Shadow Inventory

There is a growing concern in the real estate industry that there may be a problem with “Shadow Inventory”. Shadow Inventory is caused by Sellers that are holding off on selling until the real estate market starts to recover & prices rebound. Another form of Shadow Inventory is banks holding off on foreclosing properties until the market recovers. Obviously, the banks are taking a big hit when they are selling foreclosed properties in the current market. In an article in the January/February 2010 edition of The Residential Specialist, Rick Sharga, Senior VP at RealtyTrac Inc., an Irvine, CA foreclosure research form, stated that as many as 600,000 foreclosed homes are being held by banks. Not only do banks not want to take a hit on homes right now. There also has been a recent change in federal accounting rules that allow banks to hold these home at the values of 3-5 years ago, making the banks books look better. Wouldn’t we all prefer that our house valued at what it was 5 years ago. Some agents think that banks are even holding off on Sheriff Sales, figuring it’s better to have someone live in the house rather than a vacant house, even if the mortgage payments are not being made.


The current Foreclosure Inventory in the Twin Cities varies on area. According to the Mpls Area Association of Realtors, January, 2010 Lender Mediated properties (Bank Owned or Short Sale) comprised 28.9% of the Inventory on the Market. However, January Sales were consisted of slightly more Lender Mediated transactions than Traditional transactions (946 Lender Mediated sales / 942 Traditional sales). Whether Shadow Inventory is real or just a fallacy remains to be seen. I wish I had a Crystal Ball, but since noone does, we’ll all have to just wait and see.