Understanding “Shadow Inventory,” by Carrie Benuska, San Marino Real Estate

The San Marino Real Estate Report, as seen weekly in the San Marino Tribune

Understanding “Shadow Inventory,” by Carrie Benuska, San Marino Real Estate

My first exposure to the term “Shadow Inventory” came several years ago, while engaged in a conversation with my stock broker.  He had recently relocated his family to a new state and had made the decision to rent rather than buy in the new locale.  Even though his new community was in demand and had great schools, the U.S. economy was in the midst of its downward slide, and he did not feel confident that it was the right time to buy a home.

As any self-respecting Realtor would do, I tried to convince him that buying a home was a long-term investment he would not regret and that his young family needed a home of their own.  I pointed out that no one can determine the true bottom of the market, and that as long as he believed in his community and stayed in the home for an extended period of time, he would recover any losses he incurred.

It was at this point in the discussion that he brought up his concerns with “Shadow Inventory.”  This term refers to the number of real estate properties that are either in foreclosure and have not yet been sold or homes that owners are delaying putting on the market until prices improve.  He claimed that even if home prices appeared to be stabilizing, U.S. housing markets would not begin to truly improve until this “Shadow Inventory” was processed.

Years after this discussion, “Shadow Inventory” is now the subject of countless news headlines.  How many foreclosures are actually lurking out there?  Why are the banks holding on to foreclosed properties and not putting them on the market to be sold?  Why do banks allow owners in default to remain in their properties for extended periods of time free of charge?  These are a few of the nagging questions that are currently being addressed by industry experts.

According to Time Business, “Most housing experts agree: prices won’t rise until all distressed inventory (a.k.a. foreclosures and short sales) is moved through the market. Distressed sales keep prices low because banks want to get rid of such properties as soon as possible, and they’re willing to sell at a loss so long as the homes are out of their hands.”  Multiple distressed sales in a particular neighborhood or within a certain condominium complex will draw down median sales price and affect appraisals on future sales.

The disturbing aspect of “Shadow Inventory” is that no one can accurately quantify it.  The most respected source for “Shadow Inventory” volume data is CoreLogic, a research company which maintains and analyzes a proprietary database of loan information.  Even though CoreLogic’s estimates of “Shadow Inventory” are quoted regularly in news articles, many experts believe that their data underestimates the volume of this difficult issue.

It is easy to imagine why homeowners would try to postpone a short sale or foreclosure on their property as long as possible.  We all hope that things will get better, and no one relishes the idea of losing their family home and damaging their credit score.  What is hard to understand is why the banks are holding on to foreclosures, even when the nation has very limited inventory of available homes for sale.  Also, it is troubling that banks are allowing home owners to remain in their homes for extended periods of time, even when they are not paying their house payments or property taxes.

The Huffington Post recently reported, “Lenders have good reasons to delay. Empty homes require upkeep. Once banks claim a home, they are responsible for the taxes and fines from cities and homeowner’s associations. The loss on the loan goes on to their books.”

“Shadow Inventory” will clearly be apart of the real estate news for some time to come.  It is important that current and future home owners have a handle on what it means and how it impacts our communities.  For detailed information on “Shadow Inventory” in your community, go to http://www.micromarketreport.com.

The San Marino Real Estate Report, as seen weekly in the San Marino Tribune