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Shadow Inventory Stabilizes As Investor Sales Offset Strong Flow Of New Foreclosures

By Donna S. Robinson | November 1, 2012

A Core Logic research report on Shadow Inventory indicates about 2.3 million units currently in inventory. Shadow inventory is a term used to describe single family homes that are usually vacant and bank owned.

Image by Seth W. via

For various reasons, the home is not being actively offered for sale. Instead it sits vacant. Many neighborhoods have one or more homes that are part of the shadow inventory problem. There has been ongoing speculation that banks are holding many foreclosed homes off of the market because of low home prices.

Banks that have been left holding a large number of foreclosed properties since 2008 are hoping that the housing market will eventually turn so that the value of those foreclosed homes can start going back up. They realize that dumping millions of distressed properties on the market would reduce home values even further. This would lead to more losses for banks, something that they desperately want to avoid.

But it appears that perhaps we have finally reached some equilibrium between home sales and foreclosure numbers. This in turn could be the reason why shadow inventory seems to have stabilized at 2.3 million units.

Institutional investor activity has grown to unprecedented levels in the single family market. This has resulted in a surprising price increase of some 4% from 2011 levels and is increasing demand for foreclosed properties. At the same time, foreclosures remain elevated to near record levels, as new FHA 30 and 60 day delinquencies have increased to some 17% of their insured mortgages. The investors are spending tens of millions of dollars buying up individual houses at courthouse auctions, especially in places like Georgia, Florida, Texas, California and Michigan, where foreclosure activity is still at very high levels.

This has resulted in a housing market that remains soft due to new foreclosures and rising delinquencies, even as investor buyer activity ramps up to record levels. The buying is putting upward pressure on prices with more demand for better quality homes in better locations. Fortunately the result is an offset that has helped stabilize home prices to some extent. The downside is that it also masks what is essentially a housing market that is fundamentally very weak at it's core, and is not really expanding.

Notably all of this is leading to a tectonic shift in the housing industry. Ownership has dropped back from a high of around 68% at the market peak to about 65.5% today, which is a historical average that dates back to the 1960's. In spite of the federal government's 34 year effort to foster home ownership through various programs and policies that helped lead to the housing crash, little to no long term results have been achieved. When you consider this point, it stands to reason that we've got a significant percentage of vacant homes but no actual end user buyers available to buy them. The 65% that can afford to own a home will, and the other 35% are going to end up renting no matter what government policy is in place.

Without investor buyers, and particularly the institutional buyers, home prices likely would still be falling. Shadow inventory would be growing at a much faster rate, especially in the states with the most foreclosure activity. The large amount of inventory being picked up by well funded Wall-Street-connected investment companies is helping reduce the total amount of vacant inventory on the market, but it also speaks to the fact that fundamentally the market remains over supplied in the areas hardest hit by the foreclosure crisis.

The banks who are selling the foreclosures to the institutional investment companies are also lending them the money to buy those properties. In a sense the banks have helped create and fund companies to buy up their inventory. This is creating a sense of "recovery" but it's not a fundamental recovery.

I believe that this underlying weakness could persist for years before we reach a true balance in housing. To do that we must increase the number of first time home buyers and therefore increase real end-user demand for housing. And it has to be genuine, natural demand created by a robust economy that has millions of new, good paying jobs. Until that happens we won't have a sustainable housing recovery based on legitimate demand, but it will look like things are improving to some extent.
Donna S. Robinson is a 17 year real estate industry veteran, author and housing market analyst located in Atlanta, GA. Follow her on twitter at donnaconsults and read her blog at

Donna S. Robinson has been involved in the real estate industry since 1996. A licensed agent and real estate investor, she is a recognized expert on residential real estate investing. Her course, "Fundamentals & Strategies For Real Estate Investing" is approved for CE credit by the GA Real Estate Commission. She has authored several books on real estate investing, and consults with residential investment companies. She also offers coaching services to real estate investors.

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