Bill’s Place

Comment:

Many commenters here have used the term 'Shadow Foreclosures' the proper term is "Shadow Inventory'. Shadow inventory represents the excess supply of housing. Banks and other mortgage investors have been deferring foreclosures (for several reasons) but one primary reason is because they realize if all the inventory was to come to market in any short time period home prices in most markets would plummet (further). It's estimated, by S&P, that the current shadow inventory will take about 45 months 'to clear'.¹

A subtlety, hedge funds invest other peoples' money (o.p.m.) and they collect an annual management fee while they wait for their strategy to pay-off. If the strategy pays-off they get a very large incentive bonus (portion of the profits). Hedge funds generally will not allow investors to 'cash-out' for a couple of years after the investor deposits his or her investment (the 'lock-up' period). So, the idea is to sell a very risky or a very volatile strategy, so you can get the management fee while you wait for - and hopefully eventually reap - the huge incentive fees.² 

What happens when a hedge fund strategy "blows-up"? The manager moves-on to a different strategy, and most likely, a different group of investors.

Picking the bottom of any market is a timing issue, by the time these hedge fund "lock-ups" have expired most of the investors will probably start to see signs of life in the housing market and will decide that after a couple years of pain, during the "lock-up", it's probably a good idea to hang-in-there and perhaps enjoy some profit. In my opinion the hedge fund managers in this article are following a contrarian strategy and may be quite early . . . but, it takes time to convince those hedge fund investors to invest.

Remember, home prices change at the margin, one-sale-at-a-time, the next sale is based upon comparable sales and an appraisal - and in most cases - the completion of the sale is dependent upon the availability of mortgage financing.

Watch unemployment and don't just look at the published numbers for mortgage interest rates, look at the number of new mortgages actually issued. If what used to be a qualified buyer can't buy, the excess inventory will not be absorbed by anybody but investors who want to be landlords. I believe Mr. Mark Hanson (in the article) has the proper current view of the housing market.

Footnotes:

1. see article, S&P: 45 Months to Clear Shadow Inventory By Kerry Panchuk pub. Housing Wire November 23, 2011 - at: http://www.housingwire.com/2011/11/23/sp-45-months-to-clear-shadow-inventory

2. see Introduction pages 1 and 2 to A Balancing Act: Privacy, Regulation, and Innovation in Hedge Funds By Thomas Van De Bogart and Justin Blincoe

http://www.ethicapublishing.com/inconvenientorinvasive/2CH17.pdf