Shadow Inventory

On March 31, 2011 CoreLogic reported that the residential “shadow inventory” declined to 1.8 millions units, in January.  That’s great! Or is it? 

First, who is CoreLogic?  Well, they are a huge, publicly traded research firm that per their website “is a leader in innovative analytics, information and outsourcing solutions for businesses and government seeking dynamic insights.” 

What is a “shadow inventory”?  The “shadow inventory” is the built up stockpile of homes that are not listed in the Multiple Listing Service (MLS) that are either seriously delinquent, in foreclosure or REOs.  They are homes that may not be for sale yet but, may be on the market in the future.  Many of these homes are being held off the market by banks.  There are also more than 2.2 million homes that have negative equity and are likely to become part of the “shadow inventory”.  These properties are the “lurking-in-the-shadows-inventory”.

Now, while it is encouraging news that the “shadow inventory” went down in January, let’s put it in perspective.  In addition to the not yet on the market “shadow inventory” it is estimated that there are currently 3.5 millions homes in the nation’s official inventory.  Look at it this way, if no homes were put on the market, it would take more than 8.6 months to burn through the supply of official inventory.  

CoreLogic estimates that it will take 9 months to work through the 1.8 million homes that make up the “shadow inventory” at current absorption rates.  Factor in the 2.2 million homes that are part of the “lurking-in-the-shadows-inventory” and there is more than 2 years of housing inventory looming.  Personally, I feel the time required for the market to take back these inventories is more like 3-4 years.

While the numbers in the report paint a national picture, the local numbers are just as concerning.  In fact, New Jersey led the nation having the largest supply of distressed properties.  Pennsylvania was 18th overall, Delaware was 5th

What does this mean for our local real estate markets?  Well, just because a state may have a massive inventory of distressed homes does not necessarily mean continued plummeting prices.  But, the presence of these properties will act to slow the pace of the market’s recovery in those affected areas.  It’s simple supply and demand.  In this area, I would think that high-density markets like Philadelphia and Norristown will feel the pinch more than most.  But, realize that no market is going to be totally insulated from the wave of foreclosures looming off our shores.

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