I’ve written quite a bit about the negative impact of shadow inventory on inventory levels and housing values. There may however, be a closing window created by the issue of shadow inventory if you are considering purchasing a retirement home in the near future.
We have seen a dramatic drop off of completed foreclosures in recent months as banks clean up the problems in their paperwork. This numbers do not indicated that we are out of the woods, but rather that we are in the eye of the storm. As paperwork issues are resolved, the banks will resume foreclosure proceedings and continue to work through the backlog of delinquent mortgages. In fact, as the next slide indicates, there is an increase in the number of overall foreclosures that are in process. How this affects the amount of inventory in each state will depend on the number of delinquencies in that state, the number of buyers available to purchase the inventory, as well as the efficiency of banks to work through the foreclosure process within the confines of individual state laws.
In Illinois, approximately 32% of all homes that are sold are distressed properties. However, there are other states where the distressed properties make up even larger percentages of the real estate market. In the chart below, these states are depicted in red and include such states as California, Nevada, Arizona, and Florida.
Interestingly, studies have shown that these are the exact states that many people from the Chicagoland area choose to retire. So how does this affect retirement plans? In the short-term, these distressed sales are depressing these real estate markets making housing values very affordable. But the next chart shows that this will not always be the case. This chart illustrates the number of months of distressed property inventory for each state. Notice that with the exception of Florida, these same states are showing less than a year of distressed property inventory because they are working through their inventory faster and more efficiently than states such as Illinois. When their shadow inventory is depleted, their real estate markets will be poised for appreciation.
To illustrate my point, suppose I plan to purchase a retirement home in Arizona however, I decide to wait until the real estate market improves in Illinois so I can have more equity in my home before I sell. Based on the distressed inventory levels, it may take up to 2 years (25 months) before my local market completely turns around. In the meantime, the Arizona market depletes its distressed inventory in the first 9 months of my 25 month wait, and then begins appreciating. So while I am sitting on an asset that may depreciating in Illinois, I am waiting to buy an asset that is appreciating in Arizona. It may make more sense to sell my depreciating asset and invest in an asset that is posed to appreciate sooner.
However, if I plan to purchase a retirement home in Florida, I may have the luxury of time since Illinois’ distressed property inventory is estimated to be depleted at a faster rate than Florida’s. All real estate markets are local. It may be worthwhile to have a discussion with a REALTOR® in both markets; the market in which you plan to buy AND the market in which you plan to sell.
Please call me with your real estate questions at (630)301-1986!
