What Is Shadow Inventory and How Does It Impact the Housing Market?

April 10, 2012 / Russell Legato, Residential Property Analyst

The term “shadow inventory” refers to the foreclosed residences that remain available for sale. These low-priced homes, now owned by banks and other lending institutions are a glut on the real estate market. The hopes for a 2012 recovery grow somewhat dimmed for that reason.

What Is Shadow Inventory and How Does It Impact the Housing Market?

The news in February was that foreclosures were down and new home construction was up. The advertised listing price on some homes was actually the highest since 2006. Then “shadow inventory” began to cloud the optimism. Even more ominous is the fact that another 1.25 million residences may be offered at low sale prices at the conclusion of an investigation into lending institution practices.

The Federal Reserve Bank of Cleveland reports that a foreclosed home that sits idle on the market for over a year sees a possible price decrease of 60 percent. Overall, home prices were pushed downward by the foreclosure rates. However, in some areas the problem has not only been resolved, but the trend has been reversed.

In general, the market seems to be undergoing a transitional period. Currently it is apparently experiencing a downward trend. There are 2.43 million houses up for sale. This is 19.3 percent less than were available last year at this time. This indicates that “shadow inventory” in the housing market is reduced.

On the pessimistic side, one expert expects that volume to rise due to another three million residential properties that are in distress. When a homeowner is three months behind in mortgage payments, a foreclosure looms on the horizon. Although the unemployment rate has decreased, one expert posits it is simply due to people who have given up looking for jobs. Along with that factor, gas is on its way to having a $5 price tag per gallon.

With the U.S. government offering loans with less than a 4 percent interest rate, it appears that will spur the housing market. Buyers do not have to supply a 20 percent down payment, which is what is holding up application approvals by the major banks. However, this is viewed by some experts as the same mistake that preceded the subprime crisis.

How these factors will play out in the housing market remains to be seen.

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