What Will Shadow Inventory and Foreclosures Do To Our Real Estate Recovery?

What are foreclosures and shadow inventory, and why should you care if you are thinking of buying or selling a home this year?

We are constantly hearing news of the end of the real estate tragic novel and the beginning of the comeback kid story. Although no one has a crystal ball as to what will happen in the future, one thing is for certain: foreclosures are looming overhead and can make the recovery slower than it would be. It's unfortunate how each foreclosure and short sale has such a sad story to tell. I can just feel it sometimes when I walk through the homes, like this foreclosure that just came on the market for sale.

It would be ideal if banks would actually execute programs allowing homeowners to stay in their homes, if warranted, or allow short sales to actually go through smoothly and be sold. Since this isn't going to happen anytime soon we have to be aware that those foreclosures gates -- locked by the late 2010 "robo-signing" scandal that uncovered loan-servicing companies were having workers sign mortgage documents without diligent review -- are beginning to open just as the Spring market gets underway.  

According to RealtyTrac here's how a foreclosure is defined:

Foreclosure is a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (repossession) of the property securing the loan. The foreclosure process begins when a borrower/owner defaults on loan payments (usually mortgage payments) and the lender files a public default notice, called a Notice of Default or Lis Pendens.
The foreclosure process can end one of four ways:
  1. The borrower/owner reinstates the loan by paying off the default amount during a grace period determined by state law. This grace period is also known as pre-foreclosure.
  2. The borrower/owner sells the property to a third party during the pre-foreclosure period. The sale allows the borrower/owner to pay off the loan and avoid having a foreclosure on his or her credit history.
  3. A third party buys the property at a public auction at the end of the pre-foreclosure period.
  4. The lender takes ownership of the property, usually with the intent to re-sell it on the open market. The lender can take ownership either through an agreement with the borrower/owner during pre-foreclosure, via a short sale foreclosure or by buying back the property at the public auction. Properties repossessed by the lender are also known as bank-owned or REO properties (Real Estate Owned by the lender).

Potential Foreclosures In This Northern New Jersey Area

The March 6 Wall Street Journal article, Are More New Foreclosures a Good Thing? noted foreclosures starts increased 28% in January just as the foreclosures sales (the homes being sold to a new homeowner) also went up to 29% in January. In this big national picture, there appears to be a good ebb and flow but it depends on what amount of shadow inventory will be released in your town to determine the potential effects on pricing as the year progresses.

As stated in the WSJ article, most of the increase in starts came from judicial states like Florida, New Jersey and New York, where foreclosures must be approved by courts and where twice the increase in foreclosure starts occurred than in states with a non-judicial foreclosure process, like California, Arizona and Nevada. It's been reported New Jersey has 65 months of shadow inventory supply in the wings with 6.4% of foreclosures in process.  

Here are foreclosure and short sale numbers in some Northern New Jersey area towns:

TOWN Pre-Foreclosures Foreclosures/Bank-Owned Short Sales Glen Ridge




Millburn/Short Hills












South Orange




West Orange




*Pre-foreclosure and foreclosure numbers were pulled from RealtyTrac last week, while the short sale numbers were pulled from the Garden State Multiple Listing Service(GSMLS) on March 7. GSMLS also lists foreclosures.

According to RealtyTrac, when a property enters pre-foreclosure, the owner usually has at least 2-3 months to reinstate the property by paying off the amount in default. If the owner pays off the debt, the reinstatement stops the foreclosure process.  

Buyers Be Prepared: Don't Think You Always Get the Best Deal with Foreclosures

Many homebuyers feel if they want a great deal/discount on a home, they should only look at foreclosures. Be careful. With a bank/company you are dealing with no emotional connection with the home and the responsibility is usually all on you.

The bank/company normally wants to complete a sale of a foreclosure in 30-45 days of accepting a contract, won't accept a home sale contingency and will require the buyer to take the home "as is", uninsured underground oil tank and all. The buyer will need to do his due diligence to make sure this is a worthwhile purchase in light of the work the property will require. This is where the negotiation comes in and a good REALTOR®.

It's not wise, though, to think you will get a great discount on a home just because it is a foreclosure; you can, but don't think it's a given. The bank/company will still try to get as close to the market value of the home in balance with its expenses.

Homeowners who are putting their home on the market for sale this year will find buyers comparing their home to foreclosures. Some home buyers will attempt to determine price based on the value they place on your home being headache-free of concerns that a foreclosure will have and how much your home is in move-in condition. Prepare your home for sale with this in mind.

While we know shadow inventory and foreclosures will impact the real estate market by increasing the number of homes on the market and comparable sale prices, all signs point to this being an active Spring and Summer Real Estate market. Whether you are a buyer or a seller there are signs showing ways you can take advantage of the market.

Work with us and we'll show you how.  

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

Joanne Smythe March 11, 2012 at 08:59 AM
The absurd property taxes of course.
Joanne Smythe March 11, 2012 at 09:08 AM
http://www.nytimes.com/2010/06/27/realestate/27njzo.html Property Taxes Inhibit Sales in West Orange “The taxes are breathtaking,” said Scott Hazen Mueller, who with his wife, Marty Mueller, recently bought a three-bedroom ranch in the Rock Spring neighborhood as a short sale from a bank for $280,000, taking on an annual tax bill of $13,000. In the same West Orange neighborhood, Adam and Ruth Kraemer own a four-bedroom house they bought six years ago, newly built, for $699,000. It is worth perhaps $500,000 now, Mr. Kraemer said. They paid $25,972 in taxes this year. Taking into account the newly adopted town budget, they expect to pay $27,300 next year. Ms. Meaux, who works with her husband, Bob, described one of their current listings, a three-bedroom Cape Cod at 13 Beech Road, whose sellers bought it in 1952. “When we looked into it,” she said, “we discovered that their tax bill was $14,800 on a house valued at about $300,000 — crazy, right?”
Beverly Meaux March 12, 2012 at 03:25 PM
M Okeef, no, short sales are listed separately. The old NY Times article referenced above was slanted because the goal of the reporter was to exploit the tax concern everyone has and the reporter left out 99% of what we had to discuss. I wrote about this when this article first came out in 2010. In the case of the home where I am quoted, the taxes were so high because it was an elderly owner who never tracked her taxes or ever thought of appealing them. When it became an estate sale and we were contacted, we immediately completed the paperwork for them to submit a tax appeal. The appeal resulted in the taxes being lowered to just under $10,000 at the time. I don't want to debate the taxes but Bob and I have spoken to homeowners in West Orange, Montclair, Maplewood, Glen Ridge and South Orange, and each have said taxes were a big issue. The feeling is not specific to West Orange. I can also say one of our buyers who just went under contract on a home chose West Orange over the other towns because of the amount of house and land they were able to get and the central locality. And, this particular buyer works in Montclair.
Beverly Meaux March 12, 2012 at 03:25 PM
Taxes are a given in New Jersey and in Essex County. People still look to buy here, though, because the towns have a lot to offer, provide many commuting conveniences, the amount of what they get in a home is good or higher than other towns -- at least that is what 2 new buyers who are looking specifically in West Orange told me this weekend. But regardless if it's West Orange, Montclair or Maplewood, for example, buyers are still choosing these towns because they do offer a lot. It's hard for homeowners to see this sometimes when the tax bill comes in, but it is true.
Cynthia Cumming March 14, 2012 at 07:31 PM
Beverly, glad that you updated readers on the real scoop of that article from 2010. I appreciate your efforts and successes with the real estate market.


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