Does #Fail = “Shadow Inventory”?

While my clients buy and sell in both Seattle and The Eastside, I often use The Eastside when diving deep into the stats, because the age and style of homes is easier to compartmentalize. My recent posts showing #FAIL in Bellevue, Redmond and Kirkland have raised the question “Does #FAIL = Shadow Inventory?”.

@darinpersinger on Twitter says: “I would be interested in knowing how many of those #fails were REPEAT #fails”

WaileaKid comments on the post here on RCG said: “All those red lines in the graphs above are the hopeful sellers that tried to sell in a market that they knew was falling. With the green shoots of recovery just beginning to show, these sellers will be out with a gusto. This is exactly the shadow inventory a lot of people are talking about. Looks like it will kep the prices suppressed for quite some time.”

Seattle Bubble Forum commenter, Barista, says: “Just look at all the failed attempts over this year. This looks like a huge shadow inventory to me.

Since my recent posts raised the question, seems only fair that I should answer it. For those who haven’t been following along since I started posting #FAIL stats on Christmas Eve, #FAIL = the total 2009 Expired, Cancelled and Sale Fail Release stats.

For the purpose of answering the question, I am going to use Redmond 98052 stats. These stats will not match the “Redmond” post on my blog, as I did not separate 98052 from 98053 in that “Redmond” post.

Let’s start with an overview of Redmond 98052:

98052 stats

I’m going to start with 3 bedroom townhomes. Only 4 on market, 3 Pending and 38 sales year to date. Looks like a pretty strong sellers market in that group until you get to the #31 #FAILed attempts. Let’s see if there is any Shadow Inventory in there, and if so, why.

My first thought was maybe they were early in the year, but no. 14 in the first half and 17 in the 2nd half.

Going through the #FAILS one by one is tedious. I’m going to show the results for the first seven properties and then summarize. Seeing a few of the “stories” will help you judge my accuracy, as it is a subjective process. I originally had all of them listed, but it made a long post beyond reasonably long.

#FAIL #1 = Shadow Inventory.- Looks like they decided to stay when they couldn’t get their price. Plenty of equity. No mortgage. Not going to come back as a distressed sale. It was $40,000 overpriced then $30,000 overpriced, then they quit.

#FAIL #2 and #3 = Shadow Inventory – Priced well when they took it off market for the holidays. Started out $100,000 overpriced which is A LOT in this price range. Over 30% over priced. On market for well over a year, but priced properly by they time they quit. Will likely come back after the holidays. Nice place. Could use a little staging help.

#FAIL #4, #5,, #6, #7, #8, #9 This one’s been failing repeatedly. 6 of the 31 #FAIL’s for 2009 are this one townhome. Went into escrow several times and fell apart on inspection several times even though it is a newer townhome. Just a train wreck. It may be shadow inventory forever, so I’m not counting it as shadow inventory. It should be rented.

#FAIL #10 = SOLD – No big story. Started out a little high. Relisted with a 5% reduction and it sold. A “normal” #FAIL.

#FAIL #11, 12, 13, 14 (Plus 5 in 2008) This is one of those agent’s that lists for 30 days so it expires and she picks up a new listing number. It’s a SOLD now for almost $100,000 less than when it started.

#15 Overpriced = Shadow Inventory Overpriced by about $50,000 for a year with no price change. The first agent quit after 30 days, likely because they wouldn’t do a price reduction. It will be back eventually.

#FAIL #16 It was a rented property when it was listed and looks like after a half hearted attempt to sell it, they continued to rent it. I wouldn’t call it a shadow inventory unless you want to call all rented property shadow inventory.

So, to answer Darin’s question, 20 Properties Failed 31 times. So let’s call 2/3rds of #FAILS = the number of properties involved.

To answer Does #FAIL = Shadow Inventory? Of the 20 properties remaining after step number one I would say it’s about half Shadow Inventory and 25% SOLD and 25% not coming back anytime soon.

I didn’t see any that were short sales or any that could become short sales or foreclosures. Most had plenty of equity.

