If you are an active home buyer, you have likely driven past many homes with signs in the yards that you cannot find on the Internet or that your Realtor tells you they are not for sale yet.
More than likely, these homes are bank foreclosures that are going through the process of getting ready for sale. Sometimes, the “getting ready” part seems to take months. I have seen some take up to 8 months and some fellow agents have told me they have seen some that have been “getting ready” for over a year.
The questions I get from my clients is, “why do they put a for sale sign up if it is not ready for sale?” The answer to this question can vary, but in general, the answer to this question is this. In the process of the bank getting the home ready for sale, they select a listing broker to work on the listing part. In general, the listing agent will put up a sign very early in the process. This serves two main purposes. First the listing agent wants to be ready when the bank says to list it (even if it is months away from listing approval). Second, the listing agent wants to get phone calls from prospective buyers to build a list of buyers for that particular home, but more likely to show the prospective buyer additional homes that are currently available.
But this does not answer the question regarding why it is taking so long for homes to hit the market after they have been foreclosed. In the past, banks wanted their foreclosure inventory to hit the market as soon as possible so that they could recover their losses more quickly. Now-a-days many banks are taking the time to rehab the home and make it more presentable, thus maximizing the amount they can sell the home for (of course, this takes some time). Additionally, banks are becoming more and more strategic on when they list homes for sale so that they do not flood the market with foreclosures. The economic law of supply-and-demand is pretty clear, if inventory is lower than the number of buyers, prices will go up. Banks are betting that delaying a home from hitting the market for a longer period of time will yield them a higher return even if they incur monthly maintenance and opportunity cost.
Some people have referred to this inventory as “shadow inventory.” Some economists believe that the banks’ practice of holding this “shadow inventory” from the market to artificially inflate prices and create bidding wars on the current inventory may run the risk of violating federal anti-trust or other laws. Others believe that since these foreclosed homes are the banks’ assets, they have certain property rights just like individuals do to maximize their returns. I suspect we will be hearing more regarding this debate in the months and years to come.
Of course, there are other reasons why banks keep the “shadow inventory” off the market for extended periods of time, but this practice has been increasing and is likely to increase in the future. However, when banks hit a certain threshold of inventory, they will have no choice but to put more foreclosures on the market. If they all decide to do this at the same time, I suspect we will have another round of drop in home prices for everyone, not just the banks’ inventory.
Carlos Barron is a real estate professional servicing the Southern California Market. He can be reached via www.CarlosBarron.com or 714-982-2300