The Shadow Inventory that Wasn’t in Las Vegas
Not long ago there was a lot of speculation over “Shadow Inventory” that was supposedly being held back by the banks and how it would affect real estate not only in Las Vegas, but in many cities across the country. Many foreclosure “experts” predicted a second wave was out there and would eventually flood our market once again, wrecking havoc on pricing and bringing our recovery to a standstill. Estimating the actual amount of shadow inventory however, could be difficult to quantify they said. As it turns out the second hit never came and probably never will.
Then vs. Now
The first wave of foreclosures was primarily a result of property owners who took out loans for homes in Las Vegas that they could not afford. These buyers eventually defaulted at some point along the way. The majority of these scenarios have already played out as lending standards have become much stricter over the last several years.
Furthermore the distress sales we are seeing now are primarily buyers who lost a job, which represents a much smaller group than the first.
Short Sales, then vs. now
Another factor is that banks have begun to expedite the short sale process in Las Vegas and Henderson thereby avoiding foreclosure altogether. In short (no pun intended of course) a short sale is when a bank agrees to accept less than is owed on the home. A once arduous, slam-your-head-on-the-desk-daily process has been leaned down to become more efficient. In fact some banks had begun experimenting with paying their home owners in order to leave the property. One part incentive and one part “bribe," this program ensured a quick exit and a home that is left in good condition. While this may sound remarkable, some banks had even offered upwards of 30 thousand dollars for home owners to agree to a short sale and leave the property in good condition.
Undoubtedly many readers may share an incredulous gasp upon hearing something like this. And while it may not seem fair (it's not-but neither is life) it has and will continue to keep the foreclosure rate down for Las Vegas and Henderson. Ultimately this has helped shed excess inventory and stabilize our real estate market.
Realty Trac data shows that nationwide we’re seeing a similar story. Short sales are up from previous years and foreclosures are down.
More interesting is that banks are finally getting a clue. All too often I’ve seen banks turn down (or just screw up) short sales. Subsequently the homes would go into foreclosure. After taking possession of the property they often would end up selling for an even larger discount, which made absolutely no sense to me. Apparently after years of this, they have finally figured out that working with home owners also works to their advantage (what a concept, I know.) The National Association of Realtors reports that an REO discount is roughly 20 percent, when compared to 14 percent for short sales.
(On a side note, I actually have a friend who this happened to. Strangely enough he found an older home, which was originally built by his Grandfather, as a short sale. He made an offer which was accepted by the seller. Unfortunately after months of fumbling around by the bank, the deal fell apart. My friend was crushed since he had a deep emotional attachment to this home and it meant a lot to him to purchase it.
Well wouldn't you know that a few months later it came back on the market as a bank owned home. This time however the price was 50% less than it was prior as a short sale! He ended up getting his Grandfather's home for a song.)
What’s the skinny?
Yes we have more REOs on the way, but it’s not anything to be concerned about. Notices of Sales give us a good idea of what to expect for the Las Vegas and Henderson real estate markets. However this is completely different and does not mean we should expect another foreclosure crisis is looming. A more likely scenario would be future interest rate hikes impacting housing affordability, putting downward pressure on home prices, and increasing our inventory. But excess inventory that's off the books, aka "Shadow Inventory", that is going to suddenly be unloaded onto the Las Vegas real estate market? I don’t see that happening.