MARIETTA — Shadow inventory. Mention the name in real estate circles, and you can almost feel the chill.
The term refers to real estate properties either bank/lender owned and have not been sold yet, or to homeowners who are delaying sale until prices improve.
Why shadow inventory matters is it can shape a marketplace by controlling the number of available properties. Simply put, for the scores of real estate brokers and growing number of homebuyers in and around the Cobb area, shadow inventory can create uncertainty about the best time to sell a home and when a depressed local market can expect to fully recover.
And in many cases it typically causes reported data on housing inventory to understate the actual number of inventory in the market.
“There is definitely a false sense of numbers in Cobb and throughout the country (about the extent of shadow inventory),” said Judson Adamson, president and CEO of Atlanta Communities Real Estate Brokerage. “(There has been) irresponsibility in reporting the stats. The impact of institutional investors, both locally and nationally, is the single main reason the market has rebounded. Every market, anywhere, is a micro economy. What’s happening in Smyrna is different than in East Cobb and Acworth, etc.”
Since the beginning of the housing crisis in 2008, housing experts have cited concern over shadow inventory and its pitfalls. But as the housing market slowly recovers, foreclosure activity continues to fall. According to foreclosure sales and analytics company RealtyTrac, 107,194 U.S. properties had filed for foreclosure in June — the lowest level since before the housing market bubble burst in July 2006. Georgia was not among the nine states that showed an increase in foreclosure activity in the latest numbers, RealtyTrac reported.
As for shadow inventory, a recent National Foreclosure Report shows those numbers have declined year-over-year and posted double-digit declines for the past 16 consecutive months.
And while there remains a presence of shadow inventory in Cobb, it mainly is segregated by area, with the lowest inventory in the most desirable areas, Adamson said. For example, the east Cobb market, driven by its schools and economic stability, has the least. When a lender-owned home is offered for sale, it’s typically quickly absorbed. The south and southwest Cobb markets tend to have the most, as many of the homes there were highly leveraged. The slumping economy had an immediate impact on the area.
“South Cobb has been hit hard,” Adamson said. “A combination of very high LTVs (loan to value) and 100 percent loans have blown up. Small investors without the knowledge or finances to ensure success during the regular cycles have lost properties. These areas have yet to see fundamental improvement in schools and per capita economic growth. Renters continue to be a significant segment of this market.”
Therein lies another issue for housing markets such as Cobb: hedge funds and institutional investors. While every real estate market has an investor presence, Atlanta is among the nation’s highest, driven by opportunity and ROI. With millions of dollars to spend — and that must be placed — they are buying homes for prices that defy logic or data, resulting in a growing rental market.
“Hedge funds became extremely active in Georgia in 2012,” said Barry C. Bramlett, president and CEO of Equity Depot. “Thousands upon thousands of properties have been purchased in Georgia, and the vast majority are being held as rentals for now. I don’t believe lenders still hold large amounts of property they haven’t listed. I think the hedge funds took care of that. It’s why you quit seeing ‘foreclosed’ listings by realtors. The inventory of bank-owned foreclosed property for sale has virtually vanished. It’s a factor, in general, because it limits the available inventory, which, I suppose, should drive prices up and has to a small degree.”
The activity by these investor groups has created a strong rental market, so while they may overpay for a home, they can compensate with higher rents.
“Until a certain percentage of these renters turn into buyers, they (investor groups) will have a captive audience,” Adamson said. “It would not be surprising to see a flood of investor-owned listings once a more lucrative opportunity presents itself. When something better comes along, they will start to liquidate. When the first one starts, the rest will follow. The potential for a segmented market slump ($150K and under) is a genuine concern and one that bears watching.”
Bramlett said he believes the bigger overall problem may be demand. With a stagnant economy and little job movement, he said he thinks most homeowners are staying put for now.
“While there are some hot areas, we’re not seeing the upward movement we saw for decades,” Bramlett said. “If the demand were greater, I suspect we’d magically see more property for sale, whether by funds or by pending mortgage foreclosures. I’m sure that’s part of the model hedge funds and lenders are looking at. I believe the economy is holding the real estate market down now, not vice versa, as it clearly was in the real estate crash.”