The Lowdown on Shadow Inventory
The 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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