Dear TZ - Should I be afraid of the Shadow Inventory?

Dear TZ,

I keep hearing about something called a shadow inventory. What is it? How does it impact me and my home?

Thanks,

Homeowner Harry

Dear Harry,

Shadow inventory…  Almost sounds scary, like it’s lurking in the forest waiting to jump out at you.  

Very simply there have been homes that have been foreclosed that are now bank owned properties.  Much of that inventory is not yet on the market, hence it’s in the shadows.  The amount of inventory is not measured in houses, it’s measured in months, meaning that if no new houses come on the market, how long will it take to empty the shadow inventory at the current rate of sales.

Let’s say you live in Washington State, where there are only 4 months of shadow inventory.  Well the news there is good.  Those homes should sell and not bog the market down due to all the new inventory that it’s creating. 

We happen to live in New Jersey, which currently has the greatest shadow inventory - a 65 month supply.  Yes, you read that right!  If no other homes come on the market it will take 5 years and 5 months to clear out the inventory.  Sounds like New Jersey will have a rough time.   In truth parts of the state will, while other areas won’t be affected as badly.  For example, Newark will be hit much harder than let’s say Westfield or Summit.  Towns surrounding the hardest hit urban areas will more likely feel the effect of the shadow inventory more than an upscale suburb will. 

So while New Jersey has the largest shadow inventory, New York is a distant second with 41 months of shadow inventory.  In fact other than New Mexico, Louisiana, Florida and North Dakota the states with the most shadow inventory are all in the Northeast.  This is largely due to the fact that many of these are legislative states where foreclosures must go through the courts, thus further slowing down the process long enough for significant inventory to accumulate.

So what does it all mean?  Well if you’re in a state with a higher shadow inventory and you might want to sell, do it now, because prices will continue to fall until the demand is larger than the supply.  If you’re going to buy you may “pay less” by waiting, but if interest rates rise, they way the experts are predicting, but your monthly payments will probably be higher than if you were to buy now.

Good luck!

- TZ

Please note that all information is reliable but not guaranteed.  Please consult with your Real Estate professional before making any Real Estate decisions.