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Banks Could Make Some Money – But . . .
Here is a way for Banks to make more money on their inventory of Bank Owned Homes (REO) and Shadow Inventory.
In Tucson the available inventory for buyers is the lowest it has been in 6 years. There isn’t much to pick from in some sub-divisions and certain types of homes.
Banks own homes that are not on the market. “Shadow Inventory” has been said to be a HUGE issue.
Here is how Banks can make more money on REOs
Hire a data analyst, to compare available inventory in subdivisions against the Banks own Shadow Inventory. If the analysis shows that a particular sub-division is low on available inventory that matches homes the Bank has in inventory, then put one or more of their homes in that area on the market.
Example
Subdivision A is located near the U of A. There are no three bedroom homes on the market in that neighborhood. The banks have three homes sitting in Shadow Inventory in that subdivision. Put one or two of those homes on the market.
Since the bank has the only home available with 3 bedrooms in that subdivision they have an opportunity to get a better price. (The law of supply and demand). When they sell that property for a higher price they have just increased the Comp sale price for other homes they have for that subdivision.
It is pretty simple to do, doesn’t cost much once the model is setup for comparisons, and it can increase the banks bottom dollar while getting rid of some of their inventory.
This is how any agent who is about to take a listing finds the market price.
- They find Sold comps for the neighborhood
- They find out how many homes like the one they are listing are on the market and their list price
- They now know where to competitively list the property.
That’s it. Not an expensive process. Quick to implement and increase the sale price.
However, I doubt the banks will do it. Why? It makes too much sense.
Dave, this is a complex issue.
Banks keep foreclosed real estate on their books ‘marked’ at the bid price they paid at the foreclosure auction. That number is almost always much higher than the home’s actual value. Many refer to this as ‘mark to fantasy’; however, the bank can claim that the property is ‘marked to market’.
When banks sell these underwater homes for true market value, they have to take a paper loss on the transaction. This causes their capital ratios to decline. Since every bank needs to remain ‘well capitalized’, they can’t take too many hits to their balance sheet in any given quarter. … they need profits in other areas of the business in order to offset those real estate losses. So banks will continue to slowly release REOs onto the market as long as their balance sheet can take the hit.
There’s also the hopium that housing prices will start to rise. If we see a sustained rise in home values, you can bet that banks will dump their shadow REO inventories much quicker.
My personal take on the robosigning scandal and why it’s been drug out so long is because the banks have wanted to slow down the foreclosure process because their balance sheets couldn’t afford to make much more of a hit.
All of this is resulting in a lot of empty houses and tighter home inventories. Keep in mind that even with declining home sale numbers, >50% of all home sales in Tucson are REOs and short sales. I’m looking at Dec 2011′s sales numbers and the REO/short sales were a bit more than 55% of all sales. I can’t remember when Tucson reached the >50% inflection point but it seems like it’s been more than 18 months since that statistic was below 50%. When one removes ‘flippers’ from the sales numbers, the percentage of REO/short sales is even higher – a friend in Pheonix pulled those numbers out for his market and came up with ~80% of sales being controlled by the banks.
What you effectively have is the banks controlling both supply and prices of houses in the Tucson market. This will put a ceiling on home values until that percentage declines considerably. If you pull up historic numbers, you’ll likely be hard pressed to find any time in the last four decades where REO/short sales are >10% of overall sales.
It seems like the banks are trying to keep prices at a point where they can get cash investors interested in buying rental properties. They can’t put too much inventory on the market because that will cause a big drop in rent prices. It’s a fine balancing act.
The above isn’t a complete picture of banks’ reasoning for holding back inventory but I hope it helps when you see a bunch of empty REOs in a neighborhood that aren’t on the market. It’s just looking at the problem from a different angle.
In closing, I love your website. All the best to you and your family.