Shadow Inventory May Stall Real Estate Recovery 18 to 103 Months
Shadow inventory is real estate to sell that we don't yet know about. It's made up of homes that soon will be on the market, but not for the usual reasons.
It includes homes that are usually several months in arrears on their mortgage and about to hit the foreclosure circuit; homes that are 90-plus days delinquent and currently languishing in foreclosure; or bank-owned (REOs) that have not yet been put on the market. But come on the market they will, one way or the other, and at greatly discounted prices – distressed or short sales.
These houses will keep our values flat as long as they exist. How?
Take Neiman Marcus: Let's say you put a discount designer-fashion outlet smack next to Neiman's couture -- if everyone can buy Ralph Lauren and Escada at half-price, they sure won't pay full price at Neiman's.
Neither will homebuyers.
"The biggest problem with the market today is convincing sellers of how much the market has dropped," says Dallas appraiser D.W. Skelton of Skelton & Associates. In Dallas, Skelton is like an appraiser to the stars --- he counts Ross Perot as one of his clients -- and he is not sure we are out of muddy water just yet in what is supposed to be one of the better markets in the country.
Emphasis on "supposed to be": The Standard & Poor's/Case-Shiller analysis on shadow inventory indicates that Dallas may have more foreclosures -- a 43-month supply of shadow inventory. That's along with Denver, Atlanta and Boston. Phoenix may actually be over their peak and heading to a far healthier inventory. In fact, Phoenix has the smallest inventory of shadow supply -- a mere 18 months.
New York City metro has the worst, an 103 month supply, or eight years!
To help understand what that number means, consider this: Most Realtors consider a six-month supply of housing inventory to be a healthy market. When you get on up to nine months, or a year or so, there's more product, more inventory, more competition and lower prices. When it comes to shadow inventory, 34 months is considered the norm.
For the record, the report also assumed that 70 percent of recently "cured" loans would ultimately re-default.
What do you get when you have both high shadow inventory and an uptick in median prices? California.
The median real estate prices in San Diego have risen by 22.5%, spurred by the first-time homebuyer's tax credit.
Shadow inventory is scary, but not insurmountable.
See homes for sale in Dallas, Texas and elsewhere at AOL Real Estate.
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