Going back to the chart insert anyone interested in 98052 should print that out. Lots of detailed breakdown there of everything that happened in 2009. We’ll take the 653 #Fails less 1/3 for Repeat fails of same property = 435 less 25% SOLD = 325. Maybe 250 are Shadow Inventory and the rest will stay as rentals for some time.

REQUIRED DISCLOSURE: Stats in this post are not compiled, verified or posted by The Northwest Multiple Listing Service.

About ARDELL

ARDELL is the Managing Broker of Sound Realty in Seattle/Kirkland. ARDELL was named one of the Most Influential Real Estate Bloggers in the U.S. by Inman News and has over 22 years experience in Real Estate up and down both Coasts, representing both buyers and sellers of homes in Seattle and on The Eastside. Follow Ardell on Google+

Comments

  1. Very interesting analysis, Ardell. So the question is, what does that ‘shadow inventory’ number mean? Is it higher than normal for this time of year? And how much of it will come rolling back on to the market as ‘new’ listings during the normal seasonal flood of new listings coming on the market between now and the end of March? Here’s some thoughts on that seasonal pattern from a post on my own blog titled The Holiday Effect on the Real Estate Market. It will be very interesting to see what other insights people have to contribute here. Should be a fascinating year in real estate :-)

  2. Thank you Chuck, and Happy New Year to you!

    In the sample of 98052 (not the smaller townhome sample) here is the difference from 2006 through 2009.

    2006 – 11/15/09 to 12/28/09 #FAILS = 22

    2007 – 11/15/09 to 12/28/09 #FAILS = 90

    2008 – 11/15/09 to 12/28/09 #FAILS = 99

    2009 – 11/16/09 to 12/28/09 #FAILS = 70

    Hard to define “normal”. I usually go back to pre-subprime days of 2002 to find “normal”, so here’s the 2002 stat.

    2002 – 11/15/02 to 12/28/02 = 66

    I’ll throw in 2001 at 68 for good measure.

    Looks like you can call some portion of the 653 – 2009 #FAILS “seasonal”, but not many. What portion of those between 11/15 through 12/28 are actual “seasonal” reasons? Not all for sure.

    The more clear reasoning for the #Fails is sellers starting with an unrealistic asking price, and is not a true “seasonal” issue. Adjusting to the price declines since late 2007 adequately, is more the story.

    I am putting the mls required disclaimer here, even though it is in the post, since this is “new” data. For those wondering…yes, it has to be “in bold lettering” per the mls rule.

    REQUIRED DISCLOSURE: Stats in this post and it’s comments by ARDELL are not compiled, verified or posted by The Northwest Multiple Listing Service.

    I do wish I only had to say that when it IS info from compiled and verified by them vs. when it is not. Seems a bit backward to me.

  3. Thanks for the analysis Ardell. This is very helpful. I’m sure it must’ve taken a good chunck of your time.

    I must note here that the analysis you did was for one of the hottest selling segments. With only 4 on the market and 20 is shadow inventory, you can see how significant the number of shadow inventory is. I am sure if you do this analysis for higher priced SFH for example, you’d see a much higher percentage of shadow inventory there.

    This is expected as a real estate market never recovers in a V shape. So the slowness in the market will continue for some time at least. But I was surprised to see that there are so many sellers waiting to unload their houses.

  4. WaileaKid,

    Real Estate can’t recover in a V-Shape. The stock market can, but not real estate. It’s because of the appraisal process. So anyone expecting a V-Shape recovery in real estate (and I don’t know any) are just misguided. Even saying “V Shape Recovery” and real estate in the same sentence is an oxymoron.

    I spend the time because it is an area where I work, and so is of use to me. I would not, for instance, do Kent even upon request, as I do not work there and the exercise would be purely academic vs. useful to me in my business and for my clients down the road.

    I will not do an area where I have current clients, well I do it, but I won’t post it publicly in real time. It draws too much attention to the area and could create unwanted competition (buyer clients) and even for seller clients, I would not post my research publicly if a current client is buying or selling in that area. 98052 was a safe zone today, but one I work often. I’ve sold 3 of those townhomes in one complex in recent history. So I can tell if the #FAIL is the market or the seller or something else like that one backs up to the busy road.

