I’ve read this same story from so many markets I can only assume it’s happening everywhere in the U.S. As many homes as you see for sale, there are even more homes not on the market, namely all of the homes that were repossessed by the banks.
Real Estate Channel – Why Are Banks Withholding Highend Repossessions Over $300,000 From the Market?:
This year, banks in the Chicago area have foreclosed on a huge number of expensive homes. RealtyTrac lists 2,650 repossessed homes for more than $300,000 and 169 for more than $1 million.
Here is where it gets really interesting. Out of 28,829 repossessed properties, there were only 1,292 listed by lenders as “for sale.” The vast majority of these available homes were inexpensive. A mere 29 homes over $300,000 were for sale. In other words, the banks have withheld from the market 2,621 properties listed at $300,000 or higher.
There are probably two important reasons why banks have pursued this strategy. First, they are concerned that placing these more expensive homes on the market will severely weaken an already thin upper tier market.
Even more crucial is that selling substantial numbers of expensive homes at discounts of 50% or more would compel the lenders to take substantial losses which have been avoided by keeping them off the market.
That last part is the key. Remember the uproar over mark to market accounting? If a bank holds a $500,000 mortgage they can pretend it’s still worth it, even if it would sell on the market today for $300,000. If all those mortgages were marked to market (value), the banks would be declared insolvent. The FDIC would march in, close the bank, and either sell it to another bank or shut it down and pay the depositors.
The government suspended mark to market accounting to keep the banks from shuttering. However, when a repossessed home is sold the sale triggers a revaluation of the mortgage – it’s marked to the actual sale price. The banks don’t want that to happen, because doing so would destroy their accounting sheet. Most banks are insolvent. They’re walking zombies.
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I notice that here in my own neighborhood (Sumner County TN). Two homes near me have been repossessed. The first one was sold and is now occupied.
The second sits across the street, empty. It is essentially abandoned. There has been zero activity there in the last year plus – no weatherproofing, no checks on condition, nothing.
This explains another item. I’ve noticed a number of job postings for maintence crews to keep forclosed homes in good shape. Now I see that if the banks are going to hold on to the over valued property then they need it to look like it still has value. This can’t be good long term for those banks as they are still holding assests that aren’t increasing in value, so what are they going to do to make for the lost income?
I’ve been saying this for years. The banks would rather pay the taxes and upkeep than take a loss so big. Go back to the older accounting practices, and these houses will sell like hotcakes.
Oops, saying it for months…..
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The latest report from NAR is that the shadow inventory is approx. 2.4 mil. which might be low in my opinion as there are over 130 mil. households in the country. If this figure is accurate it might not be as horrible as it is only about 2% of the nations properties.