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Shadow Inventory Larger Than Reported

by Joe Manausa, MBA on January 18, 2011 · 19 comments


One of the new buzz words to have sprung from the collapse of the housing market is “shadow inventory,” and when most industry “experts” report the numbers, they are referring to distressed properties that have yet to hit the market. Primarily, these are REO properties (homes that have changed ownership from individuals to lenders) and pre-foreclosures (homes that are in the process of being foreclosed upon and are 90 days late or more).

The reason the term “shadow inventory” was coined is because these homes are not out in the open, rather they are hidden from the market by owners who have ulterior motives that prohibit them from being listed. These motives are not sinister, they are just self serving.

Lenders do not want to flood the market with distressed properties and exert even greater pricing pressure than the glutted market is already experiencing. Some homeowners who are in pre-foreclosure are living in their homes and not paying on their mortgages. Why would they want to sell? These will soon become foreclosed properties, and many will remain in the shadows.

But there is another group that is not reported in the “shadow inventory count.” And from my measurements in Tallahassee (perhaps only anecdotal evidence, but I suspect it holds true in most markets), we have homeowners who tried to sell their homes in the recent past, but failed to sell. The following graph shows that in the past 365 days, roughly 60% of homes listed for sale in the Tallahassee MLS failed to sell, and many have not yet returned to the market.

Why Your Home Is Not Sold Image

By my measurements, this subset of the shadow inventory is more than a year’s supply and is not being reported when reports discuss the glut of homes that need to be cleared before we see a true housing market recovery. Look to to a  longer than projected recovery period, with continued “surprises” as more and more homes languish on the market.

Photo: francois

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{ 19 comments… read them below or add one }

Kevin Kaczmarek January 18, 2011 at 8:20 am

Joe, I think “Shadow Inventory” is going to best describe 2011 in the real estate market space. Too much data, across too many sources is pointing out the fact that there is more inventory than buyers in all markets.


Joe Manausa, MBA January 18, 2011 at 8:21 am

That’s funny you should say it that way Kevin. I just wrote a newsletter saying 2011 is the year of the foreclosure … which is much the same thing. Thanks for commenting Kevin.


Brian January 18, 2011 at 8:26 am

I can only imagine how much inventory the banks are holding on to but not yet releasing. On top of that, people are still having a hard time making their payments so I can only imagine that more properties are on their way to market.


MH January 18, 2011 at 10:14 am

Wow. Why isn’t shadow inventory data easier to find? Obviously it can’t be included in regular inventory, but trying to keep it quiet that we have a whole extra year of recovery time ahead of us isn’t doing anyone in the industry a favor, right?


Jeff Brown January 18, 2011 at 10:33 am

Welcome Joe — Been sayin’ this for some time now, but in my neck of the woods, folks are still clinging to the ‘San Diego’s different, it always goes up’ mantra. We may be nearing bottom, but IMHO we’re not there yet. Your take isn’t a popular one, but it’s what many of us have concluded.


Joe Manausa, MBA January 18, 2011 at 10:43 am

Thanks Jeff, it’s a heck of an assembled group.


Joe Manausa, MBA January 18, 2011 at 11:10 am

MH, by definition ‘shadow inventory’ is all the homes that need to be sold but which are not yet on the market. It takes a whole lot of data crunching and knowledge of which rocks to look under to find them all.


Joe Manausa, MBA January 18, 2011 at 11:16 am

Brian, we are actually able to extrapolate that kind of information fairly accurately. In Tallahassee, I count the lis pendens filed (new foreclosures) and the foreclosure sales (change of ownership) and track the delta. Over time, we see how many short sales and pre-foreclosure sales occur, as well as the unfiled 90 day late notices. A lot to gather, but it gives us a good idea of what is out there.


Sandra Watkins January 18, 2011 at 10:04 pm

I am in Cherokee County GA and all you have to do is drive certain neighborhoods to see homes sitting all over the place that the banks have but look like they have not been maintained in two or more years. They are everywhere. the banks are overwhelmed I know but there has to be a better way then just letting the homes sit there and deteriorate.


Anonymous January 19, 2011 at 12:52 am

The invisibility of this “shadow inventory” does not have a good effect on the market. The improvement will be slow because of these potential homes hidden.


Joe Manausa, MBA January 23, 2011 at 9:50 pm

Thank you Kaiholo, I don’t think there is a dircct link between the failures and foreclosures yet. Most of the 6 come back on the market relatively soon after failing, with the discretionary sellers just falling back and waiting.


