What the heck is

If you do a google search for “Shadow Inventory” you will find that it is rumored that there possibly exists a HUGE wave of foreclosures and pre-foreclosures due to hit the “market” in the next couple of years.

Part of the reason is the result of the recently lifted State and Federal foreclosure moratoriums. In a recent article reported by Bloomberg, an estimated 7 million homes are yet to hit the market.

Sept. 23 (Bloomberg) — The crash in U.S. home prices will probably resume because about 7 million properties that are likely to be seized by lenders have yet to hit the market, Amherst Securities Group LP analysts said.

The “huge shadow inventory,” reflecting mortgages already being foreclosed upon or now delinquent and likely to be, compares with 1.27 million in 2005, the analysts led by Laurie Goodman wrote today in a report. Assuming no other homes are on the market, it would take 1.35 years to sell the properties based on the current pace of existing-home sales, they said.

In addition to foreclosures and pre-foreclosures, there are other sources that may contribute to this shadow inventory. In this article posted on Calculated Risk and little thought of source of shadow inventory is homeowners waiting for some sign of market recovery to “cut their losses” while home prices are experiencing a slight upturn and before they dip again.

There are several categories of shadow inventory:

REOs. There are bank owned properties that have not been put on the market yet. Several sources have told me the number is growing – no one knows why except possibly for accounting reasons (the banks might have to take an addition write down when they sell the property).

Foreclosures in process. The delinquency rate has continued to rise, and this will probably lead to many more foreclosures later this year. The number of foreclosures depends somewhat on the success of the modification programs. Last year many delinquent homeowners listed their homes as “short sales” – so those homes were not shadow inventory, however fewer delinquent homeowners are listing their homes now as they try to work with their lenders on a modification. Some percentage of these homes are shadow inventory.

New high rise condos. These properties are not included in the new home inventory report from the Census Bureau, and do not show up anywhere unless they are listed.

Homeowners waiting for a better market. This was the group mentioned in the Reuters story (the article also mentioned foreclosures). These are homeowners waiting for better market conditions to sell.Inventory is usually the best metric to follow for the housing market – and according to recent releases inventory is declining for both new and existing homes – however shadow inventory clouds this picture.

Does this mean that home prices will drop? That’s a great question that nobody can answer right now. In this article by The Atlantic, and I’ve seen this analogy elsewhere as well, It’s uncertain how the banks will treat this apparently inevitable event:

Banks may not want to foreclose on all of these homes immediately. A WSJ source above used the analogy of foreclosures hitting the market like “a fire hose or a garden hose or a drip.” Which do you think would be better for housing prices? The drip. If you have a huge inventory, then it’s more of a buyer’s market, where few buyers can drive down the prices of many homes. If you have the foreclosures spread out over a longer amount of time, new buyers may enter the market over that lengthened period. I have heard the theory (from a Floridian friend of mine who knows the real estate market there) that banks are purposely holding back foreclosures for exactly this reason.

What does this mean to you? Well, just as with the “bottom of the market” – an influx of foreclosure will mean one of two things to you, the aspiring home buyer.

If you are currently approved for financing, looking every weekend, making offers on homes and maybe even trying to take advantage of the homebuyer tax credit before it expires – You’re in the best position to take advantage of this inventory coming out of the shadows and onto the market.

If you are going to sit on the sidelines and wait until it’s announce on the news….you will find yourself in a seriously competitive market where prices are on the rise and many buyers are making offers on the same property as we are experiencing now, in today’s market.

Either way, is there a right answer? No, probably not. I’m no fortune teller, but I do have a few opinions here and there and I do keep my ear alert listening to the opinions and predictions of folks much smarter than myself.

One thing that I do know for sure is that it’s better to be prepared to take advantage of an opportunity, and be one of the first ones in line, than to file in at the rear of the line after everyone else is doing it. That’s my $.02 – Hope this helps!

We will talk about this “Shadow Inventory” in our Homebuyer Education Webinar – An UPDATED Guide to buying Foreclosures and Short Sales.