To some, the phrase 'Shadow Inventory' conjures up dark images and impending doom, kind of like the Darth Vader character from Star Wars. You may not have heard of shadow inventory as it is not mentioned too much in the mainstream media. I've seen several definitions of shadow inventory, however it typically includes all the homes which are currently in foreclosure or those homes that are delinquent and will probably go into foreclosure, and which have not yet been put on the market for sale.Shadow Inventory can be as scary as Darth Vader.
In a recent article on their website the Wall Street Journal stated that it would take 103 months, or almost 9 years, to sell off shadow inventory. This is based on the rate at which banks are liquidating the inventory they currently have. Of course if the banks are able to streamline the process, and shorten the time to sell their REO (real estate owned) properties, this time period could be shortened.
You may ask, "What does this have to do with me? It can effect the value of your home because as these foreclosed houses enter the market, at their reduced prices, your homes value could also be reduced. As appraisers we measure value by comparing the home we are appraising to other similar recently sold homes. As more and more of these homes sell they will start to "make the market" and cannot be ignored. This has been happening already but could increase as this additional wave of foreclosures hit the market. Foreclosures could increase in the future.
As an appraiser one question I get a lot is "how can you use a foreclosure as a comparable?". Many times there are no better sales to use. In addition to closed sales we also look at active listings, and if the only homes listed for sale are foreclosures, and they are comparable in condition and physical characteristics, then a typical buyer would consider buying the foreclosure and it has to be analyzed. As appraisers we read and interpret the market and are subject to its various fluctuations.
The government is currently pushing its Home Affordable Modification Program (HAMP), which could help more people stay in their homes and reduce the shadow inventory. If it is successful it would go a long way in reducing the Wall Street Journals recent prediction. We can only hope the force will be with us.
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