Boomer’s Blog

A huge, largely underestimated and under-reported glut of foreclosed, real estate owned (REO) inventory is clogging up the U.S. housing market, and the majority of doesn’t seem to appear on the MLS. The size of this “ghost inventory” is unknown, but its effects cold be chilling for cash-strapped lenders. What does this mean to real estate investors? Tons of cash if you know how to buy right and stay on top of the real estate marketing curve.

Inventories, Foreclosure Filings Skyrocket
In November, the National Association of Realtors (NAR) reported an 11.2-month inventory of existing homes on the market, up from a 10.3-month in October. But now it seems those sky-high numbers statistics could continue rising dramatically, which is likely to lower home sales prices, and slow overall U.S. economic recovery.

Foreclosure filings were reported on 2.3 million U.S. properties in 2008, and an 81 percent hike from 2007, and a whopping 225 percent surge from 2006, according to RealtyTrac’s U.S. Foreclosure Market Report released in mid-January.

These inventory and foreclosure statistics are interesting enough to raise a few eyebrows among hungry real estate investors. But when RealtyTrac compared NAR’s MLS data with its foreclosure data they raised more than a few eyebrows: they raised the question of whether a vast “ghost inventory” is lingering in REO lender clutches, and if so, is it poised to deliver another hard blow to the U.S. housing market?

Piecing together the “Ghost Inventory” Puzzle
RealtyTrac recently examined the MLS listings in four states, including California, Maryland, Florida and Wisconsin, and found that they contained only a third of the foreclosures it has in its database. Research and analysis by Mr. Mortgage points to an even more widespread problem. There are several possible reasons for this apparent disparity and none of them are good for lenders.

At a minimum, preliminary data suggest that only one-third of foreclosures are reaching the MLS database, and it’s entirely likely that this is a conservative estimate.

The value of REO property on the books of FDIC-insured banks at the end of the Q3  rose 21 percent from the previous quarter, to $23 billion. That total represents a 134 percent increase over last year, according to the latest quarterly report released by the FDIC.

Since there is no reliable way to track these data and existing systems are likely overwhelmed by the high volumes of foreclosures working their way through the system, all we have at this point are estimates as to the number of houses that are haunting  REO’s “ghost” or “shadow”  inventory, as it also is coming to be known.

According to CNNMoney, current U.S. housing market declines are likely to sharpen dramatically as a result of this situation because so many foreclosed homes are lingering in bank possession without representation in the MLS.  Regardless of how the government and lenders approach the problem, averting a tidal wave of foreclosures appears to be impossible.

What’s the Holdup?
What could explain this Grand Canyon-sized gap between the numbers of foreclosures that are recorded vs. the number that has appeared on the MLS? Here are a few explanations that immediately come to mind:

• Inventories of foreclosed and REO properties has grown so fast and in such high volumes that the banks can’t keep up with processing demands, which could delay the MLS listing process.
• Federal and state government attempts to slow the foreclosure tide and Fannie Mae and Freddie Mac’s holiday moratoria on foreclosures are contributing to MLS listing delays for many of these properties.
• Because it’s taking longer to process the foreclosures, the REO properties are getting vandalized or suffering natural damage as a result of what’s becoming long-term neglect. Getting these properties on the MLS is further delayed while banks grapple with making necessary repairs.
• It’s also possible that lenders are lagging in submitting these distressed property listings to the MLS in hopes of deferring their losses as long as possible in hopes of protecting their institutions from insolubility.
• Many of these REO properties might already be listed as short sales.

What does the Ghost Inventory Mean to Your Business?
REO housing inventories are expected to shatter more records in 2009 as more of them hit the market and banks continue their struggle to stay afloat. These market conditions are ideal for real estate investors who deploy sound purchasing strategies and stay on top of the game with effective real estate marketing.

For a quick  video detailing how and why this “ghost inventory” is likely to unleash a mighty wave of foreclosure inventory on the U.S. Housing market, check out this Mr. Mortgage interview on CNBC’s Faber Report.

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To learn how you can leverage quick-fire market developments such as the REO “Ghost Inventory” to generate tons of cash for your real estate investing business, check out SalesTeamLive or call us directly at 1-877-STL1 (that’s 877-438-7851).

A three-year standoff between the U.S. Justice Department (DOJ) and the National Association of Realtors (NAR) over the association’s attempts to virtually monopolize its multiple listing service (MLS) data is one legal hurdle away from resolution. Both litigants have consented to a settlement agreement just weeks before the case was slated for the Federal docket in Chicago.

