The Inventory Lurking in the Shadows
photo credit: cdsessums
If you’ve been following real estate news, you have heard of the term Shadow Inventory. Shadow inventory is the inventory of homes that will probably be for sale in the near future. Homes that have been built and have not been listed by the builder yet, or homes in foreclosure which have not been listed are both examples of shadow inventory.
Sounds harmless, right? So why is there concern over this inventory lurking in the shadows?
In particular, we are concerned with bank owned properties, or foreclosed homes, coming to market in the near future. Here is why this type of shadow inventory causes concern.
Although at first glance, it looks as though bank owned properties coming to market have significantly dropped in the last quarter of 2010, hitting their peak in September. However, because the banks were rushing to push these properties through to market they got sloppy in their paper work and the process was halted for examination by the government late last year. Banks were forced to slow down, get their paperwork in order, and less foreclosed homes came to market. This gives the false appearance that the number of bank owned properties was dropping, when in reality, it was just the process of them coming to the market that was slowed.
Whenever foreclosed properties hit the market, they put a downward pressure on the prices of the other homes around it. These homes are priced to sell, often times at a substantial discount compared to comparable properties in the same neighborhoods. This is great news if you are a buyer looking for an instant equity boost, but less positive for those looking to sell or gain value in their homes.
As stated by David Stiff, chief economist of Firserv:
“Large supplies of foreclosed properties will continue to be the biggest downside risk for home prices and metro area housing markets. Foreclosure activity declined at the end of 2010, but sales activity of bank-owned homes increased.”
When this back-up of shadow inventory is pushed through to market and prices drop, it will force a lot of homeowners into negative equity – meaning they owe more on their home then it is currently worth. Once homeowners have negative equity in their homes, or get close to negative equity there is a higher chance they will walk away from their mortgage and foreclose on their home – forcing more banked owned properties to market.
As you can see, it is a double edged sword.
However, this is all speculation at this point. Our goal as a real estate blog is to keep you on top of industry trends and to do our best to forecast market changes to our consumers. We urge you to stay connected to us as the year progresses.
If there is one thing we know for sure, it is that the future is uncertain. We do know that right now the bank owned inventory is still lurking in the shadows, waiting to be released. For the most part, real estate prices have remained stable in the beginning of 2011 making now a great time to make your move and list your property.
Category: Industry News
