What Does “Shadow Inventory” Even Mean?

We hear the term “shadow inventory” pretty often these days, look especially when the media is on a doom and gloom kick. What better than a term like “shadow inventory” to spark fear and concern, to keep viewers watching, and to generate clicks. In fairness they are probably not wrong to point it out as a concern.

No Spooky Vodoo, or Is It?

So what does the term “shadow inventory” mean anyway? Well, the answer is, appropriately enough, shrouded in mystery and sort of depends on who you talk to and the angle they are taking. In my mega guru opinion there are two primary interpretations:

  1. Shadow inventory is the inventory of homes that have already been foreclosed on, the bank has regained control of, but has not yet listed the property on the market as an REO (real estate owned – see video at right).
  2. Shadow inventory is any home that is in distress, and in any stage of the foreclosure process from the first delinquent payment all the way to description one above. This often also includes homes that have had loan modifications because there is such a high rate of future delinquency after a modification has been granted.

In essence “shadow inventory” always refers, at one level or another, to immanent future inventory. Measuring exactly how much shadow inventory there is would be quite a task. Sure someone could take certain angles to generate some concrete numbers, such as delinquency rates. Delinquency numbers are pretty well known, but in reality even then we are left with only estimates because we have no way of knowing who will get loan modifications, and how many modifications will succeed.

Not To Be Ignored

That is not to say that an estimate of shadow inventory is meaningless. Quite the contrary. Based on the current environment, chances are good that a majority portion of any shadow inventory estimate will indeed hit the market at some point, be it as a foreclosure, an REO, or a short sale. These homes not only add unintended inventory to the market, they come on at varying condition levels, and so have a negative overall impact on prices in a any given area.

As a result, a cycle can be created that is difficult to pull out of. As more “shadow inventory” becomes real inventory, and prices fall in response, more homeowners can find themselves upside down on their home and become at risk. If the cycle continues it can also put early investors at risk as they go for longer periods than planned or expected before prices begin to recover, thus adding more potential fuel to the fire.

Such concerns drive many of the theories that say a double-dip in home prices is possible, or even likely. I am not saying that is my opinion, but simply that this type of data, along with unemployment numbers is what those folks are looking at.

The Opportunity

No troubled market is without its opportunities. Buy low sell high, right? If what I said above did not scare you too much you may be interested in having a look below at the current foreclosure (REO) listings in Northern Virginia and DC…

Northern Virginia Foreclosures

Washington DC Foreclosures

Related Posts: