Phoenix-area "shadow inventory" of homes doing well in market

Metro Phoenix has a "shadow inventory" of nearly 100,000 homes, the kind that market watchers sometimes fear could flood the region's long-suffering housing market and drive down prices.

These homes are either in foreclosure or the owners are behind on their mortgage payments, signaling that the houses could eventually join the supply of properties offered by lenders for sale at a deep discount.

But the region is actually in much better shape than other parts of the U.S. hit hard by foreclosures, according to new analysis from a national real-estate group.

Foreclosure homes are selling fast in the Valley as investors jump at the low prices, and experts don't think the area's shadow inventory will suppress prices further.

Analysts and investors have warily eyed the tough-to-measure shadow inventory since last year, when worries arose that banks were delaying foreclosures and holding onto large numbers of homes after foreclosing.

Market watchers saw the potential for the growing backlog of homes to drive the entire market. If buyers believed more bargains were coming, they would wait and prices would fall.

New data from California-based John Burns Real Estate Consulting, one of the nation's leading housing researchers, puts the number of homes in the Phoenix area's shadow inventory at about 92,000, the size of a small Valley suburb.

But that number, which includes Pinal County, isn't alarming housing analysts.

That's because the rate of sales is as important as the raw number of homes. If sales are brisk, the homes are snapped up quickly, meaning they won't lead to lower prices.

And homes in the Valley, especially low-priced foreclosure homes, are selling.

Other markets racked by the housing downturn since 2007, including Las Vegas, Orlando and Sacramento, are in worse shape - sometimes much worse.

Based on historical rates of home sales, the Valley's inventory would clear out much faster than other cities'.

"(Metro) Phoenix's shadow-inventory figure may look scary, but the area is in much better shape than other markets," said Tim Sullivan, a principal with Burns Real Estate. "Foreclosure homes are selling and selling fast in Phoenix, which makes a big difference."

Measuring the inventory

The supply of homes is as its name implies: shadowy, difficult to gauge.

Burns Real Estate estimates the number through a series of steps.

First, the group counts the number of homes already in foreclosure, including homes taken back by a bank and not yet resold: at least 40,000 in metro Phoenix as of January.

Then, it adds the number of homes in which the owner is at least 30 days' delinquent on the mortgage. From that number, it calculates how many are likely to end up being foreclosed on and resold, based on its formula tracking the same data during the past year.

In all, metro Phoenix has 110,000 houses in or approaching foreclosure, based on the estimates.

Bank-owned homes already listed are taken out. Also removed are homes listed for a short sale, in which the buyer is seeking the bank's OK to sell for less than the house is worth, thus staying out of foreclosure. These homes total about 18,000 in the Valley.

The remainder, about 92,000 houses, is considered the area's shadow inventory.

The rate at which homes sell is important to gauging the health of any market.

Based on the region's long-term sales rate over the past 10 years, the number of homes in the shadows is about as many as would sell in a year. Thus, the firm calls it a 12-month supply.

That puts the Valley in better shape than many similar markets.

Based on their local 10-year average sales rates, according to Burns Real Estate's estimates:

- Orlando has a 23-month supply of shadow inventory.

- Modesto, Calif., a boom market inland from the Bay Area, has a 20-month supply.

- Sacramento has a 16-month supply.

- Las Vegas has a 14-month supply.

"Shadow inventory isn't a big problem looming for the (metro) Phoenix market," said real-estate analyst Tom Ruff with Information Market. "The numbers have to be put in perspective. When you look at everything that's going on with home sales in Phoenix, you see that shadow inventory isn't something to worry about."

He said the number of pending foreclosures in Maricopa County is falling rapidly because new foreclosure filings are down and lenders are clearing out more of their foreclosure backlogs.

Foreclosure sales

Homes taken back by lenders through foreclosure have become a major part of metro Phoenix's housing market during the past few years.

Today, though prices have plummeted from their 2006 highs, the Valley housing market is moving at a healthy pace, partly because the low-priced foreclosure homes attract plenty of willing buyers.

Homes are selling at foreclosure auctions at record-setting paces, with more than 1,300 sold in Maricopa County last month.

The number of foreclosure and normal resale homes on the Arizona Multiple Listing Service is a five-month supply, based on the long-term rate of sales.

These homes, because they're already listed, aren't part of the shadow inventory.

So, Phoenix's combined supply of homes, including shadow inventory and current inventory, should take 17 months to sell.

Other cities with high foreclosure rates all have higher levels of total supply. Las Vegas has a 21-month combined supply, according to Burns Real Estate. Orlando's overall supply is 29 months.

Experts say Phoenix-area homes are selling because investors see them as a good value. Many can hold the houses and turn them into rentals, earning a good return on the investment. Others move to resell or "flip" the properties quickly, still turning a profit because the up-front price was so low.

Another benefit of investment buyers: Many pay cash. Many homeowners who abandoned their homes during the crash did so because they lost little in the process, forfeiting only their small down-payments. A cash buyer owns a house free and clear and is less likely to walk away.

The combination of more buyers and bargain prices is making the region's housing market more competitive, and bidding wars have broken out for houses priced right. Investors are eager to get in before the deals end.

"(Metro) Phoenix's inventory of homes for sale has been shrinking fast this year," said Julie Bieganski, a real-estate agent and investor. "It's getting harder to find bargains."

Impact on prices

What buyers are doing now - and what they expect to happen soon - is key to the direction of any market. The experience of early 2009 shows how the shadow inventory can affect those expectations.

In early 2009, after seeing mortgages fail in historic numbers, lenders tried to resell a record supply of foreclosure homes in the Phoenix area, all at once.

Buyers saw the supply was huge and kept their offers low, believing there were even more homes to come. The region's median home price, already battered by two years of downturn and recession, sank to 2003's level.

However, metro Phoenix's shadow inventory now doesn't appear large enough to prompt a waiting game. The area's supply of homes for sale continues to shrink, even as more foreclosure homes are listed or put up for auction.

Last spring, some analysts estimated the Valley had 18 months of shadow inventory looming over its housing market.

New estimates of a smaller supply could mean metro Phoenix's housing market is poised to recover sooner than other areas.

"(Metro) Phoenix has seen an overcorrection in prices" said housing analyst John Burns. "There are vacancies and shadow inventory. But now is the most affordable time to buy in my lifetime."

by Catherine Reagor The Arizona Republic May. 28, 2011 12:00 AM



Phoenix-area "shadow inventory" of homes doing well in market