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Space Aliens, Ghosts and Shadow Inventory

by Marty Boardman on June 28, 2012 · 11 comments

shadow inventory

What is it with this country and our morbid curiosity for the unknown, the mysterious and the enigmatic? We’re fascinated with space aliens, ghosts, zombies, vampires, a lone gunman on the grassy knoll, and Adele. Okay, maybe it’s just me that’s fascinated with Adele. It’s just that I’ve never heard a woman sing like that before.

I guess this also explains why the mainstream media, bloggers and real estate pundits love talking about shadow inventory. It sounds so, I don’t know, shadowy.

This love affair is so insatiable that the definition of shadow inventory is now regularly expanded so the phenomenon can be kept alive. When I first heard the term it was used to describe those houses owned by the bank that weren’t for sale on the multiple listing service. The shadow inventory definition was changed later to include those homes in the foreclosure process. When the number of homes in foreclosure started to dwindle all delinquent mortgages not yet in foreclosure were added to the list. includes homes that owners are delaying putting on the market until prices improve in their definition of shadow inventory.

Where does it end?

Tom Ruff, a Phoenix housing expert with once said, “there are no shadows, we know where all the houses are.” He informed me that as of today there are 17,554 homes in foreclosure in greater-Phoenix. Okay, so that’s one mystery solved. His firm also tracks trustee’s deeds so he knows exactly how many homes in foreclosure end up in the hands of third party investors and banks. Ruff knows when those homes go on the multiple listing service. Another mystery solved.

As for delinquent mortgages not yet in foreclosure, CoreLogic tracks delinquency rates in most major markets so that suspense is gone (in case you’re wondering, 6.86% of homeowners in greater-Phoenix are 90 days or more past due. The national average is 7.07%).

It’s easy to see why some would say that houses owned by the bank but not for sale on the multiple listing service are in the shadows. But the definition should stop there. Not to be a drama killer but only a tiny, miniscule percentage of those homes in the foreclosure process and delinquent mortgages not yet in foreclosure will ever make it to auction. Most will be modified, brought current or paid off long before the foreclosure takes place.

And as for those homes that owners are delaying putting on the market until prices improve? Give me a break. How many of those can there be? And what are the odds that every one of them will put their houses on the market at the exact same time?

Professor Michael Orr with the Arizona State University Real Estate Studies department summed up the shadow inventory debate here in Phoenix best in a recent radio interview:

“It’s a bit like the Y2K problem, everyone was really scared about that, but when [the year 2000] came around, nothing happened.”

Is there a shadow inventory problem in your market? Maybe. But there’s probably an expert in your area that can tell you what Tom Ruff told me about Phoenix.

Find out the truth. Don’t let the shadow inventory paranoia keep you from investing in real estate. That investment property you buy to fix and flip or buy and hold has a better chance of being haunted or invaded by space aliens than it does of dropping in value if and when those mysterious houses finally emerge from the shadows.

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{ 11 comments… read them below or add one }

Karen Rittenhouse June 29, 2012 at 7:28 am

Great post!

Rather than worrying about the boogey man… dealing with reality can be confusing enough!

Here in North Carolina, we have a very low foreclosure rate so “shadow inventory” is pretty much a non-discussion (thank goodness).


Marty Boardman June 29, 2012 at 10:38 am

Karen, that’s another beef I have with the mainstream media, pundits and bloggers – they make it sound like shadow inventory exists everywhere and it’s not true.


Steve Cook June 29, 2012 at 7:52 am


Like you, I wouldn’t advise folks to lay awake at night worrying about shadow inventories, since there’s not much any of us can do about them unless you’re named BofA, Citi, Chase or Wells. I also share your impatience with some of the ridiculous definitions and calculations used to describe the “shadow inventory.”

As I recall, “shadow inventory” was coined several years ago by a marketing guy at RealtyTrac, Rick Sharga. It generated─and continues to generate─terrific headlines. But it is not an exact term based in housing economics.

However, I don’t think it would be wise to ignore the real and potential inventories piling up in local markets of both distressed and non-distressed properties.

Some thoughts:

Approximately 1.4 million homes, or 3.4 percent of all homes with a mortgage, were in the national foreclosure inventory as of May 2012, according to today’s CoreLogic report. That number has been steady since late last year. It doesn’t really matter whether you call these homes a shadow inventory, a closet inventory, a ghostly inventory or a visible inventory, they are somewhere in the foreclosure process and they are very real. The total does not include serious delinquencies or other categories of potential future defaults which are often included in creative shadow inventory estimates. The CoreLogic inventory equals about 150 percent of all the foreclosures completed in the US last year and a quarter of all foreclosures since 2006. Despite today’s shortage of inventory, it will take years for them to be absorbed, especially in the judicial states where they are concentrated.

