Shadow Housing Inventory: Can Provide Opportunity to Baltimore Investors

March 19, 2010 - PRLog -- A recent report issued by Standard & Poors asserts the great quantity of delinquent or foreclosed properties on the market will likely undo any potential increases in housing prices. However, the problem with this argument is that it is based on the presumption that prices in the housing market is a function of supply when, in truth, selling price is a function of the amount of income available for borrowers to service their mortgage debt.

Standard & Poors has stated shadow inventory has jumped, which will likely undo U.S. housing price gains. Let us explain what shadow inventory is. Shadow inventory refers to properties that are delinquent, or in foreclosure, rather than unlisted bank owned homes.

“It should be clarified that distressed homeowners do have other alternatives rather than foreclosure such as short sales or loan modification,” said Eric Skeeter, Pillar Property Group.

Yet, this can open up opportunities for potential new investors, who wish to diversify financial portfolio.  Investors have an opportunity to buy properties at low prices and be able to turn them to sustaining income with residual longevity, which are not subjugated to the stock market.

“Investors would be investing into safety and a secure future with property investment,” said Ian Johnson, Pillar Property Group.

Another interesting part of the report deals with those homes no longer delinquent primarily due to loan modifications. They suggest that these should be included in calculations of shadow inventory because most become delinquent again because the loan modification failed to address the core problem of negative equity.

This assessment concluded that liquidation will lead to lower housing prices. The conclusion is based on the simple idea that an increase in supply will lower prices. No doubt there is some basis to this truth. The real estate markets has seen some pricing strength recently due to efforts to slow foreclosure, which have clearly constrained supply while at the same time demand has been stimulated with low interest rates and tax credits.

The simple conclusion that supply and demand theory of housing prices fails to adequately consider the fact that housing is highly leveraged, and that price is primarily a function of income and loan terms, and only secondary to supply and demand. This simplistic explanation by such reports has led consumers to believe that foreclosures cause price declines, when in fact it is exactly the opposite. The truth is price declines causes foreclosures.

Foreclosures and housing supply grew rapidly during the price correction, but those who think the correction was due to either these foreclosures or the growing supply are mistake. Instead, it was a correction back to reasonable prices, that buyers could afford based on their incomes and the more traditional loans products that have remained available.

The reality for investors is that people will spend a portion of their income on housing and this will never change. Investors are always looking for a return on their investment. So, the point is that buying homes as an investment makes sense.

For more information on investment opportunities and mortgage financing, please contact Pillar Property Group and Precision Funding.