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Shadow inventory darkens real estate recovery

By
Real Estate Agent with RE/MAX Accord

Sounding like some old time radio serial our grandparents listened to, many real estate followers are warning of the Shadow. But this shadow doesn't refer to a sinister presence lurking in dark corners. Or maybe it does.

The shadow that has some in real estate scared like an 8-year-old with an overactive imagination refers to the unrevealed inventory of foreclosed homes. The bearish of real estate experts say these foreclosures will depress prices even further, as much as 10 to 15 percent, when they eventually hit the market.

But not all are convinced the shadow inventory will create a tsunami-like wave of foreclosures that will threaten to drown a weakly recovering market next year. Some predict lenders will continue releasing foreclosures at a measured pace to keep values higher and their losses lower.

Which scenario is more accurate won't be known until next year, but one thing that is certain is that a shadow inventory does exist.

 

What is...the "Shadow?"

This shadow inventory is created by a back-log of foreclosures that lenders are refraining from listing to avoid overwhelming the market and driving the value of the properties even lower. Also contributing to the backlog has been state and national government moratoriums put on foreclosing homes in an attempt to get lenders to work out loan modifications and keep people from losing their homes. The attempts that fail will end up in foreclosure.

In the darkest recesses of the shadow market are homes that have not been foreclosed on -- properties that their owners have not made payments on for several months. Some lenders are refusing to take the keys on these homes because they don't want them on their books yet. By taking such properties, lenders incur holding costs such as upkeep, and are responsible for property taxes. Eventually, lenders will foreclose on these properties, closer to when they believe they can successfully put them on the market.

A million-plus foreclosed homes

One real estate research firm, First American CoreLogic of Santa Ana, Calif., estimates the shadow supply at 1.7 million homes. The company says that moratoriums and lenders holding off on taking homes have increased 55 percent in the year ended Sept. 30. The number of unreported foreclosures a year earlier was 1.1 million, according to CoreLogic.

 

Some are concerned that the government's Home Affordable Modification Program will fall woefully short of keeping people in their homes and lenders will have to flood the market with foreclosures.

Others believe lenders will stay with their current strategy of measured release of foreclosures. However, while that may dull the pain somewhat, it will prolong the agony because it will take much longer to work through the inventory.

As for how it will play out ... well, only the Shadow knows.-Rick Hazeltine

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