Atlanta Real Estate Blog

The Shadow Inventory of Foreclosures does exist,  even if there are questions over its size, how it affects buyers and sellers in our individual market areas, and how long it will take to liquidate it.

Steve Harney, President of Steve Harney, Inc. <http://www.facebook.com/steve.harney1>  is a former broker owner of a real estate company.  He offers a useful analogy to explain the Shadow Inventory of foreclosures.  He describes the dynamics of the Shadow Inventory as holding foreclosures behind a dam on a Raging River.

Imagine the Shadow Inventory of Foreclosures as a river.  Also, imagine that this Shadow Inventory River runs through your town and that the Lenders in your town have built a dam across the river to control the river's flow.  From your town, the river runs to a downstream valley below the dam.

Nearly all lenders have a glut of homes that are flowing into foreclosure -"the river".  Since lenders understand the economic impact of supply and demand, they realize that dumping all foreclosures on the market at the same time would create a huge supply/inventory problem.  The result would be to depress prices because of the glut of homes on the market.  This is the situation when there is too great a supply of homes for sale and not enough ready, willing, and able buyers to buy them.  The lenders realize it is foolish to release all the foreclosure inventory on the market at one time, so they hold some homes off the market. They control the flow of foreclosures on the market by their dam across the river. 

Temporarily, the lenders restrict the flow of the Shadow Inventory river.  When the lenders believe that the market can accept the added foreclosure homes for sale without unduly depressing prices, they raise the gates on the dam and release more foreclosed properties for sale. 

In the past few months, some lenders have had a moratorium on releasing the flow of the river.  When lenders were caught using Robo-signers to improperly handle the documents for foreclosures, many states stopped or delayed the foreclosure process.  The result was that even more of the Shadow Inventory river had to be held behind the dam.  One result of the Robo-signing fiasco was that current Sheriff sales / foreclosures on the courthouse steps were temporarily suspended so that even more inventory was trapped behind the dam.  Meanwhile, new foreclosures continued unabated.  The lenders realized that opening the flood gates to release all the foreclosed homes above the dam would flood the market with a raging river of Shadow Inventory.  This would resemble an actual flood of the entire area - and would destroy homes in your town's downstream valley - the homes that are alongside the banks of the river.  The resulting flood would destroy everything - the real estate market and the prices of all homes in the market, not just the foreclosures.   So the lenders have been forced to withhold the mass of Shadow Inventory river temporarily behind the dam.  Their hope seems to be that, as the market absorbs some sales, that they will  be able to let more of the foreclosures through the dam without jeopardizing the entire market. They have been managing the foreclosure volume and protecting the neighborhoods down river while reducing the risk of radically reducing home values.

So, it sounds like Shadow Inventory is benign or even a good thing, right?  Well, remember that lenders/investors may be required by banking regulators or government mandates to release the Shadow Inventory river sooner or later.  The lenders/investors cannot and will not sit on those bad mortgages or vacant homes forever.  Nor will they halt foreclosures forever.

How Large is the Shadow Inventory

How much Shadow Inventory is there?  Some estimates range from 6.5 million to 13 million properties.  Current annual sales rates for all homes are 4.5 million properties per year.  That means there is a glut of one and a half to 3 years additional inventory sitting on the sidelines that could potentially CRUSH home values.

What Does This Mean To Sellers

Your property is worth more now than it may be later.  The longer you wait to sell, the more likely you could be the victim of a rapid decline in your property's price. This is the price of doing nothing.

What Does This Mean To Buyers

There may soon be a glut of "new" inventory to evaluate.  This will make deciding on just the "right property" harder.  You may try to look at all the inventory and find yourself unable to decide on what to buy.  Interest rates have not been this low since President Eisenhower.  Continued turmoil in the European debt markets are making U.S. Treasury bonds more attractive (flight to quality).  This raises our bond prices and lowers their yields.  That means interest/mortgage rates could remain at historic lows for awhile.  This means that homes will be more affordable for a buyer.

Conversely, if the economy improves and inflation rises, interest/mortgage rates could rise.  Some homebuyers would have higher mortgage rates and lenders could require higher credit scores to qualify for a loan.  Buyers could find that their most desired homes were priced out of reach.

 Contact me to discuss your situation and timing and to chart a course of action that makes sense for you.

Tags: Shadow Inventory of foreclosures, Steve Harney, foreclosures, mortgage rates, economic recovery, inflation, Robo-signer fiasco, Sheriff sales, courthouse steps, dam across raging river of foreclosures, homebuyer, home seller, inventory glut, annual sale rates, European debt market, real estate market, U.S. Treasury bonds, historically low interest rates, mortgage rates, home price declines, higher credit scores, ATLShortSales.com