Shadow Inventory Rises 54 Percent

Written by: Steve Cook   Fri, December 18, 2009 Beyond Today’s News, Foreclosure Situation, Market Trends

The number of foreclosed and repossessed homes owned by lenders but not yet on the market is up 54 percent in the third quarter over a year ago.  The 1.7 million homes currently in the “shadow inventory” significantly increases calculations of the inventory of homes for sale, according to a new report from First American CoreLogic.

The current total unsold inventory (which combines the visible and “shadow” supply) was 5.5 million units in September, down from 5.7 million a year ago. The total months’ supply was 11.1 months, down from 12.7 million a year ago.  However, including the shadow inventory increases total inventory 42 percent above the widely used 7.8 months estimate.

Shadow  inventory estimates real estate owned (REO) by banks and mortgage companies as a result of foreclosures and other actions, such as deeds in lieu, as well as real estate that is at least 90 days delinquent.

Record numbers of foreclosures and repossessions have swamped lenders’ ability to process properties for sale in many markets, delaying their entry into the market.  In some markets, especially those with extraordinary numbers of foreclosures, lenders have been accused of sitting on REO properties in order to get better prices when local inventories fall and values stabilize. 

“This indicates that while the visible months’ supply has decreased and is beginning to approach more normal levels, adding in the pending supply reveals there is still quite a bit of inventory that will impact the housing market for the next few years, especially in the context of the current increase in home sales, which is in part due to artificially low interest rates and the homebuyer tax credit,” the report concluded.

2 Comments For This Post

  1. Ditech Home Loans Says:

    Home values may fluctuate depending on how long the banks are able to hold REO inventory. Regardless of the size of shadow inventory, banks should be able to control the number of homes released for sale, which protects the value of their asset portfolio.

  2. Steve Cook Says:

    Hypothetically, there’s no doubt that a bank that is dominant in a local market can influence prices by gaming its REO inventory if it chose to do so. But it’s kinda like drawing to an inside straight in poker. No bank dominates a market completely. What if the competition doesn’t cooperate? And other factors beside foreclosure inventories impact prices: organic inventory, interest rates, local economic conditions, etc. Who’s to say when prices will rise, if they rise at all? I suspect that the current long lead times for pre-foreclosures (”shadow inventory”) are due more to the lack of staff to process them, delays resultig from Federal and lender modification programs, and mangement’s desire to keep foreclosures off their books as long as possible.

    Thanks for your comment.

1 Trackbacks For This Post

  1. 2010 Will Start With Strong Home Sales. But What Happens After The Home Buyer Tax Credits Expire? – CBS Says:

    […] high levels, another 4 million foreclosures expected to come on line in 2010, and the shadow inventory of foreclosed homes owned by lenders but not yet on the market rising significantly, it’s hard to imagine that we’ll be at 2005 as quickly as Wall Street would […]

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