Guide to understanding Shadow Inventory

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Guide to understanding Shadow Inventory

  1. 1. 2 Introduction Is this guide for you? A word about KCM Chapter 1: Let’s Bring Shadow Inventory into the Light How shadow inventory is calculated Where to find the details on shadow inventory Chapter 2: How Shadow Inventory Affects YOU The truth about supply and demand Chapter 3: Uncovering the Shadow Inventory in Your Area How to find the information you need What KCM recommends Bonus Chapter: How to Discuss Shadow Inventory With Your Clients Use visuals to make your point Conclusion: Help is Just a Click Awayshare this e-guide
  2. 2. 3 introduction Over the past few years, the term “shadow inventory” We’re here has been making its way into the vocabulary of many real to confirm estate agents. In fact, the topic has become quite volatile, with agents from all over the country debating whether that shadow shadow inventory actually exists.inventory not To help you make sense of it all, in this guide we will… only exists, • Define what shadow inventory means but that it • Show how shadow inventory is calculatedwill also have • Explain why every real estate agent needs a basican impact on understanding of shadow inventory and how it affects a market all markets • Provide resources for uncovering the shadow inventory for quite in your market some time. And, if you stick with us to the end, we will share a bonus section where you’ll find ways to discuss this topic with a buyer and seller without them (or you) getting a migraine. share this e-guide
  3. 3. 4 is this guide fo r yo u ? Some people believe that shadow inventory only affects people in the previously named “sand states”: Florida, Arizona, California, and Nevada. So if you live and work in one of those states, then you’ll definitely want to read this. Consumers in all markets are But here’s the truth… hearing about If you list and sell property for a living anywhere in the shadow inventory United States, then you should read this guide because in the news. consumers in all markets are hearing about shadow inventory in the news. You owe it to your clients to know what’s going on and to explain what the impact of shadow inventory will be in your market. So how do we know so much about shadow inventory? That’s certainly a valid question. Because we are constantly reporting on the changes and updates in the real estate industry via our KCMblog.com and our Keeping Current Matters™ program, we have a unique and in-depth view of the market. We examine national trends and how they affect the industry as a whole. Additionally, in January 2011, the founder of KCM, Steve a word Harney, appeared on Fox Business (at the peak of the confusion about shadow inventory) to clarify some of the common misunderstandings about shadow inventory about and to provide an analysis of the market at that point. KC M So you could say that KCM is a company that put shadow inventory in the spotlight! Now, let’s shed some light on the topic for you.share this e-guide
  4. 4. 5chapter one Let’s Bring Shadow Inventory into the LightThe first and most natural to doubt the validity of shadow inventory. Many cite thequestion is: “What is shadow banking organizations’ reports and statements thatinventory?” they are not holding back inventory from the market.Here’s the definition we Realize that the bank-owned properties account for onlylike to use: some of the shadow inventory. There are many more houses that “are not yet for sale that will eventually come “Shadow Inventory refers to market in the near future,” as the definition states. to the inventory of homes not yet for sale that will So let’s look at what is included in shadow inventory. eventually come to market Once you have the full picture of what it includes, it’s in the near future.” hard to refute its existence.When the concept of shadowinventory first emerged, manydoubted it was real. But as “Shadow Inventorymore and more homes becamedistressed and went into refers to the inventoryforeclosure—with some listed of homes not yet forfor sale right away while otherssat in the shadows—the concept sale that will eventuallybecame more mainstream. come to market in theStill, some people today continue near future.” share this e-guide
  5. 5. 6 How shadow inventory is calculated Shadow inventory includes 3 categories The percentage of those who do catch of houses: up on their mortgage payment is often referred to as the “cure rate.” 1. Properties already foreclosed on but Unfortunately, the cure rate is incredibly not brought to market yet low in this new market reality. From 2. Houses currently in the foreclosure 2000 to 2006, the cure rate averaged process 45%. Since then, the cure rate has 3. Properties where the homeowner been at record lows of less than 5%. is seriously delinquent on their mortgage payment (at least 90 days behind) Categories 1 and 2 seem obvious for inclusion, but why category 3 – properties where the homeowner is seriously delinquent on their mortgage payment? We include these because studies show that 95+% of all those who fall 90 days behind on their Since we now have a less than 5% mortgage payment never catch up, and cure rate, not including delinquent these properties do eventually come to properties in the calculation would be the market as distressed sales (either misinformation and a disservice to the short sales or foreclosures). real estate industry and our clients. Foreclosed In the Seriously but not on foreclosure delinquent market process homes (at least 90 days behind)share this e-guide
