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Nationwide ‘Shadow Inventory’ Dwindling. Why?

by Harrison Stowe on January 28, 2013 · 6 comments


Statistics compiled at the close of last year demonstrate that the fabled ‘shadow inventory’ of unsold houses had fallen 12.3% year-over-year as of October 2012. This will come as a relief to housing market speculators, as the substantial volume of houses languishing in a pre-sale state had become a persistent bugbear among property investors. According to new reporting from Time Business, the shadow inventory is standing at a recent low point of only 2.3 million houses nationwide as of Q4 2012. That being said, what exactly is causing the shadow inventory to diminish?

Why The Shadow Inventory is Shrinking

It seems that the shadow inventory has begun to dwindle in large part due to organic market factors. While there’s been much discussion as to whether or not direct market intervention from the Federal Reserve is actively stoking market health, the volume of houses being withheld from market sale is decreasing due to the initiative of more aggressive property investors. As the Time report details, housing prices fell to exceptional lows by the opening of 2012. Taking survey of the nationwide trough in asking prices for residential property, it seems that a full range of potentially interested buyers began purchasing swaths of otherwise neglected real estate.

Both major investing bodies, as well as individual prospectors, ended up seizing the chance and closing on property listed at severely dimished prices. As analytics firm CoreLogic disclosed to Time, this wave of new purchases surprised market analysts and far outstripped projections for new purchases last year. CoreLogic Deputy Chief Economist Sam Khater managed to provide further insight as to why this upswing in property purchases didn’t upset the market, noting the buying up of ‘shadow inventory’ stock was so rapid and unforeseen that it managed to sidestep the possibility of depressing home prices.

A lucky crossroads, to be sure, and news that has arrived fast on the heels of other reporting that suggests American property is being scouted by investing bodies and major wealth funds as a consistent source of asset growth. Despite the rut our housing market has sunk into, American property is clearly making a turnaround in terms of both buyer interest as well as potential for value increase. As a sort of national comparison, America’s property market has become outstandingly healthy compared to those of other western economies.

What This Means For You

So, taking all this into consideration, what will this mean for investors and prospective homebuyers in 2013? Judging by current market trends, the decrease in the national shadow inventory may further propel value increases for American real estate. Granting that we’re still looking at seriously diminished values compared to pre-2008 listings, the constriction of available property will run the supply-demand equation in favor of higher asking prices. However, this increase in property values (assuming it continues) will likely occur slowly, leaving room for discerning investors to purchase homes with a long view for their value appreciation.

It will nevertheless be interesting to see how the housing market fares throughout the next four quarters. It’s being held as market truth that signs point towards a housing sector recovery, but indicators of long-term stabilization remain more tenuous than those that point to short-term value increase. Naturally, the recent housing market turnaround is showing distinct regional favoritism. While the rate of loan default and nationwide volume of underwater mortgages is decreasing steadily, homeowners with underwater mortgages are still being forced to delay selling their property. If prices do rise, it may lead to a large portion of mortgages submerging, allowing them to re-enter the selling field and potentially deflating the median asking price. In the short-term, market outlet could well hinge on the behavior of individual homeowners.

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{ 5 comments… read them below or add one }

Jeff Brown January 28, 2013 at 3:26 pm

Hey Harrison — Does this real estate ‘recovery’ continue, even expand without significant improvement in overall employment? Thanks


Harrison Stowe January 28, 2013 at 3:56 pm

Interesting question, and I’d say we won’t see exceptional progress if there isn’t matching recovery in the employment rate. There’s the possibility of a ceiling effect if the job market doesn’t keep pace.


Dave B. January 28, 2013 at 3:40 pm

This is a very serious account of what can happen in the next four quarters depending on how housing market goes. Thanks for the great information here!


Harrison Stowe January 29, 2013 at 9:19 am

Thanks Dave! Glad you found it informative.


Mohammad Elqanni February 18, 2013 at 6:57 pm

Two part question:

Isn’t part if the diminishing shadow inventory directly tied to banks converting REO’s to rental properties?

Value climbing will help homeowners who are underwater get out from under their homes. New homebuyers will struggle to find an affordable home when they go up against the cash buyers (mainly investors) how will that shape the next two years in Real Estate?


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