To understand this, in context, let’s start by defining Shadow Inventory before discussing the affects that Shadow Inventory has on the real estate market.
What is Shadow Inventory?
Investopedia.com defines Shadow Inventory as:
“… real estate properties that are either in foreclosure and have not yet been sold or homes that owners are delaying putting on the market until prices improve. Shadow inventory can create uncertainty about the best time to sell (for owners) and when a local market can expect full recovery. Also, shadow inventory typically causes reported data on housing inventory to understate the actual number of inventory in the market.”
How does Shadow Inventory affect the real estate market?
During the subprime mortgage meltdown and overall housing market collapse of 2007-2008, lenders were left with a tremendous amount real estate holdings. Most lenders were slow to put their inventory up for sale. Why? They were afraid that by flooding the market, prices would be driven down. This, in turn, would have significantly lowered their potential Return on Investment.
What is the state of today’s market?
Although shadow inventory is down 35% from the peak as of 3Q13, there are still approximately 1.8 million homes that remain in some form of foreclosure or delinquency above a normalized level.
Zelman & Associates believes that “the flow of distressed properties into REO and the pace at which those properties exit REO is the most important relationship to be analyzed when monitoring shadow inventory and the impact on price.”
Default notices are down 11% year over year. NODs (Notice of Default) are down more than 80% from their peak. Year over year, REO filings were down 42% in key default states and 43% in key auction states, according to Zelman & Associates.
Default notices, REO filings, and REO for-sale listings—various measures across the scope of the foreclosure market—are all showing positive signs of year over year improvement and the additional supply of foreclosures coming to market continues to dwindle.