Shadow Inventory Hurts Housing

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We all know what inventory means, but what’s “shadow” inventory?

Well, it’s one of the latest things to worry about. Thanks to the recession, high unemployment and collapse in the housing market, the shadow housing inventory is soaring.

In housing, inventory refers the number of homes for sale. When more homes are on the market, it’s usually good for buyers and not so good for sellers. It takes longer for the average home to sell, and it’s harder for sellers to command top prices.

A separate figure, shadow inventory, counts homes that could come onto the market relatively soon, says CoreLogic, a California firm that provides data on the housing and mortgage markets.

“CoreLogic estimates shadow inventory, sometimes called pending supply, by calculating the number of properties that are seriously delinquent (90 days or more), in foreclosure and real estate owned by lenders that are not currently listed on multiple listing services,” the firm says.

As of August, the shadow inventory had reached 2.1 million units, an eight-month supply of homes at the current rate of sales. That was up from 1.9 million units a year earlier, a five-month supply at the rate homes were selling back then.

The “visible” supply – homes actually on the market, was about 4.2 million homes in August, the same as a year earlier. The latest visible supply figures represent 15 months worth of sales, up from 11 months at last year’s faster sales pace.

Together, the visible and shadow inventories represent 23 months of sales, compared to 17 months a year ago. Six or seven months is considered normal in a healthy market.

“The weak demand for housing is significantly increasing the risk of further price declines in the housing market,” Mark Fleming, chief economist for CoreLogic said in a statement. “This is being exacerbated by a significant and growing shadow inventory that is likely to persist for some time due to the highly extended time-to-liquidation that servicers are currently experiencing.”

The situation is so extreme it can hurt sellers and buyers alike.

Sellers cannot expect any quick relief from low sales prices. Anyone who commits to selling – by buying another home, for example – could be stuck for a long time and might be forced to drop the asking price significantly to attract a buyer. If you have the option of postponing a sale you are contemplating, that might be a smart move.

Although low prices would seem to be good for buyers, there is a risk that a home purchased today would be worth even less a few months down the road. On the other hand, interest rates are extraordinarily low, and it would be a shame to miss this opportunity to lock in a cheap mortgage.

If you are a potential buyer, the key factor is how long you expect to stay in the home. If you expect to be there for at least seven or eight years, your chances of breaking even would be much better than if you plan to stay for only three or four.

Hopefully, in seven or eight years prices will have recovered enough that you could sell for enough to cover your purchase price and the title insurance, realtor’s commission and other expenses of buying and selling.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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