While reputable sources continue to report conflicting statistics regarding the number of foreclosed homes being held by banks, the important question is: Is the shadow inventory real or imagined? And, if it is real, how will it affect home prices and sales? What most consider the so-called shadow inventory is that much touted group of foreclosed homes banks are reported to be keeping from the market for a variety of suggested reasons.
The shadow inventory is real, but it’s much more than homes being held by lenders, currently a relatively small number, and also comprises:
Homes that have entered the foreclosure process
Homes whose owners have applied for loan modification
Homes whose owners are financially unable to continue making their mortgage payments
Homes whose lender has chosen not to foreclose in order to protect their investment
Homes that have recently been unsuccessfully offered for sale
Homes whose owners are waiting for prices to improve
Homes whose owner will take the “strategic default” option as a result of being under water
Until the market can absorb all the above—potentially a three or more year supply—home prices will remain depressed. The housing crisis hasn’t ended; it’s just being spread over a longer period. And those who expect home prices to return to 2005 levels once the recession has ended will be sorely disappointed. The only way such increases could possibly happen would be through runaway inflation, which is particularly unlikely in the short-term, and doubtful in the long-term. This is not to say that inflation won’t return, just that it won’t be sufficient to restore home values for many years.
So, is the shadow inventory real or imagined? It’s very real, includes millions of homes, and has altered the housing market and financial system in ways we have yet to realize.
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