    Also, if a complex has a huge special assessment with many #FAILS, it’s good to know the area you are researching so you can negate the skew. If a complex is blackballed and no one can get financing there, it could cause every single seller to fail regardless of asking price. If a buyer can’t finance, failure is the only possible outcome. Expect to see this more soon in condos as FHA tightens their guidelines for condos vs. single family homes.

    Another aspect is watching the shift. When houses could not be had for $300,000, condos picked up the buyers. Then they built more thinking people WANTED condos, only to find that when single family homes receded, the interest in condos waned. So I am seeing many more things than what I am posting, that is useful to me in my business, and well worth the time spent.

    I do this every year between December 20 and January 15 to establish baseline expectations. I usually post most of it on my blog vs. here as it is just me working and letting people look over my shoulder as I do it. The blog post also becomes my reference like a “note pad” which I share in open book style.

    I would not do a market segment as to #FAIL, deep one by one delving, in a price range that only impacts 5% of buyers or sellers. I would only do that on an as needed basis for a client, and not in a blog post.

    That said, I will do single family $450,000 to $650,000 in 98052 or parts of Bellevue or Kirkland, or Issaquah or… some other areas if you would find that of value, as it is useful for me. Will that help you?

    I don’t want to stop, as you do not think I’ve gone far enough to answer the question in the post title. Please give me 3 examples that you feel would answer that question well. That would help me immensely.

  5. Ardell,

    There is not a single specific combination of area/price range that would help anwer the question if #FAIL=Shadow Inventory. But if it did, it certainly won’t be one of the hottest segments. It would most likely be a midrange SFH (500-600) in either bellevue/redmond or kirkland.

    I know you tried to answer the question that roughly 1/3 of the #FAIL is shadow inventory but my argument is that the number is much larger as the sample you chose was representing a hot segment of the market and not representative of the overall market.

  6. WaileaKid,

    Here’s how SFH 98052 breaks down:

    $800k – 22 sold – 70 fail

    Do you want to pick three of those? Or two of those and one from the condos?

    The goal is for you to be satisfied that we have conducted adequate research to apply the results somewhat broadly. Not necessarily for all of King County.

    (REQUIRED DISCLOSURE: Stats in this post and it’s comments by ARDELL are not compiled, verified or posted by The Northwest Multiple Listing Service)

  7. The most recent data from National Asociation of Realtors is that the shadow inventory is approx. 2.4 mil. which possibly could be low in my opinion as there are more than 130 mil. households in the U.S. If this data is correct it might not be as horrible as it is only roughly 2% of the nations properties.

  8. Josh,

    We never judge a market by the % of “the nation’s properties”, unless it were feasible for all houses to be for sale at once. Generally that’s not the case. So if Shadow Inventory came out all at once, would inventory double, is more the question.

    At this point the backlog of good inventory is about people who don’t have to sell, but would sell if prices were higher. My best guess is we will not see those people on market in 2011, but I’m waiting for the final closings of 2010 to be posted before making forecasts.

    Happy New Decade!

  9. Your are right, I was just saying that if for instance 10-15% (a guess) of the homes in a market go for sale in a given year another 2% spread out over a year cause they aren’t hitting the market all at once might not do as much damage to market as we might think. It definitely is not going to help any of us out and will without a doubt have an impact, but it might not be as bad… at least I hope.

    Happy New Year!

  10. Josh,

    It depends how they define “shadow inventory”. If they are only talking about foreclosures, then there are at least an equal amount of shadow inventory properties that are not foreclosures, so it will balance out to a flat market.

    I’m running some numbers now, but it depends on what % of solds in the area are foreclosures. The thing about short sales and bank owneds is they will be sold vs taken off market, so they can quickly become “the market” in areas where the only things selling are the distressed properties. In areas where they make up 10% to 15% of the market, the impact will be less.

    The shadow inventory will have no impact if the % of total sales remains a constant, even if there are more of them.

    But be careful of making statements like “It definitely is not going to help any of us…” Prices down helps buyers and prices up helps sellers. So who is this “us” you speak of?

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