What Happens When The Shadows Go Away in 2010?

Bi-line: Only a small portion of homes that are bank owned or in the foreclosure process have hit the market on the Westside. . .what will happen when they do? Will the banks continue to be able to artificially keep inventory down?

Since the beginning of the summer the Westside real estate market has shown signs of price stabilization and some zip codes have seen an increase in the median price. The inventory of available homes has dropped and multiple offer situations have been popping up in every price range especially under a million dollars.

Though prices have dropped about 20-30% on the Westside (% depends on which Westside micro market you are referring too) over the past year, the recent price stabilization seems a little counter intuitive considering the California economy is on shaky ground and the unemployment rate continues to grow.

However, the government and financial institutions have done a marvelous job of propping up prices. According to a Goldman Sachs report released last Friday, the Government’s interventions in the housing market have pushed home prices 5% higher on a national average than they would have been otherwise.

The report goes onto further state “the government over the past year has slowed the pace of foreclosures through moratoria and the drive to modify mortgage terms to keep more borrowers in their homes. It also has pumped up demand for housing by giving tax credits to many first-time home buyers and by driving down mortgage interest rates. As a result, home prices in some areas have risen in recent months, particularly for homes that appeal to investors and first-time buyers. Bidding wars for the more attractive bank-owned homes have become common.”

With the recent announcement that the tax credit program will continue and even be enhanced through the 1st part of 2010, the price stabilization is expected to continue through the beginning of next year. However, as I have explained many times in these reports, the Westside and the high-end market in general operate on a different scale than the rest of the market and the alarming back-log of shadow inventory building up in higher price ranges is startling.

Currently, Santa Monica has 236 properties that are either bank owned or in some part of the foreclosure process according to a foreclosure activity search through First American Title. Of those properties, only 20 are active on the Multiple Listing Service “MLS” and 6 are already in escrow. Couple this with about 30 properties being marketed as “short sales” on the MLS that are not currently in the foreclosure process and you almost have the same amount of properties showing economic strain than are currently available on the market.

Of the 65 bank owned properties in Santa Monica, only 8 are on the MLS. 107 properties are supposedly up for auction (they usually never get to that point) which means the properties are at the end of the foreclosure process. Undoubtedly the banks are working feverishly with property owners to modify mortgages and that will help knock these numbers down but they are still going to increase inventory in 2010. Bank of America expects 5 times as many foreclosures in 2010 and Citibank expects 3 times as many.

Low interest rates and increased inventory will make 2010 a good time to buy on the Westside. I will talk more about this in my 2010 forecast which will be out in late November.

Here is “shadow” inventory information for the Palisades, Brentwood and Culver City.

Palisades: 70 properties in foreclosure process. 4 active on the MLS and 4 are in escrow. Of the 17 bank owned properties, only 1 is active on the market.

Brentwood: 96 properties are in the foreclosure process. 6 are active on the MLS and 4 are in escrow. Of the 15 bank owned properties, only 2 are on the market. Culver City: Scary…173 properties in the foreclosure process.

Culver City only has 75 homes listed on the MLS, 12 of which are distressed properties. The potential shadow inventory is twice the size of what is on the market.

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