Me and My Shadow


Unfortunately, I’m not referring to the clever little song but instead to the building supply of “Shadow Inventory” that is currently going on in the housing market. Strangely, many are still unfamiliar with the term “Shadow Inventory” or its potential impact.

So what are we talking about when we refer to “Shadow Inventory”? In a nutshell, “Shadow inventory” is comprised of bank-owned homes (a.k.a REO or Foreclosed properties) that the financial institutions have not released to the open market yet, and homes that are currently in a delinquent status (i.e. they are behind on their mortgage payment).

And while we may have seen and heard about recent rebounds in the housing market, one should proceed with caution before making bold claims that the recent housing crisis has come to an end. Does this make me a pessimist? I say no, rather an overly cautious Realtor. Why? Well I could always point a finger to the uncertainty of the economy or perhaps the continuation of Georgia’s high unemployment rate or the likelihood we will see interest rates begin to tick up. But one of the real reasons I proceed with caution before making a bold “the housing crisis is over” claim lies in large part to the impending wave of “Shadow inventory” that will soon begin hitting the market.

In a recent press release by Standard & Poor’s, the headline read “The Shadow Inventory Of Troubled Mortgages Could Undo U.S. Housing Price Gains”. Keep in mind this is the same entity responsible for the Case-Shiller Housing Index that has recently reported gains in pricing. The press release went on to say “The current "shadow inventory" (including all delinquent loans, not only those that are real estate owned [REO]) of troubled mortgages will likely take about 33 months, nearly three years to clear at the current rate of liquidations. Moreover, we believe this estimate is conservative, as we do not assume any loans that have yet to show any serious signs of distress to date will default in the future and further increase the overhang of homes. Nonetheless, we believe that in reality additional loans will default in the near future due to the weak economic environment, distressed residential home values, and the resulting contraction in the supply of mortgage finance.”

The graph illustrates the swell of this “Shadow inventory” as it shows the relationship between the loan balance in billions of loans that have been either been paid off or closed compared to the balance of loans that are either in an REO status or are seriously delinquent.

With all of this inventory lingering, why is this going to have an impact on our housing market in 2010 and beyond? Check back for Part II of “Me and My Shadow”……………