer homes for sale in Arizona than we’ve seen in a long time. Where did they go?
There’s a rumor that Bank of America has over 55,000 Maricopa County homes in their REO inventory. Some reports count as many as 100,000 additional homes in default or serious default in Maricopa County. These figures don’t account for the hundreds of thousands of homeowners under-water and considering strategic defaults. Is this a threat or are the lenders, banks, GSE’s and other entities committed to slowly controlling their release to the market?
Can we really assume that the numbers were are seeing are real? The first lesson in economics 101 was the relationship between supply/demand and pricing. Less supply in a market should lead to more demand and to higher pricing. But that’s in a natural market - one absent of manipulation.
I guess what gnaws at me the most is that the data suggests that there are less homes on the market than we’ve seen in years, there’s little more than a 2.5 month supply at current absorption and yet prices haven’t inched up a bit (actually reported to be down year over year by 4% when June 2010 is compared to June 2011).
Clearly there has been a positive surge in rental activity. Lower vacancies and higher rents have been reported month over month in the Phoenix MSA. So there is some correlation with the data suggesting the limiting supply.
I’ll throw one more observation out there. I was recently tempted to invest in the fix and flip market for single family homes. I found a few candidate homes and was set to make a run at the trustee sale auctions, until a friend showed me an insider report on that neighborhood. What appears to be a subdivision that’s has hit bottom and gaining some stability to the outsider, was clearly not. There were dozens of homes owned by lenders and others where lenders hadn’t started foreclosure despite owners not making payments in months. Driving through the streets on a Saturday I saw owners cutting the grass, washing their cars, kids playing ball in the street - not a hint that occupied, functioning homes were not even owned by the family anymore. Were they all in denial or did they all just accept the situation as normal?
I’m absolutely encouraged that we are seeing higher rents and less vacancy. I’m happy to see that the lenders all appear to have formed some sort of a pact to slow the release of homes to the ecosystem to keep things in balance. I’m just not sure how much of it is real.
As always, open to your thoughts and comments.
John P. Kobierowski