About 17.5 percent of all homeowners would sell their homes if prices were higher, according to a national survey conducted by a top opinion research firm for Move, Inc. last October. That translates into about 13 million homes. Would they do it all at once when prices rose? Well, more or less. A price increase of 20 percent or less would motivate 55.4 percent of all owners to sell. Even a 5 percent increase in prices today would motivate 11.7 percent of owners to sell their homes.

What will individual investors who are sitting on properties they purchased at bargain prices when prices rise in their markets? I wouldn’t be surprised if investors weren’t more price sensitive than owner-occupants when it comes to profiting from price increases like those currently underway in some markets.

Is this situation analogous to the Y2K situation? Not at all. These inventories are not fictions and their impact on local markets is a simple function of supply and demand. No one expects lenders to sit on them forever; some have already been vacant for years as it is. Some, like Bank of America, already are experimenting with strategies to take REOS off the market in bulk and convert them to rentals. Absolutely no one I know is forecasting a robust, U-shaped price recovery. National average prices are going to look a lot like they look today this time in 2013 and 2014. Foreclosures past, present and future ─whether they are visible or invisible─are a major reason why.



Marty Boardman June 29, 2012 at 10:52 am

Steve, I agree that shadow inventories exist in a lot of markets, just not in mine. Michael Orr and Tom Ruff are both well respected local housing analysts and believe, at least in Phoenix, shadow inventory is fiction. They count every notice of trustee’s sale, trustee’s deed and trustee sale cancellation. They also track who the third party investors are buying at auction and those properties that end up back in the hands of banks.

I agree if prices were higher lots of people would sell. But where are all those sellers going to go once their houses are sold? They have to live somewhere right? Won’t they buy again some place else? It’s seems to me that that theory cancels itself out.


Adam Van Eaton June 29, 2012 at 8:14 am

See the problem here in Florida is we do have REAL shadow inventory that lenders are holding onto. They are holding properties off the market for over a year, a house in South Florida with no A/C for a year means you will have mold no question about it, so in reality they are ruining properties that could be sold now in much better condition. I’ve seen many properties go through this where once it’s put on the market the condition does not match the price that the lenders are asking, you see a lot of REO’s like this where they are asking ARV for a house that needs $50-$100,000 worth of work and they just sit and deteriorate longer.


Marty Boardman June 29, 2012 at 10:54 am

Adam, I’ve never understood why banks do this. But then again, I’m not a banker. I wonder if the banks will have enough sense to unleash this supply on the market slowly.


Brandon Turner June 29, 2012 at 8:19 am

Marty- I like Adele also :)

And good stuff!


Marty Boardman June 29, 2012 at 10:55 am

Brandon, she is very talented. But I still can’t figure out what Rolling in the Deep means. Must be a British thing.


Jeff Brown June 29, 2012 at 10:21 am

I love it. No shadow inventory. The national real estate median price will begin to rise shortly, and resume it’s traditional behavior.


Steve Cook June 29, 2012 at 11:32 am


Yes, some current owners who want to sell but are frozen in place by negative equity or low prices are potential move-up buyers, but a large number, perhaps a third or more today, are boomer retirees who don’t want to own, people without a down payment, adequate credit or LTV or DTI ratio, or just people who want to rent. After all renters are the hottest market in real estate. That works out to maybe 2 or 3 million households that own today who will rfent tomorrow if they could. To put that into context, we only sold 4 million homes nationwide last year. Unfortunately, the days when a home sale automatically led to a purchase are over.

Phoenix may not have unaccounted for defaults, which by the way is unusual, but I’ve seen definitions of shadow inventory that included pending divorces among underwater owners, expired listings, 30 and 60 day delinquencies and pending resets of alternative loans. I totally agree with you that many of these are useless and ridiculous.



Marty Boardman June 29, 2012 at 11:42 am

Steve, I’m definitely not trying to argue with you here, just trying to wrap my head around this whole shadow inventory thing. If there are 2-3 million people that would rather rent than buy then investors will have to buy houses for these people to rent right? There may be some glut at the top of the market if people are trying to downsize but I’d think anything around median price would remain a hot commodity.


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