Shadow Inventory – What Is It and What Does It Mean For Selling Your House?

Posted on April 4, 2011

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“Shadow inventory” – homes that are soon to hit the market (because of foreclosure) or where mortgage payments are 90 days or more delinquent.” Definition from a Christian Science Monitor article.

“Shadow inventory is expected to last 51 months in New Jersey, 32 months in Utah and 38 months in New Mexico.” see here.

“A state-by-state breakdown of “shadow inventory” suggests that while Nevada, Arizona and California have the highest foreclosure rates in the nation, buyers will clear those properties from the market at a faster rate than in most other states.

The analysis, by National Association of Realtors Research Economist Selma Hepp, shows the impact of shadow inventory is likely to linger for much longer in states like New York, New Jersey, Florida, Illinois and Washington, where distressed properties make up a smaller percentage of sales.”. See Inman.com for article.

“It could be a case of hope springs eternal, but may also be a result of less foreclosure inventory on the market and a strong gain in total employment in March.

The reduction in supply is largely due to the legal foreclosure problems the banks are having now for scr#wing the mortgage pooch in the first place, but the shadow inventory is still out there. The clock is ticking. The question is whether the lenders will be able to clear up the legal issues faster than the properties become functionally obsolete due to neglect or vandalism. Total obsolescence occurs when the repair costs and legal costs are greater than what can be recovered in a sale. Bad for the lender and the financial system in the short run, but good for the market in the long run.” Interesting blog at minyanville.com. This blogger has the best and most nuanced look at the effect of the shadow inventory on the overall housing market. It would be worth it to read the entire post. He’s a bit of a wild-eyed blogger, but the analysis is sound.

From what we’ve seen so far, shadow inventory means “mortgages in trouble.” That’s not quite the same thing as “houses ready for sale.” With over 200,000 jobs created last month, increased employment prospects will do more to chip away at the shadow inventory than any government program. Minyan raises a good point about the rising costs to the mortgage companies of foreclosure. And a good thing, too. Now with their conduct coming to light, there will be financial costs to mortgage company sloppiness in foreclosure practices.

Of course, the idea of a large shadow inventory will loom in the minds of real-estate professionals as they try to guess the true market value of a home. It will cause them to underestimate it’s value, and the values in the marketplace overall.

Just remember, “shadow inventory” is speculative. No one knows how many of those distressed mortgages will eventually get to the market. Economic conditions are changing and that will effect the turnover from shadow inventory to actual inventory. And so will those Attorney General lawsuits.

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