Shadow Inventory-What It Is And How It Affects You

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 futureAs 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.

Comments

  1. Tom, certainly a problem that will continue to impact values. One of the eye opening statements in the WSJ article is the 30% increase of shadow inventory from the prior year. With current unemployment trends, these numbers will likely continue to escalate.

    • Yeah Wendell it was not real positive. I am very interested in finding out what the shadow inventory is for the Birmingham area so that I can write about it in future posts.

  2. Good post, Tom. I like how you brough Darth Vadar into the conversation here too. My boys might even be interested in shadow inventory now. 🙂

    • I originally titled this post “Shadow Inventory and The Impending Doom”, which sounded like a Star Wars movie, but then thought it might be too negative. I decided to keep Darth Vader though.

  3. Real Estate Appraiser Tips says:

    Great Post, Tom! This is part of the reason I think the “Green Homes” industry is far before its’ time! New home construction is and has already been at nose bleed pricing levels…why do you think we needed all of that exotic financing to get people into new homes in 2006-2009? Those green homes cost 25% more than conventional homes and there absolutely ZERO market support or justification for 25% higher pricing on new homes. COST does not EQUAL MARKET VALUE! 103 months to absorb all of that shadow inventory and now the Stock Market tanking throws major wrenches into the cogs of the Green Housing Industry!

    Bill Cobb

    • Hey Bill, good points. I have not really done any appraisals on the “green homes” so I am not familiar with the pricing, although I can imagine it’s higher since most “specialized” products typically cost more. The cost vs. value is something I think most people cannot (or do not) want to understand.

Trackbacks

  1. […] future.  I have written before about shadow inventory.  In my my blog post titled “Shadow Inventory-What It Is And How It Affects You“, I reported that the Wall Street Journal predicted it would take close to 9 years to sell […]

  2. […] on the market AND the foreclosures that have not yet entered the market and been listed for sale (shadow inventory)?.  The short sales and foreclosures are really effecting our appraisal values in a negative […]

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