What is in the shadows of the real estate industry? If you are talking to agents that follow distressed properties they talk about the shadow inventory. What is it and why do any of us care?
The shadow inventory would be those homes that are not shown anywhere. They are the homes where the homeowner has not made payments in a long period of time and the bank has not shown their property as a distressed property. No notice of default published and no record to look to to find the distressed property. The banks know that the homeowner is in trouble.
Realtor's and economist's believe that there is a shadow inventory of homes that exist with homeowner's that are in trouble. The reason that we believe this comes from talking to homeowner that have not paid mortgages for a period of 1 year to 3 years. The troubled properties are out there and they do not show up in any published data.
The banks tell us there is no shadow inventory. So, estimates by reporters and economists are just guesses as to the number of distressed properties in existance. The banks deny the existance of unpublished inventory.
The reason that we care about the shadow inventory is because we need to project the health of the housing market. We must understand the true depth of the problem. Without the data we cannot get a grip on the problem. The banking industry does not want the public to become frightened and plung the market into a sever down turn.
Some might ask how it could be worse?
If all the inventory came on the market at the same time prices would drop causing the banks bigger losses. Showily, bringing the distressed property on the market has worked for the banks. The prices have moved up slightly from the beginning of the crisis in the real estate market. The banks have stronger balance sheets and can handle more of the distressed properties than they could of 3 years ago.
So, if the banks are releasing more properties into the market it is because they can now afford to do so. CoreLogic estimates that 1.8 million U.S. residences are in the shadows. What they are looking at are the properties that have been notified of the problem and there is a public record. These are properties that are not being sold on the MLS currently. Not my definition of a shadow inventory.
It is interesting that this number does not have the properties that the bank knows are in trouble but have not published. For that reason we cannot believe the numbers we see and draw any conclusions on the supply. It will always be larger than what we can see.
This shadow inventory will be a drag on the housing market as long as it is out there. Until we sell off the majority of the distressed properties we will not be able to have a recovery. I believe the slow release is a problem because it causes the pain to go on much longer. It extends the crisis. Once the inventory is gone the troubled properties are off the market the properties will go up.
The fear is that we are heading into a double dip. If that becomes the case we will not think the banks were wise in holding off the market distressed properties. So, What is in the shadows of the Real Estate Industry only the banks know.
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