What Ever Happened to the Big, Bad ‘Shadow Inventory’ of Homes?

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One of the great economic success stories of 2012 was that the housing market finally found a bottom, and even began to show signs of a nascent recovery. But even as positive data on the real estate market began to trickle in early last year, not everyone was convinced. The main reason for skepticism were millions of homes that had not yet hit the market, but probably would soon — either because they were already in foreclosure or because the homeowners were so far behind on payments that foreclosures were imminent. These properties, which last year were estimated to range anywhere from 3 million to 10 million in number, were dubbed the “shadow inventory” of homes.

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The reason the shadow inventory was thought to be bad news for the housing market was that when these homes finally did go up for sale, they would overwhelm the demand for housing, which had slowed in recent years due to the poor economy and sluggish population growth. But a recent report from analytics firm CoreLogic says that the shadow inventory as of October 2012 has fallen to 2.3 million, a 12.3% drop year-over-year. In other words, this catalog of homes has been reduced significantly without the detrimental effect on nationwide home prices that some had feared. So what happened, and why has the dreaded shadow inventory not yet sunk the convalescent U.S. housing market? I asked Sam Khater, Deputy Chief Economist at CoreLogic, and he outlined three key reasons:

Investors Got in on the Game

The housing recovery was prevented for so long in part because of tight credit standards and because so many homeowners owed more on their mortgages than their homes were worth. This left many homeowners unable to take advantage of increasingly cheap prices. But by 2012, home prices had fell so far that it became lucrative for investors — either investment vehicles like real estate investment trusts or individual investors looking to earn extra income as landlords — to snap up real estate at historically low prices. Khater says the speed and enthusiasm with which investors bought these properties was a bit of a surprise, and one of the main reasons why the market was able to work off a significant chunk of shadow inventory without it depressing home prices.

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Lenders Ramped Up Principal Forgiveness

When a homeowner cannot repay his mortgage, mortgage lenders often end up losing a lot of money even after they repossesses and resell the home. Homes sold after foreclosure sell for a deep discount, and going through foreclosure proceedings is very costly for banks as they must continue to pay taxes and upkeep costs while the process unfolds. So modifying a delinquent loan so the borrowers can remain in the home, even if it means forgiving principal, can sometimes make sense for all parties involved.

The problem is that the securitization of home loans, whereby loans are pooled and sliced up into different payment “tranches,” or bundles, made it so that there wasn’t one specific investor who could decide to modify a loan. And the fight over who would bear the losses when a mortgage was modified prevented much modification from happening at all.

Beginning with the $25 billion mortgage settlement between the nation’s largest mortgage servicers and states attorneys general, however, the tide began to shift a bit. Banks have been forced, because of the terms of that settlement, to engage in principal-reducing mortgage modifications, which have helped keep homeowners out of foreclosure and, thereby, their homes off the market. According to a recent report from the OCC the share of loan modifications made by servicers in the third quarter of 2012 that include principal reduction have risen 110.6% when compared to the similar period in 2011.

Many Homeowners Remain Underwater

Even with the improving housing market, many homeowners remain underwater. Paradoxically, this has buttressed the housing market of late, as it keeps these homeowners from putting their property on the market. These homeowners being locked out of the market, combined with avid interest from investors in cheap residential real estate, has led to the amount of homes for sale being historically very low. And when supply is restrained, prices go up. As prices rise, more homeowners will get out from their underwater mortgages. “This dynamic will unlock some borrowers, but it won’t lead to a flood of new homes on the market,” Khater says. “It’ll be more of a slight opening of the spigot.”

All this goes to show that predicting the movement of large, complex markets like housing can be difficult even for experts who make a living doing just that. A year ago, many smart people took a look at the inventory waiting on the sidelines, and couldn’t imagine the market being able to absorb it. The fact that lenders are more aggressively modifying mortgages and a new investor class has stepped up to take advantage of cheap prices shows that even the savviest of analysts can be caught off guard by new trends.

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That shadow inventory is being bought with cash from China


The shadow inventory problem was never as dire as some made it out to be.. Banks have five years to sell foreclosed properties and 1) did not foreclose on 3 million homes on one day in early 2009 (it has taken four years to get to this point), and 2) have no financial interest in collectively dumping all these properties in the market at one time....  So this is more of a sloping, rolling problem than a dramatic, instantaneous event... 

This inventory will create a headwind to a dramatic price recovery, but was nevert going to cause a disaster because Banks are sophisticated enough to know better than to drive down the value of their assets, or not hold them if they feel the current market was artificially depressed by other banks dumping their foreclosed property portfolio. 


"Shadow Inventory" indicates a market that is expected bu unrealized.  Mr. Khater neatly quantifies it as 2.3 million.  I would like to see the "analytics" on that.   A decade ago, people were selling their $500,000 home to purchase a $300,000 home and bank the balance.  Perhaps Mr. Khater has an "analaytic"on that trend.  Total sales, after all, are still a fraction of what they where a decade ago.


