Shadow Inventory: How Big, What Opportunities?

By Robert Freedman, senior editor, REALTOR® Magazine

You often hear talk within real estate about the shadow inventory that looms over markets. These are the homes that are at risk of going into default or are already owned by the banks and that can come onto the market at any time. They pose a problem because a flood of these properties can put enormous downward pressure on prices as inventories rise far above what can be absorbed by demand. Of course, the properties tend to sell for quite a bit less than other properties, and that’s good for buyers, particularly investors who can scoop up properties in bulk. But the discount inventory isn’t friendly to sellers whose properties have to compete with them.

 

 

All this notwithstanding, there really isn’t a hard and fast rule of what properties actually comprise the shadow inventory. This lack of definition is important, because one analyst who reports a big, scary number in the news might be thinking something very different than another analyst who uses very different assumptions. So, whether 7 million properties are looming over markets or something closer to 2.5 million is an important distinction.

 

To get a handle on what properties NAR considers part of the inventory, I sat down with NAR Research Economist Selma Lewis. In our 5-minute video interview, she walked me through how she calculates the inventory size. She also talked about the pace at which banks appear to be unloading their properties.

What it all boils down to is opportunity. After getting off to a very slow start, banks appear to be looking at the short-sale portion of the inventory differently than they did before and want to get them done. You would know whether that’s actually happening in your market or not, but that appears to be the direction in which banks are heading now that the short-sale guidelines from the federal government (and Fannie ad Freddie) are in place.

So, with these and other shadow-inventory properties looming over markets and selling at a discount, there’s a place for you to help strapped sellers and hopeful buyers. But it helps to start with some concrete numbers on the inventory, and that’s what NAR Research has tried to provide.

 

 

http://speakingofrealestate.blogs.realtor.org/2010/06/29/shadow-inventory-how-big-what-opportunities/