Kaiholo Hale January 21, 2011 at 1:47 am

Welcome to BP, Joe. Of those ‘6 out of 10′, how many do you think will come on the market as REO’s?


Ryan Hinricher January 23, 2011 at 3:53 pm

Joe, welcome to the BP blog team!

This year we should absorb a good amount of inventory and make some headway on this shadow. I’m optimistic that 12 months from now the overhang won’t be nearly as high and 12 months after that homes will be shorter supply (nationally). Builders aren’t building, population is growing, household formation is starting again. Actual inventories are shrinking (a few months ago 11mo supply to 8.5mo now!), which is good for the market.

I’m curious when do you see price stabilization in your market or a shrinking of actual inventory?


Joe Manausa, MBA January 23, 2011 at 9:51 pm

Thanks Ryan. Actually, I keep a monthly update on my market reports site of the current supply and demand so that I will see it coming. In Tallahassee, I feel like we have anywhere from 2 to 5 years worth of shadow inventory (2 if the normal rate of sales returns, 5 if we stay at current pace).


Matt Mathews January 24, 2011 at 11:21 am

Part of that Shadow Inventory that isn’t and hasn’t been accounted for falls into 2 areas:
1. Judicial mortgage states with pending/future lawsuits.
2. Strategic Defaults- 2007-2008, – .3%
2009-2010 – 32%
Add it all up and you will get an additional 5+ million homes, currently that are not even in the pipeline or accounted for. (With more to come)!! To add insult to injury, the extend and pretend coming out of Washington along with the major lenders, have kept Housing market prices, artificially high in most parts of the country. Another 20% to the downside is called for in order to find a historical trend line bottom. When you see unemployment moving back into the 5-6% range, then and only then will you see a a stable market. That puts us out to 2013-2014. before we, as Investors can count on any lasting long term, equity appreciation on our properties. Over the next few years-Deflation should be your concern-not thinking Inflation! Sorry to rattle on, but your great article Jeff, got me going. Welcome aboard!!


Steve Young February 2, 2011 at 8:29 am

Just curious, after reading several places and on several search engines, and having read each of your articles on this blog, Is it, or is it not prudent to still buy real estate? My position is, if you’re a real estate investor, and have the ability to buy, then prudently, purchase your real estate. If you have an opportunity to buy properties in a good neighborhood, with a good purchase price-to-profit margin possible, and you’re willing to control that property (or those properties), Isn’t that the way to go. By the way, Are you guys hearing if certain hedgefunds are still buying large quantities of REO’s? Do you know if they are residential, commercial, mostly residential, mostly commercial, or a mixture of the two?


Ryan Hinricher February 2, 2011 at 6:03 pm

Steve, good questions.

First regarding funds, they are buying still. In fact they are buying more now. Capital flows from foreign funds are expected to double this year in RESIDENTIAL. Commercial hasn’t crashed as bad as everyone said it would. The funds are buying across the board but aren’t limited to hedge funds. Private equity and REITs are rocking right now by finding bargains that produce strong yields.

Whether to buy or not to buy?
There are a lot of personal factors involved, certainly. I’ve done a lot of property trading over the last 2 years and depending on the market it could be an excellent time to buy or a bad time. I’m yield-focused primarily and am seeing many opportunities in markets I’m working in.


Brandon Becker March 9, 2011 at 2:36 pm

Hi Joe,
I live in San Diego, and am currently looking to make an offer on a short sale. I would hate to do so if more Shadow inventory is launched into the market and deflates home values. Is there a reporting agency that tracks the San Diego Shadow Inventory that I can contact, or is there a historical trend and timing within the year, that the banks release shadow inventory?

Brandon Becker


Joe Manausa, MBA March 9, 2011 at 7:36 pm

I doubt it Brandon. You’ll have to scour local blogs to find one perhaps…

However, I don’t think it will matter for you. If you’re getting a good deal, and IF you are financing the home, the “cost”of money over time is often times much higher than the cost of the house over time. Rates are at historical lows and if you plan on owning this house a while, I think you are fine.

Think about this. Let’s just say that the interest you’ll pay on the house, if rates go up 2% (that would only be in the mid 6’s, would represent an increase in interest payments of 40%! Even if you stay in the house for 10 years, the house would need to depreciate more than 15% (from where you buy it, not where the rest of the market is).

I say take the money and run if you are financing, if you are paying cash, make sure you have a great deal.


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