Defining Shadow Inventory In Real Estate

Posted by Joe Manausa on Monday, November 22nd, 2010 at 12:19pm.

Defining shadow inventory varies from region to region, but we all agree that it includes the inventory of "not on the market" homes.

Shadow Inventory was the hot topic for Inman News this morning. They reviewed a report by CoreLogic which showed the inventory of "not on the market" homes that need to be sold is growing at a disheartening pace, stating demand as the primary culprit:

Weak demand for housing is "significantly increasing the risk of further price declines in the housing market," said CoreLogic Chief Economist Mark Fleming -- a problem that's exacerbated "by a significant and growing shadow inventory that is likely to persist for some time" because of the length of time it takes loan servicers to liquidate properties.

Shadow Inventory Real Estate ImageWhat hurts so much about the growing inventory of homes that have yet to reach the market is the known fact that we have such a large volume of homes that failed to sell in the past and are currently not back on the market. That means that no matter what you read about the shadow inventory of homes, the reality is actually going to be worse than the reports.

Defining Shadow Inventory

When we go about defining shadow inventory, we should consider that it is a phrase used to describe "homes for sale" that are not on the market. These listings that are lingering in the shadows include:

  1. Homes in the foreclosure process (pre-foreclosure)
  2. REO homes unlisted (foreclosures)
  3. Unlisted Homes that previously failed to sell (failures)

When we read this morning's report from CoreLogic, we only see the first two types being reported, as the homes that failed to sell were completely ignored. Even so, their report paints a very scary picture, with nearly two year's worth of supply needing to be consumed. The math looks like this:

Combine the 2.1 million "shadow inventory" with the 4.2 million homes that were actually on the market in August, and the total months' supply of unsold homes was 23 months -- about double the 11.6 months the National Association of Realtors estimated in September.

But I am certain that the third type is even larger than the other two, meaning we can assume well over three year's worth of supply on the market in most areas of our country. What does this really mean?

Huge Shadow Inventory Of Homes Represents Future Supply

Sadly, as we define the shadow inventory of homes and identify it as three years worth of future sales, we can reduce it to this simple point:

If nobody else builds a home for sale or puts one on the market, then we still have more than enough homes to last us three years at our current rate of demand.

Now what are the odds of nobody deciding to sell their home, or home builders choosing to build zero new units? This is why the recovery is going to take more than five years, and I am advising clients to look for a 7 to 10 year recovery. If you need to sell a home, you better choose the absolute best progressive marketing plan and be spot-on with your initial market positioning.

Joe Manausa, MBA is a 26 year veteran of real estate brokerage in Tallahassee, Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.

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