  6. 6. 7Where to find the details onshadow inventorySearching for information about shadow But beware! You’ll find differentinventory can be a lot like searching for numbers and figures for shadowa needle in a haystack. It’s there, but inventory depending on which sourceit’s extremely hard to see. So before you use. Why?you go spinning your wheels trying tofind something definitive, keep in mind When compiling their information, eachthat 3 key companies provide regular, organization uses the numbers anddetailed information about shadow data they have access to, and thisinventory. They are: information is not always the same for each reporting agency. Also, each1. CoreLogic’s Negative Equity Report organization uses slightly different2. LPS’s Monthly Mortgage Monitor methodologies to get their numbers.3. S&P Indices (quarterly reports) So which numbers should you believe?Others that report on shadow inventoryfrom time to time include: At KCM, we use CoreLogic’s numbers1. Barclays Capital for shadow inventory, which tend to2. Capital Economics be lower than what the others report.3. Calculated Risk Blog That’s because CoreLogic is the only firm (that we know of as of this writing) that actively scrubs their information against what is currently on the market. This creates a truer report of what inventory is “in the shadows.” So as far as we can tell, they are providing the best and cleanest data regarding this market segment. share this e-guide
  7. 7. 8 chapter two How Shadow Inventory Affects YOU As a real estate professional, In order for you to get the best price available for your you need to have at least a seller, you need to understand what will impact pricing in basic understanding of shadow the next 6 months. In the near future, the release of this inventory … regardless of where shadow inventory will certainly have an impact. Why? It all you live and work. This knowledge comes down to supply and demand. will play a big role in how well you do your job. For example, when you’re working with a seller, he or she will have 4 key questions about working with In order for you to get you as the listing agent: the best price available 1. Can you sell my house? for your seller, you need 2. Can you get me the best price to understand what will available? impact pricing in the 3. Can you do this in the shortest next 6 months. time possible? 4. Can you take care of all the hassles that will occur during the selling process?share this e-guide
  8. 8. 9The truth about supply and demandThe law of supply and demand is in Here’s why…effect every day in every industry. For As shadow inventory comes to market,example, when farmers have a low it adds to the supply in that market.harvest of their crops, food prices go How that additional inventory affects youup (the demand for the food is high depends on your current market condition.but the supply is low). But when theyhave “bumper” crops and produce Here’s a simple analogy we like to usemore than anyone expected, food to put it in perspective: Think of yourprices go down (the supply easilymeets the demand). market as a town. Within that town is a river (inventory) running through it.In real estate, the price of a property The clouds in the sky are the shadowis dependent on supply and demand inventory waiting to be released toas well. As an educator in the real market. When it rains (when the shadowestate industry, you simply cannot inventory releases), it fills the river (theforget this concept and how it impacts inventory levels) to new heights.future pricing in your market. share this e-guide
  9. 9. 10 Scenario A: If you have an extreme shortage of And let’s not forget one important inventory (1-2 months), then it’s like point: This is not just any supply you’re in a drought and the river is very coming to market. Many, if not most, of low. You need some rain to replenish these listings will come to market as the river so everything can go back to distressed properties (short sales and normal. In this case, the additional REOs). In other words, their prices inventory could be much needed will be naturally lower. So unless your because the supply is low and the market is in dire need of inventory, demand is high. these additional distressed listings can certainly soften prices in your Scenario B: area. Both you and your clients need If you have normal inventory (5-6 to understand this important point months typically), when it rains the because it will affect pricing across river will crest slightly, resulting in the board. some flooded roads and some water in basements. In this case, real estate prices will soften, but it probably won’t be catastrophic. Supply and demand will be roughly equal. Scenario C: If you have far too much inventory (7+ months), then any new rain will cause major flooding throughout the entire town, with some houses literally going under water. In this case, real estate prices will drop because the supply will be abundant as compared to the demand. As shadow inventory comes to market, it adds to the supply in that market.share this e-guide
  10. 10. 11chapter three Uncovering the Shadow Inventory in Your AreaNow that you realize shadow inventory is real and can affect pricing in yourarea, you need to get a handle on how much shadow inventory is coming in yourparticular market.How do you do that? 90 Day DelinquentRemember, you have to look at 3key areas: Foreclosure Process1. Properties where the Foreclosure homeowner is seriously delinquent on their mortgage payment (at least 90 days REO on the Market behind)2. Houses currently in the foreclosure process3. Properties already foreclosed on but that have not been brought to market yet share this e-guide
