"Ghost House" by Muffet

For years now we’ve been hearing housing “experts” talk about the shadow housing inventory.  This is apparently all the distressed housing backlog that has yet to make its way through the system.

Depending on who you talk to, it may or may not include homeowners that are underwater (but current), people who have jobs now but might not later, or people who will decide to default just because everyone else is (the “herd effect”).

These prognosticators of doom have been forecasting this new tsunami of foreclosures to hit our housing market for years now… and are again predicting them this year.  After all, it is 2012 and the whole world is supposed to end, right?

This shadow inventory is definitely the housing market’s version of The Boogieman – “experts” have been using this to scare agents, homeowners, buyers and the general public at large for far too long and I think it is time to turn on the lights and check under the bed.

Yes, there are still several years of foreclosures in our future and they will continue to be an anchor slowing down our housing markets recovery, but the stories of impending disaster have been greatly exaggerated.

Banks Are Stupid

People as a whole are generally intelligent, but when you put them into a huge mess of inter-dependent departments of a bank, co-dependent mortgage insurance companies, investors and the government, you end up with some of the most nonsensical actions (or lack of action) that you could possibly imagine.  I used to be shocked by some of the things I saw – now it has become so common that now that I am surprised by almost nothing.  There is certainly a TV series-worth of material on all the crap that happens with foreclosures… maybe we should call it The Big Bank Theory.

Even if the banks, their insurers and investors, and the government did magically have their act together all at once (plausible if you take a lot of drugs) and could pump these through the backlog of foreclosures far quicker than they have been able to do in the years that they have been doing this, I still am not worried about us in Minnesota. In our state there simply cannot be a surge of new foreclosures for sale anytime in the next year and here’s why:

Pre-Foreclosure Notices Are Down Dramatically

Minnesota requires that lenders provide home owners and a nonprofit agency in the area a notice of pending foreclosure.  These notices are collected and tallied quarterly by the Minnesota Home Ownership Center.  While the law is only a couple years old, Q4 2011 showed the lowest notices on record.  A pre-foreclosure notice typically appears 3-5 months before the sheriff sale of the property.

Sheriff Sales Are Also Down Dramatically

Once a sheriff sale has occurred, the homeowner in most cases can occupy the home for another six months, which is called the redemption period.  After the redemption period is over the bank legally owns the home and takes possession.  It can then take 1-3 months before the bank puts the home on the market as a bank owned home.

What Does This All Mean?

Taking into account that a house will need 10-14 months at a minimum to work through the foreclosure system, if we are not seeing high levels of pre-foreclosure notices now (which we are not) then the 2012 housing apocalypse (at least in Minnesota) is going to come up short.  Given the stories I have heard from other areas about how slow the foreclosures work through the system there too, I’d hazard a guess that the rest of the country is in for much the same.