The Shadow Inventory: an Analysis of its Cause and Effects

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By Sarah Parr

Recent statistics show a positive trend for the United States housing market: a decrease in the shadow inventory, CoreLogic reports. The report demonstrates how the shadow inventory of homes has decreased 28 percent from three years ago, when the amount of properties in the shadow inventory peaked. As of early this year, the shadow inventory contains about 2.2 million housing units, or in real estate terms, nine months of supply. CoreLogic used data on very delinquent homes, properties in foreclosure and homes held as REOs (real estate-owned) by mortgage servicers but not yet listed on multiple listing services (MLS) to calculate the shadow inventory figure.

Describing the shadow inventory

There are a few ways a property can become a part of what is known as the shadow inventory. One of the most common ways a home can become absorbed into the shadow inventory is when a bank holds onto the home without listing it on the market. Other properties in the shadow inventory include homes that people are waiting to list for sale because they want to optimize profit, and “zombie foreclosures.” These properties are vacant, since homeowners sometimes abandon a property because they expect foreclosure.

The cause of the increase

The establishment of the National Mortgage Settlement in April 2012 contributed to the growth of the shadow inventory in America, according to RealtyTRAC. With the settlement in motion, banks and lenders revived pending foreclosure cases and were also required to work with homeowners on alternatives to foreclosure, keeping some of these homes off the market. The states in which the shadow inventory grew are mostly judicial process states since these states are more predisposed to a buildup of foreclosure cases in their courts, as Orlando foreclosure lawyers would tell you. Foreclosure cases in these states take much longer to process on average.

How it affects real estate

Market analysts initially feared properties that are part of the shadow inventory would be listed simultaneously, leading to a decrease in property values in specific local neighborhoods. According to Reuters, however, shadow inventory properties have been listed in small batches, and tight inventory has actually created a price increase in some areas. Investment firms have also helped diminish potential flooding of the market by purchasing some shadow inventory properties, according to a TIME article.

To summarize, the number of properties in the shadow inventory is down. As the rest of the held properties are free to be listed on the market, the United States can expect a prosperous housing market once more.