Shadow inventory is an inventory of homes entering the market as distressed properties with a discounted price. Data companies define shadow inventory in different ways.
What is included as shadow inventory?
When banks decide which of their properties to include in their shadow inventory reports, they use the following criteria:
- Distressed – Any and all properties where the mortgage payments are more than 90 days overdue.
- Foreclosures – All properties that are currently in foreclosure status, are placed in the shadow inventory.
- REO – Properties that are real estate owned are also listed, as banks lose money everyday that these properties are not owned by a real mortgage holder.
- Cured – Cured loans are those that were over 90 days past due, but became current again within the past year. 70 percent of these are included because the banks believe that they will go into default again in the near future.
According to the report many parts of the country are experiencing a decrease in the shadow inventory. This is because banks are releasing the distressed properties into the housing market. The report states that it can take 45 months to clear the shadow inventory. This is seven months earlier than the peak estimate and three months longer than the estimate of a year ago.
How can the shadow inventory affect the real estate market?
Either the inventory will continue to get bigger and affect the housing recovery negatively or the inventory can be placed on the market. Placing them on the market for sale will definitely have an impact on housing prices.
There has been some major leeway made recently in the “months-to-clear estimates and liquidation rates” of shadow inventory. But, so many of these properties still exist, that it’s a little hard to actually see things getting better. Things are still uncertain as distressed homes stay tied up in foreclosure processes that seem to take longer, as more and more properties are added to the foreclosure lists.
Until servicers are able to come up wit a process that improves and speeds up the time it takes to liquidate these properties, the shadow inventory will continuously be a threat to the housing market’s stabilization.
Many believe that if the shadow inventory can be placed back into the market faster, this can an effect on housing prices now. The belief is that this will bring about housing recovery in a shorter period of time than originally expected.
Housing Market Optimism
Although experts are more positive than before, they are cautious about being so optimistic. With the current total volume being at about $384 billion, there has still been a drop in the amount of distressed home loans. In the third quarter of 2011, the number declined to its lowest level since November of 2008.
Even though the recovery phase of the foreclosure crisis may be still be years away, we can finally start to see the light. Balancing the supply and demand in the housing market will help to bring home prices back to normal. One way to speed this process along is by clearing away as much of the shadow inventory of distressed properties, as fast as possible. Then, and only then, will we start to see a speedier housing market recovery coming in our future.
Article provided by Kimberley Kelly a Realtor in Palm Springs, CA. You can get to know Kim by visiting her Rancho Mirage CA real estate website where you can also search Thermal CA real estate.
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