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Shadow Inventory: It’s Impact in 2010

We have often talked about a ‘shadow inventory’ of homes about to come to market. The two big questions are:

  • What does this ‘shadow inventory’ actually consist of?
  • How will it impact home values in 2010?

Standard and Poors has just come out with a paper which sheds some light on these questions. Let’s look at the report.

First, let’s define shadow inventory as S&P sees it:

“Shadow inventory” (including all delinquent loans, not only those that are real estate owned [REO]).

So, we can see ‘shadow inventory’ is made up of homes that have been foreclosed on but not yet put on the market and homes not yet in foreclosure but seriously delinquent and heading to foreclosure. The S&P Report gives us the graph below showing that the existing REO (foreclosure) inventory pales in comparison to the number of homes about to come to market as distressed properties.

The graph above shows the number of homes about to become distressed properties is 31 times greater than the number of homes currently on the market in that category.

Next, we have to look at what affect this will have on home values this year. The S&P Report states it rather simply:

Liquidated properties provide the market with a supply of homes for sale. Home prices directly reflect the relationship between the supply and demand of properties for sale. Prices will remain level if a comparable increase in demand accompanies an increase in supply. Otherwise, an increase in supply will result in a decline in prices to attract demand.

They go on to say:

Our estimate of $473.4 billion in loans that will eventually need to be liquidated corresponds to approximately 1.75 million individual properties. This number represents almost 50% of the existing homes available for sale as of December 2009 … An influx of liquidated properties is likely to prompt a decline in prices.

1.75 million houses are coming to the market as the Fed is existing from programs aimed at  bolstering demand. It sounds like lower prices to me.

What does that mean to you?

If you are thinking of selling anytime in the near future, DO IT NOW!


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