How Bank-Owned Property Affects the Real Estate Market
My parents sold the house I grew up in eight years ago. Now I had always driven by on my occasional visits back home, but never upped the creep factor to the knocking-on-the-door level. I didn’t really care who lived there; just knowing that someone did brought me some small, inexplicable sense of comfort.
However, the last time I made the pilgrimage back, I discovered that the place of my humble beginnings had become The House. You know the one, because there’s one in every neighborhood. Slightly too kempt to be abandoned, a little too haggard for residence. Source of hush-hush gossip, neighborhood headshakes and squatters' raised eyebrows. Forgotten, but not gone. A denizen of real estate purgatory.
Whomever had purchased the house from my parents had done so at a very inopportune time, just before the last big market crash. They presumably later defaulted, and the house was taken back by the bank. And there it still sits, a vessel without a captain, adrift and at the utter mercy of the beating sunshine, merciless winters and daring aluminum siding bandits.
My first instinct was to buy it. This made no sense, admittedly. I live 2500 miles away, and had zero intention of moving back. But I felt that in some karmic kind of way, buying it would somehow provide an impenetrable force field of protection, bubble-wrapping my childhood forevermore. Like I said, it didn’t make much sense. I was fueled by a desperate form of nostalgia, not logic. But this all became immediately moot. You see, The House was not for sale.
This is how I became familiar with the concept of “shadow inventory.” Shadow inventory refers to bank-owned properties that are not currently on the market. The term became popular in the wake of the financial crisis, when the loans that were being pushed through for mortgages that people simply could not afford were defaulted on.
According to Bloomberg, the resulting spate of foreclosures left the banks holding up to 4 million homes at its peak. This sudden influx of $382 billion of inventory left banks facing new challenges. AOL reported that as many as 90% of the REOs (Real Estate Owned) properties were being kept off the market. They became The House, four million times over. But why?
There are 3 good reasons that shadow inventory happens:
1. Foreclosures. Though foreclosure numbers have subsided in recent years, a contributing factor to empty homes is simply time. According to Realtytrac, the average foreclosure period in Q2 of 2016 was 629 days. In New Jersey, which leads the nation in lengthy foreclosures, the average turnaround was 1,249 days, or just over three years.
2. Market Tolerance. Banks must assess the current market conditions. At the height of the financial crisis, putting the foreclosed houses immediately up for sale would have flooded an already stagnant, bottomed-out market. In fact, AOL estimated that overall home values would have dropped by 20%. Banks must always act prudently on behalf of the market.
3. Appreciation. Market tolerance also has its upside. Many of the homes shadowed by the crisis taught a valuable lesson. By taking on the role of de facto caregivers, banks took these fragile properties in, nursed them back to health, and then, when the time was just right, released them back into the wild for a nice profit. Also, in some of the hotter current markets, the smart money is on purposely keeping properties off the market to let them gain value.
So the next time you are out for a walk in your neighborhood and come upon The House, and start to speculate and theorize (or impulse buy), rest assured that no house is truly abandoned. And someone behind the scenes may just be looking out for your neighborhood’s best interests.