Chasing Shadow Inventory: Sloppy Foreclosures and Unintended Consequences

Daren Blomquist, RealtyTrac® Inc.

Point of Contention: Shadow Inventory
With this issue, we introduce a new section of Cityscape, “Point of Contention,” in which we present viewpoints on narrow issues on which expert opinions nonetheless may be remarkably different. The first point of contention is the shadow inventory. For our purposes, we define the shadow inventory as housing units being held off the market by lenders, either in the form of Real Estate Owned (REO) properties not offered for sale or in the form of mortgages delinquent for more than X months on which the lenders have not foreclosed. The unknown X is at least 3, but lenders seem to differ on how many months of delinquency they allow and what other conditions must be met before foreclosure occurs. Some commentators argue that home prices cannot stabilize as long as a large potential supply of inventory overhangs the market and that falling home prices are a major drag on the economy. For this issue, we asked three experts to explain why the shadow inventory exists, why it has increased, how large they think it is, how large it would be in a normal market, and whether the shadow inventory requires government action to accomplish economic recovery.

The specter of shadow inventory continues to loom over the housing market, despite an undeniable decrease in the actual shadow inventory numbers.

The inventory of properties in some stage of foreclosure or Real Estate Owned (REO) shrank from a record high of more than 2.2 million properties in December 2010 to slightly fewer than 1.5 million properties in September 2011—a 32-percent drop in just 9 months—according to RealtyTrac® Inc. proprietary data.

During a similar time period, the unsold REO inventory fell 30 percent, from more than 1 million properties in January 2011 to about 710,000 properties in September 2011. The inventory of properties in the foreclosure process fell 37 percent during the same period.