Shadow Inventory

Shadow Inventory: a component of housing supply = homes in process of being bank owned or subject to foreclosure action by bank. Includes: delinquent on payments, short sales, in foreclosure, foreclosed, bank owned. They are homes on re-sale market or getting ready to hit the market, sadly most times at wholesale or discount prices and sold "as-is".

There is a GARGANTUAN glut of homes getting ready to hit the market over course of next year. They make up the “shadow inventory”. There’s the normal, conventional inventory. You know people selling their homes because they have died, need to relocate, have too many kids and only one toilet, etc. etc. These conventional inventories are at historical highs right now. Measured in months, they range from 40 months to some price ranges around the 80 month range to absorb. Great news for buyers, hey, call me :-)

Now, due to the crisis we’re in, there’s a boat load of homes on the market or getting ready to come on the market in what’s called the shadow inventory. Like the Dark Matter in our Universe, it’s hard to see and quantify but, it appears to have mass. It’s composed of (with some poetic license):
1) Short sales: bank has agreed to allow the seller to sell their home “short” of what’s owed to the bank. The banks may still stick it to the homeowners to pay the difference rather than forgive it. This destroys their credit too.
2) Bank Owned: In the process of being foreclosed on, foreclosed on and those that are delinquent on their payments.

The issue is that the inventory or supply is already bloated with homes being sold from the conventional inventory and when you count the shadow inventory it becomes much, much, much, much, BIGGER! My friend Harold Balles asks “How much bigger Tom?” Well, Hairy does it really matter at this point? I mean come on! The absorption rate* is already in the years not months and some homeowners are just saying “screw it” we’re upside down, under water, short on our loan to the home’s market value. Let’s just walk away from the bad investment/purchase we made”. The media is calling this a “strategic foreclosure”. There is a moral/ethical WWJD issue here in that homeowners did enter into a valid contract with assumed risks. Although, politicians and business women/men don't seem to mind operating under a different set of rules than us regular folks at times. *(Absorption Rate: time it will take to absorb or get the home sold in the inventory)

Anyway I digress. So we’ve got this housing inventory bigger than Oprah’s.....ego. Remember Economics 101? Supply vs. Demand = Supply way, way up, Demand way, way, down, prices way, way, way, way, down. Ouch!

The good news is that Demand is starting to respond to the massive amounts of Federal Government stimulus you, the taxpayer, have so graciously supplied. Or should I say you’re Grandchildren, since they will be the people paying it back. This stimulus ends April 30th and the hope is that the private sector will be robust enough to take over and continue to fuel the recovery. This will/could take the next few years to climb out of the recession and absorb all the homes on the market now. Not to mention the homes in the shawdow inventory pipleine. There are some great buys out there right now and coming in the future. Hey Call me :-)

Keep in mind housing markets historically lag the economy by about 6 months and Western North Carolina’s housing market lags that by about 6 months. Plus, this recession is a bit different, it involved a financial crisis and we have a much more globalized economy now. It could end in a slightly different result this time around. Keep a close eye on prices from now into Summer and 2011. It looks like they are going to fall, maybe 20% to 30% from now! They say there's a pent up buyer demand out there let's see if it gets released this Summer without anymore help/stimulus from Uncle Sam.