Extent of Foreclosures in Houston Masked by Shadow Inventory

by Simon Lindsay on cities

Prices of houses are in better shape in Houston compared with national levels for the fifth consecutive months. Some homebuyers and sellers might perceive this as a recovery, but real estate market analysts have warned that current numbers do not portray the real condition of foreclosures in Houston.

According to local realtors, a big inventory of Texas foreclosures is sitting on mortgage firms’ books, with the companies not making any move to sell them or offer them in the market. Some homes are not even getting foreclosed, despite already qualifying for foreclosure, realtors have reported.

These homes are what realtors call shadow inventory. They estimate the number of these homes to be in the hundreds. Several theories have been formed by analysts as to why mortgage firms and banks are just sitting on these properties and not offering them as REO bank properties for sale.

One theory is that banks are allegedly receiving incentives to hide these foreclosures as long as they could to prevent them from hurting the financial status of banks. This theory was adamantly denied by banks. They also stated that no foreclosures are being held from the market and that shadow inventory is just speculation. Banks reiterated that they have a responsibility to prepare foreclosed homes and sell them to the market as efficiently as they could.

Market analysts stated that if there is truth about shadow inventories, foreclosures in Houston will get worse once these alleged surplus inventories are released on the market. They reported that in the last 60 days, prices of houses have started declining again, leading them to believe that some of the surpluses are being released on the market.

However, some realtors explained the declining prices as the result of tighter lending processes. According to them, lenders are requiring homebuyers to provide a down payment and to have a reliable employment before loans can be issued. This leads to fewer people qualifying for loans and having the ability to purchase a house, even low-priced ones such as government foreclosure homes.

Real estate companies explained that the tight lending practices being used in the city now is meant to prevent the impact of lax lending practices to affect majority of neighborhoods in the city as they did before. They reported that a huge number of subdivisions and neighborhoods have become ghost towns, with homes being abandoned by foreclosed owners and buyers not being able to purchase the foreclosed properties.

Prices for homes that used to be tagged between $110,000 and $130,000 are now as low as $60,000 according to some homeowners. Some of the foreclosure problems being experienced by the city are being blamed by residents on developers who took advantage of borrowers with poor credit backgrounds. They stated that lenders and developers issued loans to people who have no capacity to pay for the loans and then foreclosed on their properties when they failed to meet their monthly dues.

Whether the concept of shadow inventory is true or not, real property experts are predicting that if surplus inventories of houses are suddenly released on the market, home prices will plummet and foreclosures in Houston will be worse than they already are.

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