Shadow Inventory Larger Than Reported
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).
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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.
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.