'Shadow inventory' may prolong housing slump

On any given day, homebuyers can chose from 1,300 houses and condominiums in Sonoma County.

But just out of sight, a wave of new properties is headed toward the market, one that is expected to prolong the housing downturn and might even cause prices to dip again.

A new study estimates that Sonoma County has more than 7,000 houses and condos that will be lost to foreclosures or other distressed sales in the next few years.

These homes comprise what real estate experts call the county's “shadow inventory.” While these properties aren't currently for sale, they eventually could reach the market because their owners no longer can afford them.

If correct, the forecast by John Burns Real Estate Consulting would surpass the 5,600 homes already seized by banks in foreclosure proceedings over the past three years.

Some observers have portrayed the shadow inventory as a potential flood that could overwhelm the market. But analysts and real estate agents suggested that what lies ahead for the housing market better resembles the slow draining of a swamp, one created by years of risky loans and hyperinflated prices.

“It'll be 2015 or '16 before this thing is over,” said James Madison, an agent with Coldwell Banker who specializes in selling foreclosed homes.

It took seven years for the housing market to come back from lesser boom-and-bust episodes in the 1980s and 1990s, said Madison, who in both of those decades helped banks sell their foreclosure properties.

Some fear the estimate of 7,000 homes in shadow inventory may turn out to be too low.

Forrest Jinks, a principal in the Santa Rosa real estate investment company Altus Equity LLC, said government loan programs and tax credits are still allowing some buyers to purchase homes with virtually no money down. With the government incentives, buyers often purchase the most expensive place they can afford, and “any hiccup in their employment” could put them into serious trouble, he said.

“It was that kind of lending that got us into this trouble in the first place,” said Jinks, whose company is fixing up a home on Rusty Drive in Santa Rosa before putting it back on the market.

Shadow inventory has long been a matter of conjecture among local agents and brokers, since the potential of so many distressed properties could significantly depress housing prices.

The term is loosely defined, but generally refers to those homes likely to be sold in the future due to the financial woes of their owners. It includes vacant houses that banks have yet to officially take back and homes in loan modification programs where the owners still will lose the properties in the end. Also included are those homes to be sold by short sales, where the owners obtain lender permission to sell the properties for less than the amount of the mortgages.

By all accounts, shadow inventory is difficult to measure. And many say that no one can know exactly how fast these properties will come on the market.

The distressed inventory is casting a shadow as agents and sellers gear up for the spring home-buying season. Many hope the worst is behind them, but the times remain shaky.

Since 2006, the Sonoma County's median home price has plummeted 43 percent to $353,000. While home prices have leveled off since last summer, the downturn has left nearly a third of the county's homeowners under water, according to a new estimate by First American CoreLogic. That means that nearly 34,000 homeowners in Sonoma County owe more to their lenders than their homes are worth.

Many of those owners are struggling to keep their homes. In December, more than 1,600 county homeowners had turned for help to the federal home loan modification program. Only 151 had won permanent modifications, which usually include a lower monthly payment for five years.

Nationwide, there are 5 million homes that will go through foreclosure or similar exchanges in the next few years, according to the study by John Burns Real Estate Consulting.

For the county, the Irvine consulting firm estimated the shadow inventory would amount to an 11-month supply of homes, based on average sales for the past 10 years. In comparison, the nation's shadow inventory would equal a 10-month supply of homes.

It is just one more question hanging over the housing market.

Analysts and agents are watching to see whether home prices drop this spring. Some point to an April 30 deadline for homebuyers wishing to qualify for a federal tax credit. Others note the planned pullback next month in purchases of mortgage-backed securities by the Federal Reserve, which might lead to a hike in interest rates.

“The worrisome part is, if they take the entitlements away, if interest rates go up, what happens?” said Doug Solwick, a broker associate with Keller Williams Realty in Santa Rosa.

Others, however, maintained that both Congress and the Fed will face pressure during an election year to keep these programs alive to avoid a double dip in housing prices.

About 7.7 million households in the United States are behind on their loan payments, according to the John Burns study. Even so, the firm expresses cautious optimism about how the housing market will absorb distressed homes that reach the market this year.

“We think that prices have bottomed in most markets, including Santa Rosa, despite the looming shadow inventory,” said Wayne Yamano, a vice president for John Burns. “Tremendous affordability has created a floor for prices and investors are active again. Prices will fall, however, if the economic recovery stalls or we see a spike in mortgage rates.”

Suzanne Shanbaum, a home shopper from Sebastopol, isn't waiting to see if the market takes another dip. For the past year she has carefully monitored the price movement of available homes in the $700,000 range. She said she is ready to buy if she can find one she loves that is “reasonably priced.”

A business software analyst, Shanbaum noted she now isn't facing the same “buying frenzy” she found after moving here from New York in 2004. At that time, she said, people seemed willing to pay “$650,000 for a shack ... It made absolutely no sense whatsoever.”

Her agent, Ann Harris of Coldwell Banker in Sebastopol, said that in the past year more owners have realized they must lower prices to match the market. And many with financial problems are realizing they can't outlast this downturn in prices.

Some owners had hoped to “hang on for a year, and that doesn't look like it's going to make a difference,” Harris said.

Many of the agents interviewed specialize in foreclosures and real-estate-owned, or REO, properties, meaning those homes taken back by lenders. None predicted a quick turnaround in the market.

“There's such a huge amount of distressed assets out there and there's no coherent plan to deal with them,” said John Binns, an agent with Creative Property Services.

Despite the gloomy outlook, a variety of agents and brokers don't think the banks will flood the housing market this year. The reason is that such a move would inflict tremendous damage on the lenders themselves, resulting in lower prices and greater investment losses.

“If the banks are smart at all, they will take their inventory and release it in slow doses,” said Glen Hurley, a manager at Platinum Realty in Santa Rosa and the president of the North Bay Association of Realtors' Santa Rosa chapter.

Dustin Hobbs, a spokesman for the California Mortgage Bankers Association, also rejects any talk of a flood of new inventory.

“I don't see any reason and any movement to dump hundreds of thousands of properties in a short period of time,” he said. “That wouldn't help anybody.”

Even so, many current homeowners won't be able to save their homes. Some agents said the banks may delay the day when they take back those properties, but that approach only postpones the day when home values rebound.

“I hate to say it, but at some point it's got to happen,” said Charles Himes, director of REO services for Pacific Union International Real Estate in Santa Rosa. “They need to unload these properties for the market to recover.”

You can reach Staff Writer Robert Digitale at 521-5285 or robert.digitale@pressdemocrat.com