Defining the 'Shadow Inventory'

Following the housing bubble burst and flood of foreclosures over the past few years, the media and economists have talked about something called a “shadow inventory” of homes. An ominous term, for sure, but what exactly does it mean?

Definitions vary to some degree. But my understanding is that it refers to the number of homes that are in some stage of foreclosure (e.g. homeowners being severely behind on payments and still living on the property) but have not yet hit the market.

So in addition to the large number of foreclosures and short sales on the market now—that are exerting downward pressure on home prices—we have a pipeline of others that will hit the market in the future.

This “shadow inventory” makes it hard to know when the real estate market has hit its true bottom.

As of July, about 1.6 million U.S. homes were at least 90 days late on mortgage payments, were in the foreclosure process or had already been foreclosed on but were not yet listed for sale. The good news is that the number is down from 1.9 million homes in July 2010 and down from 1.7 million in April. The bad news is that it’s still a heck of a lot of distressed properties that haven’t come to market.

What does this mean for Encino homeowners? There’s a good chance home prices will continue to go down. If you want to sell, but are waiting for the market to rebound, it might be a good idea to sell sooner rather than later.

I say it in nearly every column: If a home is priced right, people will buy! L.A. is an appealing market to local first-time and move-up buyers, international buyers and investors. Don’t wait until prices sink further.

Banks are also getting better at approving short sales for homeowners who are in default on their mortgages. Now may be a good time to get that short sale approved in order to avoid foreclosure and the resulting damage to your credit.

Banks prefer not to foreclose on properties. The process is expensive. They have no idea what condition the home will be in once they take full ownership of it. And foreclosures look bad on their balance sheets.

But at a certain point, they act. And I hear some banks are getting ready to step up the pace in foreclosing on properties.

I hope the shadow inventory is less than what some experts estimate. And I can’t wait until we know, without a doubt, the market has hit bottom. Until then, homeowners who are looking to sell should factor it into their decisions.