WHAT IS THE SHADOW INVENTORY?

WHAT IS THE SHADOW INVENTORY?                     

HOW DOES IT IMPACT THE VALUE OF YOUR HOME?

The first time I heard of a “shadow inventory” was in 2008.  At a local real estate seminar, a vice president of a major national bank commented that there was no such thing as a shadow inventory.  Actually, in 2008, there already was one; big time.  This month I want to spend time on the two questions that head this article.

WHAT IS THE SHADOW INVENTORY? The real estate shadow inventory is composed of homes which are owned by banks (called REO’s for real estate owned).  These homes are acquired by banks through the foreclosure process. They are almost always vacant.  They are called “shadow” because they have not been placed on the real estate market for sale.  If banks placed the entire shadow inventory on the active market, the increased supply of homes would devastate current values.  In an effort to preserve the value in these REO homes, banks put them up for sale over an extended period of time. As the owner, banks are charged with the responsibility of maintaining the curb appearance of these properties.  Some cities actively pursue banks who have allowed these homes to have a distressed appearance.

IS THERE A “SHADOW” SHADOW INVENTORY? Actually, I think there is.  These are homes that have been abandoned by their owners who are facing foreclosure.  Rather than remaining in the home through the entire foreclosure process, the owner vacates.  Usually, the fronts of these homes appear to be in a very distressed state. Although cities try to hunt down the real owners and force them to maintain their properties, this is often very difficult to do.

HOW DOES THE LOCAL SHADOW INVENTORY IN OUR AREA COMPARE TO OTHER AREAS?  Here is some good news! A recent SF Federal Reserve report was very encouraging for our area.  Shadow inventory is currently the lowest in the western part of theU.S. which includesNevada,California,Utah andWashington.  The lone exception at this time isOregon. The northeastU.S. has the biggest shadow inventory right now.  This includesNew Jersey (big problem!),New York,Pennsylvania,Maine,Connecticut, andMaryland. In another study by CoreLogic, it is estimated that our area will clear the shadow inventory in 2-3 years. Many areas in the eastern part of theU.S. will need 6-10 years to clear inventory. To give you a feel for numbers, right now there are about 194 homes in the shadow inventory inConcord.  In surrounding communities,Martinez has 51 whilePittsburg has 92. Regarding the potential “shadow” shadow inventory, there are 286 owners inConcord in the foreclosure process.

HOW DOES THE SHADOW INVENTORY IMPACT THE VALUE OF YOUR HOME?  The shadow inventory can impact the value of your home in several ways.  If the banks do not adequately maintain and secure these homes, they become a blight on the neighborhood.  The distressed appearance usually includes a dead front yard strewn with garbage, broken windows and peeling paint.  These homes are prime targets for home invaders.  These invaders may live in the home while stripping it of any anything of value.  You’ve probably seen this type of home in your neighborhood.  Buyers also see these homes.  It creates a stigma which often results in lower values for the entire area.  A second problem is the significant future supply of homes for sale.  In a relatively pure supply-demand market, increased supply means lower prices.  Right now, the supply of homes for sale is very low throughout our area.  As banks continue to bring on more REO properties to the market, the value of all homes will be reduced.

In summary, the shadow inventory is real and it will continue to impact the local real estate market.  The good news is that the impact will be relatively short compared to other parts of theU.S.  Based on the current size of the local current shadow inventory, we seem to be moving toward a better, more traditional market at this time.

In Concord if you see a property that appears to be distressed and abandoned, contact the city at cleanup@ci.concord.ca.us or the 24 hour hot line 925-671-3282. 

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4 thoughts on “WHAT IS THE SHADOW INVENTORY?

  1. seanotoole

    Nice article C21terry. Any time you or readers want to see exactly how many homes the banks have in their inventory (currently REO, not yet resold), you can find the current stat at http://www.foreclosureradar.com/california. You’ll find the stat a few charts down under Inventories – Bank Owned (REO). That link is for the state, but you can enter any state, county, city or ZIP code in our coverage area to see the stat for free. The reality is that throughout CA bank owned inventories are low… especially given the timeframe it takes banks to resell these properties (the timeframe state is just a bit farther down the page).

    A peer, Mark Hanson, and I started using the term “shadow inventory” in mid 2008 as we were seeing bank inventories grow far faster then they were being resold. The government stepped in that September, dramatically slowing the foreclosure process, and the shadow inventory of bank owned homes returned to reasonable levels by mid 2009 (which was helped by prices dropping to affordable levels which stimulated demand).

    Other analysts have since used shadow inventory to refer to more than just bank owned homes, but also those in foreclosure, default, that have negative equity, and at the extreme homes the owners would sell if prices were higher.

    Regardless of the definition I think your summary is good. I think you are right that the concern over shadow inventory will continue to impact the market, but there is very little of this inventory that is even close to hitting the market, and the little that is continues to trickle out which should be positive for housing.

  2. c21terryc21terry Post author

    Thanks for the kind remarks. I have a subscription to foreclosureradar.com and find it very useful in tracking the local market. I thought Greg’s comment on the impact of the new federal plan was insightful. Clearly, the numbers in the shadow inventory will go up as distressed owners try to find ways to save their home using this new plan.

  3. Heather Vernon

    Hi! My name is Heather Vernon. I am a Realtor outside Philadelphia. I have been investigating the Shadow Inventory. I would like to know how to get in touch w these companies who own REO to maintain curb appeal etc and of course get the listings. Any suggetions? Thank you, Heather kwheather1@gmail.com

  4. Terry Oelschlaeger

    Heather, great question. In my area, I have found that local municipalities have laws which require banks to keep up the curb appeal of the property. In Concord, we have a Nieghborhood Preservation program. See if your local community has something similar. If so, report the address to the city and they can track down which bank is on title. Often, the banks are fined if they do not maintain the exterior of the property.

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