Growing shadow inventory of foreclosed homes driving up prices in Palm Beach County

Article Courtesy of The Palm Beach Post

By Kimberly Miller

Published April 8, 2013

There’s blight at the corner of Happiness Street and Rainbow Avenue in suburban West Palm Beach.

Despite the sunny names in a neighborhood where residents also live on Faith and Pot o’ Gold, two homes sit vacant, burned out, boarded up and part of a growing shadow inventory of foreclosed homes in Florida.

Defined as homes in the foreclosure process or bank repossessed but not listed for sale, the properties are a boon and bane to real estate. They offer the tease of more inventory in a property-starved market, but can also can deteriorate, hurting neighborhoods and threatening to cut sale prices if too many rundown homes go up for sale at once.

Palm Beach County’s shadow inventory increased 78 percent from the first quarter of 2012 to a current measure of 25,702 homes, according to a new report from the Irvine, Calif.-based RealtyTrac.

Statewide, the increase was even higher, leaping 82 percent from 175,707 to 319,147. The hike puts Florida in second place for the biggest shadow inventory increase in the country, behind New York’s 129 percent. New Jersey had the third highest increase in shadow inventory at 49 percent.

The report is the first time RealtyTrac has released its shadow inventory measure, something Realtors have speculated on at the local level throughout the market crash and recovery. The information is gained from a cross reference of the company’s foreclosure data and Multiple Listing Service records.

Daren Blomquist, RealtyTrac vice president, said a restart of foreclosure filings following the National Mortgage Settlement, is part of the reason the shadow inventory has grown. The $25 billion settlement between the nation’s largest banks and its attorneys general penalized lenders for foreclosure wrongdoing and contained guidelines for banks on how to handle foreclosures — rules they were awaiting before resuming foreclosures full force.

But the pileup in the shadow inventory is also a case of banks not wanting to take a hit on distressed properties, said Ken Thomas, a Miami-based banking consultant and economist. Lenders don’t want to reduce a home’s value by 40 percent on their books and pay thousands of dollars to rehab it for sale, he said.

“They basically just get up every morning and pray the market is better that day,” Thomas said. “In the meantime, these homes just sit and accumulate.”

Nationwide, shadow inventory increased 12 percent from the beginning of 2012 to today.

Holly Cook, who lives on Pot o’ Gold Street, three blocks from Happiness Street and Rainbow Avenue, said she’d like to see the homes there go on the market. She’d consider buying at least one as an investment, but for now they are locked up in the shadow inventory, not for sale, and not occupied — at least by legal tenants, she said.

The tannish-colored Rainbow Avenue house, where overgrown weeds catch garbage like a net, was purchased in 2006 for $239,000. Court records show a foreclosure was filed in March 2009 by SunTrust bank with a final judgment issued against the homeowner just more than a year later.

But the case was handled by the Law Offices of David J. Stern, a so-called foreclosure mill that collapsed in early 2011 following accusations it had filed flawed or fraudulent documents with the courts.

The collapse left an estimated 100,000 foreclosures in limbo statewide, and in June 2011, SunTrust dismissed the whole case against the Rainbow Avenue house. It was refiled just last week (March 26).

“I’m pretty sure there are squatters in there because the gate is pushed open and there’s an open door in back,” Cook said. “I’m afraid the banks aren’t going to follow through with foreclosures on homes they think aren’t worth much.”

Palm Beach County isn’t waiting for the bank to take back the home on Happiness. The property, which is little more than a blackened shell after a fire several years ago, is on a list for demolition, said Doug Wise, building official for Palm Beach County. The demolition will be paid for with money from a program that requires banks to pay $150 to register their foreclosures so county officials can better track them.

Bought in 2005 for $245,000, the Happiness Street home went into foreclosure in October 2008. The case was also handled by the Law Offices of David J. Stern. In May of last year, the bank dismissed the foreclosure.

“In this case, demolition is an improvement to the neighborhood,” Wise said. “We’re not in the business of improving private property, but we are in the business of protecting folks.”

Palm Beach County’s inventory of homes for sale was just 5.8 months in February, down 47 percent from the year before.

The dearth of homes, especially those priced under $250,000, has some Realtors eager for a release of shadow inventory.

More than 111,000 homes in South Florida — Palm Beach, Broward and Miami-Dade counties — are counted as shadow Inventory in RealtyTrac’s report.

Realtor Shannon Brink of RE/MAX Prestige Realty in West Palm Beach said there is so much pent-up demand for homes, he’s more concerned about another real estate bubble than worried that the shadow inventory will weaken sale prices.

“If we don’t see more inventory, and buyers outpace sellers, it may increase prices too much in too short of a time period,” Brink said. “We are going from one extreme of too much inventory to too little.”