Houses drying up?

[Greg P.]

Has anyone else noticed houses drying up compared to the past couple of years? It seems like there is barely any inventory on HUD properties and REO's. What could this mean?

[Jeff S.]

This is not a shadow inventory or holding back problem. On the contrary. Since Q3 2010 REO inventories held by Fannie, Freddie, FHA, FDIC, and the Private Label Securities (PLS, i.e. Wall St. securitized loans) have decreased from approximately 600,000 to less than 500,000. The majority of this drop has been from the PLS who have been aggressively dumping their REO's since 2008. Plus, Fannie and FHA have recently been selling at a record pace. See this article for a good explanation.

None of this is to say we're running out of REO's, as noted here. There are more than 4.1 million seriously delinquent loans (>90 days late) on the books now. In fact, “the main reason for the drop [in REO inventory] has been the artificially low pace of REO acquisitions associated with increasing foreclosure timelines/delays.” That is, they’re selling REO’s faster than they can foreclose.

I think the problem many face is not a lack of REO's, but a dramatic increase in those willing to overpay to buy them. Competition among flippers has gotten fierce and it behooves everyone not to chomp at the bit so hard you'll pay any amount to play the game.

Jeff