The threat has been hanging over the Sacramento real estate market for years: A hypothetical "shadow inventory" of
foreclosed homes that forecasters said could suddenly come up for sale and flood the market with cut-rate houses.
But with
home prices rising sharply in recent months and the supply of homes for sale near record lows, the shadow appears to be lifting. In particular, the idea that banks are sitting on thousands of
foreclosed homes – and artificially inflating prices by constraining inventory – has become far less plausible, experts said.
A few years ago, the notion that banks might be holding a backlog of foreclosures didn't seem so far-fetched.
At the peak of the foreclosure crisis in 2008, banks owned nearly 12,000 repossessed homes in Sacramento, Placer, El Dorado and Yolo counties. Lenders were foreclosing on houses faster than they could sell them.
Today, the picture is much different.
Many homeowners who fall behind on their payments are receiving loan modifications or getting permission from lenders for short sales, in which homes sell for less than what's owed. The result: Far fewer homes are going back to banks.
"You're not having as many (foreclosures) coming in the door, and there's been more time to sell off the backlog," said Andrew LePage, analyst for the real estate information firm DataQuick. "The market's hungry for it."
Banks own about 3,300 unsold homes in the four-county Sacramento region, according to San Diego-based DataQuick. That represents about a month's worth of sales in today's market.
Even if banks sold all the homes in a short time frame, the effect on prices would be small, said Svenja Gudell, senior economist with real estate tracking firm Zillow, which is conducting a study of shadow inventory across the nation.
Gudell and others said gauging shadow inventory involves more than adding up homes owned by lenders. Any attempt to quantify the number of distressed sales that could be hitting the market must take into account the entire foreclosure pipeline, including how many people are late on payments and in the process of foreclosure.
Experts have trouble arriving at a firm figure because of the big unknowns. Thousands of homeowners, for instance, fell behind on
mortgage payments in recent years but haven't been foreclosed on. Many likely caught up on payments or received a loan modification; others may still be at risk.
"You don't know. You just have to wait," LePage said.
Yet with the market strengthening, figures that could be key indicators of shadow inventory are moving in a positive direction.
CoreLogic, for example, estimates that 4.6 percent of Sacramento homeowners with a mortgage were more than 90 days delinquent in their payments in February. That's down from 7.2 percent in the same month a year ago, the Irvine-based information firm said.
Zillow, which obtains late-payment data from credit bureaus, also showed 90-day
delinquency rates dropping steadily from mid-2011 through the end of last year.
After missing several payments, the next step for many troubled homeowners is a notice of default, which formally starts the foreclosure process. Those, too, have been falling across the region, DataQuick said.
Notices of default plummeted by about 70 percent – from more than 4,800 notices in the first quarter of 2012 to fewer than 1,400 notices in the first quarter of this year across the four counties, the firm said. Numbers that low haven't been seen since last decade's housing boom.
At the same time, trustee deeds, which mark the official repossession of homes, fell from 5,600 in one three-month period at the height of the
housing crisis in 2008 to a little more than 900 in the first quarter of this year, according to DataQuick.
Part of the slowdown in foreclosure filings this year resulted from the Homeowners Bill of Rights, a new set of state legislative protections that took effect Jan. 1. Lenders curtailed activity as they tried to figure out the new foreclosure rules, said Dustin Hobbs, spokesman for the California Mortgage Bankers Association.
"Everything came to a halt," Hobbs said.
But much of the slowdown in foreclosures can be attributed to the upturn in the market that started after home prices hit bottom in January 2012, economists said. Since then, heavy investor activity, growing demand from traditional buyers and the scarcity of homes for sale have boosted prices.
Zillow estimates Sacramento home values jumped about 20 percent in the last 12 months. The firm predicts prices will rise by nearly 16 percent in the coming year.
Approximately 157,000 homeowners in the Sacramento region still owe more than their homes are worth, Zillow said. That represents about 42 percent of all homes with mortgages in the four-county region. But the number has been dropping over the past year as thousands of homeowners return to positive equity.
"The fact that you're now seeing less people in negative equity and less delinquencies is a sign that the market is picking up steam," Zillow's Gudell said.
Beacon Economics' Thornberg said the market isn't improving because banks are sitting on homes and limiting supply. The market is rising, he said, because homes are the most affordable they've been in decades and
mortgage rates are near historic lows.
Many people are still blocked from taking part in this market because they are upside-down on their mortgages or can't obtain credit, Thornberg said. But cash-paying investors and a growing number of homeowners are scrambling to take advantage.
"The market," he said, "is rallying because prices are really cheap."
Call The Bee's Hudson Sangree, (916) 321-1191. Staff writer Phillip Reese contributed to this report.