DOJ launched its anti-trust suit against NAR in 2005, over anti-competitive policies revolving around NAR’s proprietary MLS database listings of real estate properties for sale. Keeping the listings under wraps, the Fed said, keeps consumers’ costs artificially high and inhibits competition among traditional and online brokers for home and condominium sales.

WWW Infoscape Changed while NAR Battled DOJ Anti-Trust Charges
In its lawsuit, DOJ aimed to open access to the data beyond NAR’s broker network to include consumers, data aggregators and property discounters who don’t meet state-mandated minimum requirements for providing real estate services to sellers.

While DOJ and NAR have been fighting it out, Web 2.0 technologies offering free on-line property information have transformed the real estate business and quietly built a mighty market presence that imperils the relevance of the traditional real estate business model. They also bring into question the future of the 6 percent broker commission.

Innovation, Free Online Data Jeopardize NAR’s Proprietary Model
By democratizing real estate data, Web sites such as Redfin, Trulia and Zillow have shattered NAR’s MLS-intrinsic business model and showed online real estate shoppers a new and easier way to do business: A way that doesn’t require buyers to sit in the back seat of a broker’s car, or sellers to trust that their broker always has their best interests at heart.

Online Brokers Win Right to Distribute Electronic Tear Sheets
NAR has been widely criticized for allowing brokers to block their listings from being displayed on Web sites that offer discounted commissions or standard broker fees on real estate transactions. In the settlement with DOJ, NAR agreed to adopt policies that don’t discriminate against on-line real estate brokers. Specifically, the agreement requires that online brokers be able to provide the same information online that traditional brokers offer to folks who visit their offices.

Pending final court approval, a process likely to take three months or more, the settlement agreement could provide consumers with easier access to MLS data, which could enhance their market research and help them save money on real estate purchases. It also could alter some current trends in how MLS data are obtained and used in the virtual real estate marketplace.

The changes NAR agreed to likely won’t have a dramatic impact on the real estate marketplace as a whole, but it might affect those who have capitalized on NAR’s ongoing stabs at keeping MLS data secret.

Realty Times predicts that the following practices are likely to change dramatically when the settlement agreement is finalized:

• Lead generation services such as Lending Tree may have to stop filtering MLS data through broker shell companies.
• Data mining companies such as Home Buyers Marketing (HBM2.com) may have to stop reselling MLS data for profit.
• More open access to MLS data could detract from the credibility of values attached to property listings in real estate communities such as Zillow.

Registration Requirement Reinstated for MLS Data
Also as a result of the settlement agreement, NAR says it will reinstate an updated version of its virtual office Web (VOW) policy, and resume requiring customers to register before they can search MLS home listings online. NAR says it rescinded that policy in 2005, when its provisions were first challenged by DOJ.

Technologies offering free on-line property information are changing the real estate business and quietly building a mighty force that is poised to obliterate the National Association of Realtors‘ (NAR) virtual monopoly on property information and decimate the concept of the 6 percent agent commission.

Until recently, it was challenging to operate in the residential real estate market without access to the NAR’s multiple-listing service (MLS) because only realtors really knew what homes in any given area were selling for. Realtors who shared the information generally expected a return for their data sharing and professional services, usually in the form of a 6 percent commission on subsequent property transactions. But times are rapidly changing.

The Holy Grail: Data Accuracy
Soon, an estimate for just about any home’s value will be available online from sources such as Zillow.com. Many already are. But are the data accurate? A 2007 Wall Street Journal analysis of 1,000 home sales shows that Zillow’s “Zestimates” often are accurate, often within a few percentage points of the actual price paid. But when Zillow is off, the disparity can be dramatic.

Zillow.com officials say that constant refinements to their system make the data more accurate today than ever. Changes to the back-end of the system and enhancements like adding a process whereby owners can update their property information in Zillow.com’s system all work to maximize on-target data reporting.

Objectivity Fuels Credibility
Still, services such as those offered by Zillow.com are not yet perfect. Zillow’s valuation protocol is most accurate for mid-price homes in areas where there is high property turnover; it is less effective in neighborhoods where people seldom move. But the time may come when Zillow is seen as more reliable than human brokers, Money magazine reports.

Often, brokers and owners have an incentive to inflate estimates to win prospective clients and are not always tuned in to market changes. Data from sources such as Zillow.com are far more objective and are becoming more widely used by consumers, brokers and by major media media outlets to establish important benchmarks in the real estate market.

