Mortgages & Creative Financing

Where Have All The Houses Gone? Can we Fix the Growing Shadow Inventory Problem?

5 Articles Written

If you know who Pete Seeger is, you’ll recognize that I’m about to pirate the song he sang about the cyclical nature of war. Hang in there. I promise I'll tie this into real estate investing.

Where have all the houses gone?

Gone off balance sheet, every one.

When will they ever learn?

When will they e…ver learn?

You gotta be wondering where I'm going with this. This is not meant to be an essay about the just war theory. I want to illustrate why it's crazy to drive down a highway with one foot on the brake and one foot on the accelerator. I think our government is doing exactly that with its interventionist policies towards the real estate market.

Sean Purcell wrote an article, over on Bloodhound Blog, about how the “shadow inventory”.  Check out the graph in his article.  Close to one out of ten mortgages in this country are in default yet only 60% of those distressed properties are going to foreclosure. He opines that there is a financial incentive for banks to "hide" that inventory rather than to dispose of it. Such an unseemly policy seems more befitting of Messrs, Lay and Madoff than it does bankers and Federal officials. As I don my tin-foil hat, cursed with the knowledge that two plus two really does equal four, I wonder…

Where have all the houses gone?

…which is what real estate salvagers, should be asking.  The song continues.

Where have all the houses gone?  Gone off balance sheet, every one.

The government is encouraging bankers to bury the bad loans, in hopes they can “work them out”, then charging them with fraud for doing the very thing it encouraged the bankers to do.  It’s the political-banking complex and its downward spiral is more dysfunctional than the military-industrial complex Pete Seeger sang about.

Our housing market is being decimated (literally) and our government is putting severe restrictions on salvagers. Last week I wrote about the HUD suspension of the 90-day flipping rule. Upon further investigation, it appears that my observation will be proven wrong but my admonition might still be warranted. The profit restrictions, the HUD directive imposes, could be adopted as policy for all loan programs. Many underwriters, from different lenders, remarked that the profit restriction, as defined by the HUD directive, was a good guideline to quantify the profit they would “permit” a salvager when financing his/her buyer.  Before you appallingly scream about an underwriters “right” to define your profit, consider the pickle they are in.  Underwriters can be targeted as fraudsters, too.

When will they ever learn?  When will they e…ver learn ?

While Zillow discovered that the gross margins appear healthy on distressed properties, anybody who attempts the salvaging process knows that the properties sometimes come with delinquent taxes to cure, unknown repairs to make, and ever changing loan guidelines for the folks who want to buy this property from us.  Take away the profit motive and you drastically reduce the willing salvagers when we are most needed.

The free market is a sometimes ruthless but always honest crier.  Governments have tried to manipulate it for centuries through sleight-of-hand tricks, subsidy schemes, and “planned” economies.  The free market always has its say.  While the political-banking complex tries to remake the old Pete Seeger classic, we know that the result is a vicious cycle of false bubbles and brutal busts.  The real estate market is going through a period of price discovery.  Messing with that is like trying to stop the rain.

10% of the public either can't or won't make their mortgage payments and will lose their properties. With over 18 million vacant properties, you gotta wonder if they didn’t already move out.

Now, more than ever, does this market need Winston Wolf.  It is my opinion that it may be harder for Mr. Wolf to find profitable salvage opportunities because distressed (and perhaps vacant) properties are being added to the “shadow inventory” Mr. Purcell discussed on Bloodhound Blog.  This leads me to my questions:

How might we circumvent this forced housing supply drought to find opportunities in profitable salvage opportunities? Are any investors contacting defaulted homeowners or pre-foreclosure owners, in an attempt to purchase a property through short sale? What success (or failures) have you had? What tips might you offer?

Gone to graveyards, everyone.

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When will they ever learn?  When will they e…ver learn?

Brian Brady is a 22-year veteran of the financial services industry with the last 15 years in residential lending. He lives in Del Mar, CA, with his wife and daughter, and is active in the Nationa...
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    Jeff Brown
    Replied over 10 years ago
    As usual, Brian, it’s all about ideology. Ideas matter, which is a Captain Obvious statement, I know, but apparently not for those economic ‘managers’ in D.C. “We want you to clean up our mess, but you’ll hafta be content with less of a profit than the market makes available.” Huh? Exactly as you imply, the physics of economics and the free market will not be mocked for long. .-= Jeff Brown´s last blog ..Sometimes A Loss Isn’t A Loss – Nightmare On Cap Gain Street =-.
    Sean Purcell
    Replied over 10 years ago
    I can’t believe you are calling in the Wolf! Things must be bad. Allow me to make the situation a little scarier: I read that graph this way: over 10% of all mortgages are in foreclosure PLUS another 6%+ that are defaulted but the banks haven’t started the process for the very reasons we have both stated. That means over 16% of the housing market is our there in the shadows… non-performing. Hmmm, is there any good way to segue from Where Have all the Flowers Gone to Only the Shadow knows…?
    Jeff Brown
    Replied over 10 years ago
    Sean — Given the numbers you bring to the table, are they more indicative of a deflationary or inflationary cycle in our near-mid future? 🙂 .-= Jeff Brown´s last blog ..Sometimes A Loss Isn’t A Loss – Nightmare On Cap Gain Street =-.
    Susie Blackmon
    Replied over 10 years ago
    From my little pulpit, I see many vacant, deteriorating homes locally and nationwide, deteriorating jobs, and sharks feeding in a frenzy that may pick at the meat but will ultimately end up with food poisoning. And then what? Who is going to want the humongous, energy sucking McMansions? Will the builders sustain themselves by salvaging long-vacant homes? People are paying credit card bills instead of their mortgages for various reasons (buying time/saving money). Oh… and then there are the yay-who realtors touting the market is turning, the market is turning. Arghhhhh.
    Brian Brady
    Replied over 10 years ago
    @ Jeff- That’s a good question? We would do well to remember that inflation is consequence of monetary policy, not economic factors. Certainly, economic factors influence the velocity of money but the money supply is the little culprit. The argument against inflation is that the money is stuck in the banks’ coffers. The solution is for the banks to give it all back and the Fed to unwind its balance sheet. .-= Brian Brady´s last blog ..Demand For Renovation Financing Should Grow =-.
    Peter Giardini
    Replied over 10 years ago
    Great article… the more I read and hear the more convinced I am that conventional no longer works. The Government is skewing everything it gets near. If I didn’t know I was awake… I would swear I was living in the economic version of Alice in Wonderland.