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An empty mail box at the front door of a foreclosed house in Miami Gardens, Fla. (CARLOS BARRIA/CARLOS BARRIA/REUTERS)
An empty mail box at the front door of a foreclosed house in Miami Gardens, Fla. (CARLOS BARRIA/CARLOS BARRIA/REUTERS)

Shadow inventory threatens U.S. housing recovery Add to ...

Through the depths of the great U.S. housing slump, Miami real estate agent Peter Zalewski has made a tidy living taking newly built condos off the hands of anxious banks and selling them to investors.

Or, as he puts, "bringing into the light" the city's massive "shadow" inventory of homes seized by the banks.

"I've been at the heart of it," acknowledged Mr. Zalewski, president of Condo Vultures LLC.

The good news is that after more than two years, Miami's badly overbuilt market for luxury waterfront condos is finally stabilizing. Prices are firming up and lenders are finding takers more quickly for the properties they seized when the market collapsed.

The bad news is that Florida's foreclosure problem is now migrating inland, from Miami Beach to the sprawling, middle-class suburbs away from the coast, where workers are still losing their jobs. And there are far fewer takers for these properties, creating a new inventory of unwanted homes.

Even as the U.S. Federal Reserve is pointing to "signs of improvement over recent months" in the housing sector, the so-called shadow inventory threatens to launch a new wave of foreclosures and squelch a recovery in the sector before it gains any real traction.

Lingering troubles in the U.S. housing market are evident in the latest foreclosure figures, although, nationally, foreclosure filings fell 8 per cent in November from October - the fourth straight month of declines, according to market researcher RealtyTrac.

At the same time, however, more foreclosures loom as more homeowners get into trouble on their mortgages, often owing the bank in excess of what their properties are worth.

RealtyTrac said default notices, scheduled foreclosure auctions, and bank repossessions rose 18 per cent in November compared with the same month last year.

And there's little evidence the Obama administration's efforts to modify loans and keep Americans in their homes are working. More than 14 per cent of homeowners with a mortgage are either already in foreclosure or falling behind on their payments, and that number is expected to rise in 2010.

Even though new foreclosure filings are subsiding, a large inventory of bank-owned homes could eventually be dumped onto the market, putting renewed downward pressure on prices. RealtyTrac estimates that banks will send foreclosure notices to 3.2 million property owners in the coming year - and at least half of those will wind up owned by banks.

"I don't think we've seen the underlying conditions improve, which suggests that we are seeing another buildup of loans that should be in foreclosure just waiting to hit," Rick Sharga, senior vice-president of RealtyTrac, told Reuters.

RealtyTrac officials don't expect a full recovery in U.S. housing until unemployment, now at 10 per cent nationally, begins to recede to more normal levels.

Florida remains one of the country's most troubled pockets. It ranked second only to Nevada in November, with one in every 165 Florida properties going through foreclosure filing in the month, RealtyTrac said.

Four states - Florida, California, Illinois and Michigan - accounted for 52 per cent of all filings.

A recent report from lender TransUnion predicted that the overall rate of U.S. mortgage delinquencies would fall slightly in 2010, compared with 2009. But it warned that the problem will worsen in at least five states: Florida, Arizona, California, New York and Virginia. And it said Florida would lead the country next year with a mortgage delinquency rate (borrowers at least 60 days late on their loans) of nearly 17 per cent.

Mr. Zalewski, whose company tracks filings in southern Florida and who has brokered many bulk condominium sales, said there were 7,000 foreclosure filings in November in the region's three counties - up 15 per cent from the same period last year. And the region is now on a pace to record nearly 100,000 filings for 2009, up from 75,000 in 2008 and 33,000 in 2007.

At the same time, properties for sale on the Multiple Listing Service are down, suggesting a growing shadow inventory.

Lenders, Mr. Zalewski pointed out, are reluctant to unload too many of these shadow properties at once for fear of depressing prices: "They realize that if they take too much to market too quickly, it's just going to work against them."

Florida isn't only market where prices are still falling.

Outside Charlotte, N.C., in open fields where eager buyers once lined up to buy million-dollar mansions, some builders have simply walked away, leaving their earth-moving equipment idle.

"A lot of builders have inventory that needs to be completed," said Pat Riley, president of Charlotte-base Allen Tate Realty.

Across the United States, analysts say the shadow inventory probably consists of several million homes - pent-up supply that eventually will have to be sold, typically at a substantial discount. These may involve homeowners who are behind on their mortgage payments, but the bank hasn't taken possession yet. Or they may be properties where the owner is continuing to make payments, but whose home is worth less than what is owed.

The number of homes in the shadows may number anywhere from a couple of million to seven million, according to one estimate.

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