In other words, if everyone uses the data, the provider can become a significant force in the market. For example, financial news giant Bloomberg recently reported that U.S. home values dropped 7.7 percent in the first quarter to the lowest in almost three years, based on estimates by Zillow.com. The article says this is the largest decline in 12 years of data compiled by the Seattle-based online data provider. When the media major players cite a particular data provider as a source, it lends great credibility to the quality of the information outfits like Zillow.com provide.

All Aboard the Gravy Train
Zillow.com launched its Web site in 2006 to provide homeowners, real estate agents and potential buyers with value assessments called “zestimates” for single-family homes, co- operative apartments and condominiums. The company has since become a real estate powerhouse, recently expanding its operation to provide mortgage market information services. In the past couple of years, competitors have sprung up for a taste of the gravy snatched from the plates of brokers and others working from the tradtional MLS system data model.

According to Online Media Daily, in December 2007, San Francisco-based Trulia.com managed to edge out Zillow.com, AOL Real Estate and HouseValues in terms of unique visitors. The site nearly tripled its audience from the previous year, growing from 579,000 unique visitors to 1.6 million. Trulia recently sweetened the user experience by offering not only listing info and photos, but access to view the property via Google’s popular Street View Map option. Google Street View where it’s available, gives users an interactive, mobile, street-level view of properties and neighborhoods.

John Vogel, who teaches economics and real estate at Dartmouth, says that the democratization of real estate data imperils the future off the 6 percent real estate commission. Real estate brokers will retain a role as marketers, especially in tough markets. But, Money magazine says, like stock brokers before them, they’ll find that as they lose their traditional monopoly on information, they just can’t command their traditional price.

Below is a list of five top real estate valuation Web sites (My personal favorites are Trulia and Zillow).

• AOL Real Estate
• HomeGain.com
• RealEstateABC.com
• Trulia.com
• Zillow.com

Forbes.com has surveyed the 40 largest U.S. metropolitan areas and aggregated various data on foreclosure listings, job growth, transaction volumes, vacancy and current inventory rates to build a list of the 10 most ominous real estate markets in the nation.

1. Detroit, Mich.: Here, foreclosures are five times the national average, jobs are few and people are moving away in droves; the economy continues to suffer.
2. Orlando, Fla.: This market has a 7 percent vacancy rate, despite job growth in the past few years. Analysts predict negative growth for this market in 2008.
3. Cleveland, Ohio: Here, a 3 percent foreclosure rate ranks the sixth worst in the U.S. Also, there has been no significant job growth recorded since mid-2006. when the rate rose only 0.1 percent.
4. St. Louis, Mo.: Market values here dropped 20 percent from 2006 to 2007. This year, the foreclosure rate has surpassed 1 percent and job growth continues to stall. Analysts say that the sharp declines, and rock-bottom prices are likely to reduce recovery time — if the local economy holds up.
5. Miami, Fla.: Foreclosures here are the eighth highest in the U.S. and construction-fueled job growth has suffered hard hits in the past two years.
6. Las Vegas, Nev.: Despite stellar construction-based job growth in 2004 — 2005, growth in the past two years has been flat. Dangers here include rising foreclosure rates, high inventory, and threats that the overall economy will worsen.
7. Sacramento, Calif.: Ranked the fifth worst foreclosure market in the U.S. Beyond the 3 percent foreclosure rate, this market also suffers from jobs losses as as the construction-powered economy tapers off. But transaction volumes are up, even if prices are down. Way down. Here, desperate homeowners have set records with their agressive price reductions.
8. Denver, Colo.: Despite strong economic growth over the past four years, and a $240,000 median home price, Denver has experienced 50,000 foreclosures, or nearly 3 percent of the market, thusly earning the ninth-worst foreclosure rate in the nation. This market’s saving grace is reported job growth at three times the national average.
9. Tampa, Fla.: Although this market continues to add residents and remains a popular destination for retirees, inventory remains high and dismal growth in the service-oriented job market doesn’t seem to be helping.
10. Phoenix, Ariz.: With an economy supported by the construction industry and overbuilding, there are 53,000 homes reportedly on the market. This sky-high inventory is five times the 2005 rate, and homes aren’t selling anywhere close to asking prices. Besides holding one of the highest foreclosure rates in the nation, the distressed Alt-A and sub prime loans aren’t contained within one single area as is typical among large metropolitan locales.

Note: These data were culled from the following sources to create the list, which bears more bad news for cities already suffering from high foreclosure rates, job growth stagnation and dwindling tax revenues: Foreclosure listing service; RealtyTrac; job growth: U.S. Bureau of Labor Statistics; transaction volume data: Radar Logic; current inventory rates: U.S. Census Bureau; and multiple listing service (MLS) data: ZipRealty.