Friday, November 8, 2013

Real Estate Pulse: The Decline of Shadow Inventory


For those that do not know, “shadow inventory” refers to the real estate property inventory that is either in foreclosure and has not been sold, or properties that have been withheld from the active market with hopes of a price improvement. 

With seller uncertainty of the best time to list properties, this shadow inventory causes data on housing inventory to understate the actual inventory levels in the real estate market. High levels of shadow inventory, especially in the form of underwater, modified, and delinquent mortgages, pose as a significant factor to the recovery of the housing market, but refinancing and strong investor demand for distressed properties have helped bring many properties out from the shadows and into the sunlight.  Active, Pending, and SOLD!

As the largest quarter-over-quarter decrease since the beginning of the credit crisis, shadow inventory dropped from 3.28 million loans in Q1 of 2013 to 2.99 million in Q2. This represents a 35% drop based on annual computations, according to Compass Point Research & Trading. Other factors contributing to the decline of shadow inventory include recent unemployment rate decreases, increases in home prices, and improvements in mortgage credit quality. As of July 2013, banks and mortgage investors had recorded approximately 300,000 foreclosed homes in their accounts, which was the lowest level since 2007 and more than 50% below the foreclosure peak in 2008. As opposed to 3.28 million in Q1, an estimate 2.47 million mortgage loans are now considered seriously delinquent, which is an astounding 21% less than late 2012 levels. Efforts are also being made in the form of state foreclosure processing requirements to facilitate the continual decline of shadow inventory.

From what was thought to be primary delay of the housing industry recovery, worries of shadow inventory levels seem to be diminishing along with underwater mortgages.

Some things to pay attention to over the next several months are how sellers will react to the rising home prices, whether they decide to list their homes for sale, or wait, and the activity of institutional investors buying large quantities of real estate.  For more information on shadow inventory, the right time to sell, and any other desired real estate market information, please doesn’t hesitate to contact your SI Real Estate team today.