Shadow Inventory Is Part Of The New Normal

As the real estate market continues to try and find a bottom, a phrase we often hear is ‘shadow inventory’. So exactly what is it and how will it affect you?

In a normal real estate market, there are some benchmarks people use to determine the health of that particular market. For example, in a country club community or a particular neighborhood, there is a rule of thumb that says if approximately 5% of the homes are on the market, that is normal. Another rule of thumb says that if you divide the number of homes on the market by the rate at which they sell each month (called the absorption rate), you will find out how many months of inventory are out there. 6 months is considered normal.

In this market, we have a new phrase, the ‘shadow inventory’. This is the number of people who are in trouble on their mortgage payments and may slip into foreclosure, or another way of looking at it is what homes do banks own or may own that might come on the market?

There might be several reasons why homes would join the shadow inventory. A person may lose their job, they may have refinanced and are now underwater on their home, or their home may have decreased in value a significant amount since they bought it and they are considering walking away. This is called a strategic default.

Corporations and developers walk away from loans all the time, but in the personal home arena there is a stigma attached, although the strategic default is gaining momentum as a means of coping with the changing economic environment.

So the phrase ‘shadow inventory’ was spawned by the bursting of the real estate bubble and now joins the language as part of the ‘new normal’.