Guest Blogpost: Breaking Down the Shadow Inventory

By Sarah Parr

Recent statistics portray a positive picture for the real estate industry and consumer economy. A recent Corelogic report shows that the shadow inventory of homes has decreased 28 percent from when it peaked in 2010. As of early this year, the shadow inventory comprises approximately 2.2 million housing units, or in real estate terms, nine months of supply. CoreLogic calculated the number of very delinquent homes, properties in foreclosure and homes held as REOs (real estate-owned) by mortgage servicers, but are not yet listed on multiple listing services (MLS) to determine the shadow inventory figure.

The shadow inventory

The shadow inventory can refer to all of the homes held by banks, but not offered for sale, and homes that people are waiting to put on the market because they are expecting better prices in the future. The shadow inventory also consists of vacant “zombie foreclosures.” A lot of homeowners anticipate foreclosure and then move out of their house, leaving it vacant for a period of time while the mortgage lender contemplates foreclosure.

How it’s created

RealtyTRAC states that the finalization of the National Mortgage Settlement in April 2012 contributed to the growth of the shadow inventory because of a 59 percent spike in properties in some stage of foreclosure. Under the settlement, banks and lenders have been obliged to work with homeowners on loan modifications, preventing foreclosure and keeping these homes off the market. The states in which the shadow inventory grew are mostly judicial process states, and as Pine Hills, FL foreclosure lawyers will tell you, they are more prone to having a buildup of lengthy foreclosure cases in their courts.

Its impact on real estate

Experts in the real estate field initially feared properties in the shadow inventory would be listed simultaneously, leading to a decrease in property values in certain communities. According to Reuters, though, properties in the shadow inventory have been listed in small batches, and the low inventory has actually caused an increase in prices in some areas. Investment firms have also helped diminish potential flooding of the market by purchasing some of the shadow inventory, according to a TIME article. Investors buy out distressed real estate when it first hits the market. They often beat individual buyers with cash offers, sometimes before properties are listed.

Even so, a shadow inventory can create uncertainty both for homeowners looking to sell and for predicting when a specific local housing market can expect full recovery. The shadow inventory can also skew housing inventory data.

Sarah Parr is a Central Florida-based writer who blogs about foreclosure issues.

Shadow Inventory down 28% from '10