What Exactly Is Shadow Inventory, “Killer Loop” and the Housing Market’s Groundhog Day Loop.

By mark-slade February 2, 2011

What Exactly Is Shadow Inventory?
Posted: 02 Feb 2011 04:00 AM PST

It is difficult to read an article about real estate today without the term ‘shadow inventory’ being mentioned. But, what exactly is shadow inventory? It refers to the inventory of homes not yet for sale that will eventually come to market in the near future. Most definitions include properties already foreclosed on and owned by the banks (REOs), those houses in the foreclosure process and those homes where the homeowner is seriously delinquent on their mortgage payment (at least 90 days behind).
There are many questions about shadow inventory. Today, we want to address the most common misunderstandings.

I’ve heard about shadow inventory for years. Does it really exist?

Not only does it exist, it is being slowly released onto the market. The National Association of Realtors has reported that over 30% of all home sales over the last few months have been distressed properties.

Why include seriously delinquent homes in this number?

Seriously delinquent  are counted because studies show that 98% of all those who fall 90 days behind never catch up and these properties eventually come to the market as distressed sales (short sales or foreclosures).

Do banks have a backlog of properties that they currently own?

Yes. In an article in Housing Wire, RealtyTrac Senior Vice President Rick Sharga said:
“…major banks currently hold roughly 1 million REO, or homes repossessed through foreclosure, but only 30% have actually made it onto the market.”

Why are banks holding this inventory?

The article mentioned above answers this question this way:
Striking a proper balance on how to mange this shadow inventory of foreclosures is vital for the banks to show a healthy balance sheet while not dumping too many distressed properties onto the market, further dragging down home prices and values. 

Isn’t most of this inventory sub-prime and exotic mortgages?

Not any longer. A study recently done by Morgan Stanley shows that:
§ 26.3% of the loans are sub-prime
§ 17.4% are Alt-A
§ 56.2% are prime mortgages
Right now, prime mortgages make up the majority of loans in this shadow industry.

Isn’t most of this inventory confined to CA, AZ, NV and FL?

Not any more. The Morgan Stanley study showed:
…the shadow inventory is growing across all of the United States…”While hard-hit cities represent a more than fair share of shadow inventory, its distribution broadly encompasses all corners of the country,” said the analysts. 

Bottom Line from KCM:

Shadow inventory is real and will impact almost every part of the country. Make sure you ask a local real estate expert to find out how it may impact your market. 

Bottom Line from Mark Slade:

In fact, Rick Sharga of Realty Trac recently told Gary Keller of Keller Williams, Inc.,  that he forecasts we will see 3.2 million foreclosure notices in 2011, up from 2010’s 2.8 million; he also projects that bank repossessions will be up 33% this year to 1.2 million from 2010’s 900,000.    Lastly, he says we could see another 10% increase in these numbers in 2012.  

More interesting is what I like to call the “Killer Loop.”  Here, the key is to the true strength (or weakness) of the Housing Market is tied to jobs; similarly, Jobs are linked to the health of the Economy and lastly, the Economy will dictate how well the Housing Market will truly perform.  What does this all mean: without any real job creation, we can expect to be stuck in a “groundhog” day loop.