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Shadow Inventory and its Potential Affect on Future Real Estate Prices

By June 30, 2011 No Comments

Shadow Inventory is the amount of inventory that banks have on their books, but have not yet released to the market. Homes considered as Shadow Inventory could be homes near default or already in bank possession. Although the big bank representatives maintain that they are not purposely stockpiling this inventory, it has been speculated that banks are keeping these foreclosures from market to keep demand up for those homes already on the market. Regardless of intent, this surplus inventory could play a major role in determining future real estate prices.

According to a recent National Association of Realtors (NAR) study, as of Q4 2010 there were approximately 2.8 million bank owned properties not released into the market. At the current rate of sales for foreclosed homes, this backlogged inventory would take 12 months to sell. Some states however, have done a better job of listing and selling off their foreclosed properties. For the states that haven’t, (New Jersey (51 months), New Mexico (38 months), New York (34 months), Utah and Rhode Island (31 months)), the discounted price of these distressed properties have the potential to exacerbate the ongoing housing crisis. Below is a state-by-state map of the months of shadow inventory:

To reference the analysis we put together for the “The Lost Decade” blog post, the average change in median home values from 2006 to Q4 2010 was a 32.2% decline. New Jersey, New Mexico, New York, Utah and Rhode Island have not been spared in the slightest, having dropped between 27.9% and 51.9% since 2006. The NAR research implies at the very least that there are fewer reasons for these states to be optimistic about a market rebound than others. States with less shadow inventory may have less time to wait for a market turnaround (not to say that a market turnaround is coming soon).

Assuming New Jersey sells 100 homes per month, think about what would happen to home prices if an additional 5,100 homes were brought to market. Now assume that the 5,100 newly listed homes were discounted 10% (or more) as compared to their non-distressed counterparts. The affects could be huge.

Dan Price, CPA
Twenty Twenty Blogger

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