  11. 11. 12 • CoreLogic has a paid service that can get you information down to the zip code level. • The Mortgage Bankers Association (MBA) has a paid service that can get you different numbers at the county level. • RealtyTrac has both free and paid services depending on your state, county, and what information you’re looking for. What KCM recommends How to find To thrive in the real estate industry (even with the influx of shadow inventory coming the information to market), you need to do 3 key things: you need 1. Understand the basics of shadow inventory and how it will impact supply Knowing what information you need to and demand for the next 6 months. gather is certainly a good first step. We discussed these topics in chapters Next you need to know where and how 1 and 2 of this guide. to find the data. 2. Know the key indicators for shadow inventory nationally and in your state. Unfortunately, getting accurate Take that information and combine information about delinquencies and it with your knowledge of your local foreclosures at the local level (down market to determine the impact to specific cities, zip codes, and even shadow inventory will have on your neighborhoods) is difficult and often clients. We discussed this topic in expensive. With that said, though, chapter 2. there are a few places you can go 3. Prepare well enough so you can to find some of this data at different simply and effectively explain shadow levels of localness. inventory and its impact on your market to a buyer or seller. We’ll discuss this in the next chapter.share this e-guide
  12. 12. 13bonus chapter How to Discuss Shadow Inventory With Your ClientsMake no mistake … your clients based on your research and understanding, explainare hearing about shadow what impact (or lack thereof in some markets) shadowinventory on the news and from inventory will have on them.other sources. Your job is to helpthem separate the facts from Whatever you do, don’t ignore the topic of shadowthe hype so they can make an inventory when talking with clients. Don’t try to sweepinformed decision. The question it under the rug, imply it’s not important, or downplay itis, how? any way. Your clients have already heard about it. They may be confused about it. They may have questionsIt all comes down to open and about it. Ignoring it will not help them make anhonest communication. When educated decision. Talk about it openly and honestly.you’re working with a client—whether a seller or a buyer—youneed to bring them through aneducational process, like we did in When you’rethis guide with shadow inventory. working with aTo do this, explain to them that client you need toyou have shadow inventory in bring them throughyour market (and thus a greatersupply than is visible in the an educationalMLS), and then explain why this process.excess inventory is there. Finally, share this e-guide
  13. 13. 14 Use visuals to make your point You’ve likely heard the saying, “A picture is worth a thousand Both are correct, but the words.” That phrase is truer today than ever before. With picture description is so many people busy and overwhelmed with information, easier and more effective. conveying something in a simple yet powerful visual is often Why? Research at 3M more persuasive than an hour-long conversation. Corporation concluded that people process visuals For decades researchers have been looking at how 60,000 times faster than people process information and what types of messages text. Other studies have promote understanding. And for decades the research has found that the human brain continually been coming back to one key point: People deciphers image elements process and remember visuals better than words. simultaneously, while language is decoded in a For example, if you had to describe what a circle was to linear, sequential manner, someone, which of the following two approaches is easier meaning it takes more time and more effective: to process and understand 1. Give a visual explanation: words than images. And in terms of people actually remembering the information, research shows that people 2. Give a textual explanation: remember visual messages A curved line with every point equal six times better than verbal distance from the center messages. The Value of Visuals A curved line with every vs. point equal distance from the center. (visual explanation) (spoken/written explanation)share this e-guide
  14. 14. 15Research shows that people remember visualmessages 6 times better than verbal messages.Without looking, can you recite back thetextual description of what a circle is?Most people can’t.Therefore, don’t just tell people aboutshadow inventory; show them what theyneed to know. Use strong visuals duringyour conversation that reinforce keymessages. Keep these images on yourtablet or smart phone so you alwayshave them when you need them. • Finally, show your client how the potential of additional inventory• Show them the process of homes can affect their months supply. going to foreclosure. For example: For example: 90 Day Delinquent Foreclosure Process Foreclosure REO on the Market• Show them a map of your state and what the shadow inventory numbers, The more visual you can make the foreclosure numbers, and month’s communication, the better your supply of inventory numbers are clients will understand and remember for various areas of your state, the information. When you and your including your own area. clients are in complete alignment and agreement on key factors of the listing, the transaction will progress much smoother. share this e-guide
  15. 15. 16 Conclusion Shadow The agents who understand shadow inventory and adequately communicate it to their clients will fare much inventory is better in the coming months. real, it’s not going away any So here’s your action plan: time soon, and 1. Educate yourself as much as possible about shadow it will affect inventory—what it is and how it can (and will) affect your clients. you and your 2. Get a handle on how much shadow inventory exists in market in your area. Use the sources provided as a start. some way. 3. Practice the key informational talking points your clients need to know about shadow inventory. 4. Create strong visuals to reinforce the key messages your clients need to know, and keep these visuals with you at all times (on your smart phone or tablet). 5. Integrate this information into all your client presentations. And remember that KCM can help you make sense of it all. We not only information every month, but we also provide you with many of the visuals you need to bring the information directly to the consumer. Ready to learn more about KCM? Go to whatisKCM.comshare this e-guide

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