The Lowdown on Shadow Inventory

Ulster County ForeclosuresThe property market has been a hot discussion topic for quite some time now but there is no more pressing issue than that of shadow inventory, the element of the market that seems to be lurking the shadows with the potential to set the growth of the market back to an unbelievably negative degree as recovery begins.

This debate has been started by a Standard & Poor recent report, which advocated that the absorption of the shadow inventory in existence at the moment will take up to three years.  Defined as “outstanding properties that are (or were recently) 90 days or more delinquent, in foreclosure, or real estate owned (REO), but haven’t yet hit the market inventory”, this category is therefore worth in excess of $480 billion. As these properties are set to hit the market in the very near future, it is looking bleak as a result of the low prices that they will be sold at. Supply will heavily exceed demand and this may drive house prices down further.

However, there are a few issues with the assumptions made about the shadow inventory. For example, nobody actually knows how large it is because estimates stand at anywhere between two and eight million. As such, there is no way of knowing how many homes will flood onto the market in the near future. Furthermore, the problem is not exactly uniform in its coverage across the nation. Instead, the average shadow inventory is 34 months but some areas have lower or higher inventories. Phoenix, for example, is the lowest with 16 months worth and New York is the highest with 103 months worth according to Standard & Poor’s report. However, despite these discrepancies, it appears that the shadow inventory is shrinking according to the National Association of Realtors with the national total down by 3.4% in May.

The shadow inventory is certainly a problem at this moment in time because an influx of foreclosed properties into the market will definitely cause prices to plummet. However, this largely depends on the scale of the rush. Properties dripping onto the market may not cause as many problems as millions hitting the market at once. It is suggested that lenders may well seek to hold properties to enable them to get the best possible price. This trend is evident in the commercial market at the moment, where properties have not hit the market all at once thanks to realtors holding properties in shadow inventory.

Although residential shadow inventory does differ significantly from the commercial market, it should be noted that there are several categories within the market. For example, many distressed properties are low end and will not bring the higher end of the market down as well. As a result, it is fair to say that there are so many factors that could affect the market in relation to shadow inventory that it is not possible to draw solid conclusions at the present time.

Standard & Poor did issue a warning about the national shadow inventory numbers though. Careful action could undoubtedly offset the impact of the shadow inventory as it hits the market. Low interest rates and tax breaks could sustain demand and prevent disaster hitting the market at the worst possible time.

Dylan Taft is an experienced Hudson Valley real estate professional working in home sales and purchases. Visit Dylan’s professionally optimized website for more information on property taxes, and details on the Ulster County Foreclosures.

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July 14, 2010

The market now is moribund. Pending home sale is at all time lows and now the demands for mortgage are scraping 13 year lows, did I read in an economy report, maybe the property market just need to take a deep breath! The normal people don’t know if the prices are going more down or rise, so the just wait and see.

Here in Austin, TX the real estate market has managed to stay pretty flat through the roller coaster other areas have been going through. I guess we’ve been lucky. Great post though and thanks for the information.

July 20, 2010

Great article Lou! We in Atlanta are looking at a 90% absorption rate on listings and the shadow inventory is not going to make things any better. Short sales and foreclosures have pushed home prices dow so far, the only way to sell is to short sale your own home or just let it go. It seems we are falling deeper into a housing crisis, not pulling out of it like some industry people think.

Hi Jen. Owner Financing is also an option if the seller doesn’t want to “let it go” or sell with a short sale. You can see more info about owner financing and how wraps work here: http://tinyurl.com/396y5us

July 21, 2010

With the amount of shadow inventory items being in the low end of the market price wise, do you see a sort of cap opening between that and the high end property listings at all?

Informative article. Real Estate is having a big part on the business world, on real estate, selling is not as easy as eating peanuts, you need to have the guts, proper marketing and being honest on what you are selling but definitely real estate is really a great investment because it gives a lot of opportunity.Brainard Ridge Realty is a full-service real estate brokerage and development company, specializing in Timberframe and Custom Log Homes.

July 22, 2010

Great article, Lou. Most of the experts who are calling for a rebound of the real estate market are not taking into account the huge shadow inventory or the enormous unemployment rates.

Future forecasting can be tough, unless its Austin. Personally the shadow is scary since the full dollar amount is unknown.

An excellent and informative article, Lou. While the possibility of a huge overhang of shadow inventory coming onto the market does exist, the banks continue to be so incompetent at the business of real estate that the possibility of that inventory flooding the market seems remote at best. Case in point: many owners are reportedly now able to stay in their homes up to 18 months before receiving a foreclosure notice.

Great post. There is always the Owner Finance option.

July 30, 2010

With the bad loans continuing to filter through, I don’t see how anyone can feel confident in making a prediction. I’m also still fielding a ton of calls from sellers who are in a short sale situation and every one of those calls creates more uncertainty in my mind about what the future holds.

Our San Diego real estate market is really three difference markets. At the entry level, it is clearly a seller’s market and we could take on a ton of foreclosures or shadow inventory and basically not even notice it. The mid-level market is stable, so we wouldn’t want to upset that apple cart, and the high-end, well, it’s just plain ugly. A lot of the problem is the ability to get financing.

August 8, 2010

Great article, Lou. Most of the experts who are calling for a rebound of the real estate market are not taking into account the huge shadow inventory or the enormous unemployment rates

@San Diego Real Estate Agent Funny, we have a tri-tiered market in Madison Wisconsin as well. Maybe that is the new market, a split market with wildly differing characteristics. It sure would explain why we are seeing some sellers dig in their heels over a pittance while other sellers are seemingly throwing the baby out with the bathwater!

@Madison WI — you’ve sparked the geek in me. It would be worth checking out how many multi-tiered markets are out there. Based on the lending standards, I am guessing that you are right. It might just be “the new market”

The shadow market is well-represented here in Tampa. We have several neighborhoods in our suburbs that were bought in a lottery-fashion by so-called investors who have mostly walked away. What has occurred is that the shadow market has claimed nearly entire neighborhoods of modern homes that look like they are on the surface of the moon. Truly a sad sight. People here would love to buy them but getting financing is next to impossible so most of them turn to me to rent them a home as they wait out the lending crisis and shadow market.

August 15, 2010

It is just so sad that it has to come this way. Foreclosure and everything. With the dwindling economy, I hope the real estate market will bounce back from its glory days.

October 22, 2010

It’ll be interesting to see what happens with the shadow inventory now that the major banks are resuming foreclosure proceedings since the robo-signing fiasco.

November 27, 2010

Associated Press reports:
“The Realtors group said that the moratorium that many big lenders imposed on foreclosures may have dampened sales in October by introducing more uncertainty in the sales market. But they said a bigger problem is the tight lending standards that banks have put in place in the wake of record foreclosures.
“The dial has been tightened way too much” on lending standards, said Lawrence Yun, chief economist of the Realtors.”
Sales always pick up in January and February, although the weather can cool things down, as we saw early this year.
The challenge we’ll face early next year is that inventory will be higher than it was at the beginning of 2010. So, unless sales really take off, sales chances (and prices) aren’t likely to rise much.

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