There are some lovely homes in good locations that can sell at or near market, and then there are all the rest. So many homes trashed, neglected, un-maintained money pits out there lining un-maintained streets in cash-strapped communities just waiting to heap property taxes on anything occupied. A few firms have bought the low hanging fruit, spending bare minimum to make those properties rentable, and from there we get to the "shadow" inventory. The money boys have no interest in unloading at a loss, always preferring to bet on the come, always thinking demand will rise to meet their supply. However real estate rots quickly, helped along by vandals, crime, the elements, decimated areas, demoralized people long unemployed. The holders of these properties should understand they might as well be holding avocados or peaches long term given the perish-ability rates. For now, kick out the dead beats, let the property go to seed, ditch at a loss, and everybody loses. "Shadow inventory" indeed. Nothing's that simple. 

j45ashton like.author.displayName like.author.displayName 2 Like

Much of the inventory is there, but it isn't there.  It was reported on CNBC 60 minutes that a lot of the abandoned houses have been looted & trashed.  So while there houses are there, they really aren't there because they're worth nothing & can't be sold.  Consequently, these houses are bringing down the value of those houses that are still alive in these neighborhoods.  Where the banks own these houses, they've just abandoned them too.  Costs too much to fix them up, costs too much to plow them under & they're worth nothing on the market.  In some very confused way the Fed owns major pieces of these homes having bought up the 'toxic' assets from banks & brokerage houses to keep these companies from folding. I'm dead set again critics of the Fed in this.   Had the Fed not acted, we would have suffered a national/international calamity that would have devastated all but a handful of Americans.  But the banks & brokerage houses have not paid sufficiently for their crimes.  Nor have the bankers & brokers themselves paid sufficiently for the frauds that they committed.  God only knows what the SEC & the Attorney General offices are doing at the state & federal levels.  They're letting all of us down tremendously and if they don't act soon, the statute of limitations will run out.

Mallarde like.author.displayName 1 Like

Housing is really expensive again!  Yay!  Hip, hip, hooray!  50% of our income can go to our rent or mortgage!  Yay!

gjmoore73 like.author.displayName 1 Like

National stats and trend lines can say whatever someone wants them to say.  An over estimated shadow inventory gets the buzzard feeding buyers and late night infomercial late to the game investors circling in some markets.  Real Estate has and will always be a local, street to street economic factor.  The industrial, international financing of local real estate is a second issue.  It is much larger in scale and impact on the overall economy.  That boat is sunk, but it did not drag everyone under with it.  The economy has learned to float.  There is still uncertainty an SOS was sent or received, but we have to believe help is coming.  As for all the local real estate markets.  Most are sitting weighted down on the on the bottom, point #3 could have been the entire article. Investors can only buy so much, sellers can and will only sell so much at low prices, and very few will get a bailout.  To add to shadow inventory are all the empty lots, and platted developments never even started.  We are over "developed" even if we let everyone in the world that wants to come into the US in tomorrow.  Factor in the downsizing trend from the McMansions, poor construction of the past decade, and admitting everyone does not need/want a second condo/house.  We at the end of a huge, terrible ponzi scheme that makes Madoff look like a street corner hustler.  

Sincerely just one of a million broke REALTORS!

SwiftrightRight like.author.displayName 1 Like

I dont know about the nation at large but regionally I know that last summer tons of houses popped up on the market. Most of them were kinda high, few of them sold and almost all of them have either come off the market or are steeply discounted. Last week we looked at a house that in May was going for 189,900 and is currently on the market for 138,000. Tomorrow I am going to look at a house that was 142,000 that just marked down to 99,000 Which if funny because in September I offered the owner 120,000 for it and he walked away.

So while there may not be this massive shadow market there is still a huge glut of houses that cant sell and for me, that is great news.

BobCarpenter like.author.displayName like.author.displayName like.author.displayName 3 Like

Nothing like giving away the shadow inventory to your crony friends and hedge funds for pennies on the dollar, sold only in large bundles, where only billionaires are allowed to join in the spoils.   They traded current stabilization for the slow grind down to Detroit price levels, where houses cant even be given away. You cant create a boom in housing without jobs and raises.  Well maybe that isnt quite true, when you can sell a mortgage to a bum or a dead person with a signature in this paper filled mortgage scam, the bankers are the only winners.  

cwhite1898 like.author.displayName like.author.displayName like.author.displayName 3 Like

The shadow inventory is still there. These bad mortgages are just being swallowed up by the Fed in exchange for fresh treasuries for the banks. The inventory is on the Fed's balance sheet and will remain there hidden for years. Just because these properties are in limbo and not on anyone's open balance sheet any longer doesn't mean they don't exist.


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