One of the buzzwords crisscrossing the business internet this year is “Shadow Inventory”.  I’d like to take the opportunity to explain what this is and how its going to affect you as a real estate pro or homeowner in the coming year.

Actually there are two definitions of Shadow Inventory being used today – but don’t let that be confusing.  Here they are:

1) The amount of homeowners who are likely to put their homes on the market once they perceive that things are sufficiently improved so that their property will sell in a reasonable time for a reasonable price.

2) The amount of properties that have entered mortgage delinquency, are at some stage along the foreclosure process and will carry through to ultimate resale in the market.

As you can immediately see, the first definition of “Shadow Inventory” is more emotional and harder to estimate – but we who are in the industry probably all know somebody who’s “holding off” making a move until things appear better.  I recently received this email from a client who has been hesitant to put his home on the market:

“At this time, I do not think we are considering a move. I see too many “for sale” signs that have been on lawns for more than a year. I know some of the prices the homeowners are asking and I think they are reasonable……and they are still not selling. It seems most of the home sales are under $200,000 and I am sure not going that low with my home. I guess I will wait out the economy problems.”

According to Zillow.com’s Second Quarter 2009 Homeowner Confidence Survey: “…many homeowners could be waiting on the sidelines to sell. When asked about future plans to sell, 29 percent of homeowners said they would be at least ’somewhat likely’ to put their homes on the market in the next 12 months if they saw signs of a real estate market turnaround, creating ’shadow inventory’ that could slow a recovery.”  Estimates range from 11 to 30 million homes waiting on the sidelines depending on who you read – either way a staggering number.  Reuters quoted Zillow’s Chief Economist Stan Humphries as saying “The number of homes listed officially on the market, while still at historically high levels, might be only the tip of the iceberg”.

The second form of “Shadow Inventory” in housing is attributed to homes going through delinquency and foreclosure.  Laurie Goodman of Amherst Securities and her team of analysts have done a bulk of work on this subject – watch a recent interview on just this subject:

They have been using the term “Housing Overhang” to describe what is happening.  The Amherst team used, among other sources, the data from the Mortgage Bankers Association Delinquency Survey for the second quarter 2009. To quote the MBA press release, “The combined percentage of loans in foreclosure and at least one payment past due was 13.16 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey”.

By the way, the numbers estimated 7 out the 56 million estimated homes in the U.S are heading for public sale…almost a year and half of real estate sales (135% to be more exact).  Can you say “lots of new inventory”?  The Amherst Study concludes “…housing overhang is the single largest impediment to a recovery in the housing market” (quoted from a Forbes article on the study).

So the “Shadow Inventory” of 7 million foreclosures being forecasted to hit the real estate market, in addition to the “Shadow Inventory” of milllions of other homeowners just itching to get their home sold, will be an imposing challenge to home prices (and appraisals, in the case of all those foreclosures).

If you’re a homeowner and your market is relatively stable at the moment, you might want to consider putting your house on the market sooner than later, or sidestep the sale altogether if you don’t really need to move.

If you’re a Real Estate pro, you should watch local and state statistics closely and be informed about the changes in inventory going on.  Another good idea is to get in tune with sheriff sales in your county (mine is Lancaster County, PA) so as to be able to explain what’s really happening to your clients and the public.

Hopefully this article has helping enlighten us to what’s being referred to when we hear “Shadow Inventory” used with regard to the homes market.

Don’t forget to check out my recent article examining the coming storm of Mortgage Delinquencies.