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The Massive Coming Shadow Inventory and What to Do About It

by Steve Dexter on December 23, 2010 · 1 comment


Let’s see….we have 900,000 bank foreclosures happening now according to Realty Trac and 143,000 of these are in California. Only a third of these foreclosures are even listed with a realtor. In my favorite areas to buy and hold real estate-Los Angeles and Orange counties- Realty Trac tells me that 34,000 houses have been taken by the lender and only 10,000 are on the market. Banks are soooo slow to take properties back and then have to market yet another house that is in probably not-the- greatest condition.

As an act of self preservation, the shadow inventory of Chase Bank, Bank of America, and Wells Fargo-all the major banks- will be released very slowly, like a time release cold pill. To suddenly dump all the foreclosures they have on the books would bury entire neighborhoods in foreclosures, values would plunge, upside down homeowners would become more likely to walk and private sellers would have more difficulty. Banks are not stupid; wouldn’t you do the same thing?

WOW….lots of distress all around and tons more to come. Music to my ears….it should be to yours as well, whether you are a realtor, flipper or a buy and hold investor.

In the seminars I teach I am often asked where the market is going. I put together this awesome chart that tracks the California median house price for the last forty years. It’s almost biblical how prices move; seven years of good followed by seven years of bad. It’s amazing how predictable it is. The most recent seven year up cycle that began 1Q 1997 has been elongated by three years. The profusion of easy money extended the party longer than it should have. Instead of the prices peaking in 2004 as they should have, my chart shows the beginning of 2007 as the top of the market before prices started their steep descent. Three extra years of irrational exuberance!!

But sadly this means for us an extended correction. Probably we won’t see prices ascending in a major way until 2014-2015 because of two extraordinary reasons:

  1. The steepness of the incline and the velocity of the rise is producing a down trend of similar intensity
  2. Besides the 7.1 million homes that Realty Trac says are currently in distress, REOs, foreclosures being filed, loans that are 60+ days late), another 1 million new foreclosures are predicted for each of the next 2 years

I bought my first four bank repo houses 11 years ago when I first heard the sweet music of bank distress  I started buying foreclosures from now defunct banks with the name of Downey Savings, World Savings and First Federal Savings and Loan. Those banks offered me outstanding terms. Mostly the houses were in lousy condition but the neighborhoods were decent and the price tags were pretty good.  In 1999, I bought enough bank foreclosures in the right places to accumulate some pretty decent cash flow. I will be doing the same thing this time around but there is no big hurry; there will deals all around for years.

I kept buying until the banks had run out of decent inventory; all that were left on the bank foreclosure lists by that time were over-priced condos, remote properties far away or house saddled with some very material defects. It will happen the same way this time when the banks REO lists start to shorten. It will be a while before we see banks run out of repossessed houses at bargain basement prices.

In my book, “Beat the Banks-How to Profit from the Rising Wave of Bank Foreclosures,” I outline five stages of the real estate cycle. We are now at Stage One- “The Bottom.” In my next post, would you like for know what strategies savvy investors employ to take advantage of market bottoms?

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{ 1 comment… read it below or add one }

Luis December 27, 2010 at 12:53 pm

Steve, no earth shattering news here :-)

The question here is why if this inventory is so big, is it so hard to find and acquire it?

I am talking about the unlisted properties. There are thousands of foreclosed homes sitting empty and unlisted right now. Is it possible to take advantage of this and try to acquire before it is listed?


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