Shadow Inventory in Phoenix

Shadow Inventory in Phoenix

Shadow inventory is a term we hear often in the world of real estate but many still don’t understand exactly what it means and why it is so significant. In today’s post I”ll attempt to demystify somewhat by answering a few basic questions.

What exactly is shadow inventory and why is it important?

Definitions vary but CoreLogic defines it as the number of distressed properties not currently listed that are :

  • seriously delinquent (90 days or more)
  • In foreclosure
  • REO (owned by a lender, government agency, Fannie Mae or Freddie Mac, after an unsuccessful sale at a foreclosure auction)

Why don’t lenders just put them on the market and get rid of them asap?

Many banks withhold listing all of their inventory in order to dress-up their balance sheets. Listing too many at the same time could also drive prices down further. Logically this creates some restraint amongst lenders.

Why do some people shudder when they hear the term “Shadow Inventory”?

The main reason is that it has been difficult to gauge exactly how many units this shadow inventory comprises at any given time. There are different formulas applied, but generally estimates have tended to understate the total in turn making it difficult  to predict with accuracy when improvement in the housing market may occur. Some believe that it may cause the market to drag along the bottom for years.

In the metro Phoenix market however, many experts feel that it isn’t really anything to worry about anymore because:

  • New foreclosure filings are down and pending foreclosures are falling rapidly
  • Investors are snatching up REO properties at a frenzied pace
  • MLS Inventory reached record lows recently
  • Banks are better managing their inventory
  • Single-family home construction is starting up again

In August 2011 Phoenix housing inventory reached its lowest post-recession levels. At that time about 20,400 single-family and condo homes were listed for sale. This looks promising especially when you consider at the peak in November 2007 there were 50,000 .

As someone tracking the market and in the trenches himself buying and selling homes regularly, it’s plain to see that foreclosures are selling quickly due to the historically low prices and a feeling that at least in some areas we’ve seen the worst of it. There is a feeding frenzy amongst investors cashing in on the opportunity by either buying and flipping units or holding them as rentals. Homes in more desirable areas have definitely become tougher to find in the price ranges that existed only six months ago. Many homes have multiple offers the first day listed. From there it becomes a bidding war.

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