Lurking In The Shadows

The X Factor: Real Estate’s Shadow Inventory
With everyone looking toward a housing recovery that is both real and sustainable, one of the largest obstacles concerning experts at present is the market’s shadow inventory. Even if all other factors stabilize, having too many houses in competition with one another will prevent prices from bumping back up like they otherwise could.

Increasingly, the shadows are getting crowded from a variety of factors, too. Most analysts expect to see a bump in foreclosures from the self-imposed moratorium earlier in the year. Though probably worth a try, early reports are that more foreclosures were simply delayed rather than avoided.

Another pipeline for shadow inventory appears to be the sheer magnitude of the housing crisis. Banks have been overwhelmed with a bureaucratic mess, the likes of which none of them were prepared to handle. Many are just trying to catch up with refinancing demand and the latest federal initiatives.

Perhaps darkest in the shadows right now are the adjustable-rate mortgages (ARMs) from several years ago. Resets will be hitting in the next couple of years, and there seems little doubt about the potential threat they pose to create more foreclosures.

Finally, the nation’s high unemployment rate is taking the foreclosure crisis into areas of the country that were relatively sheltered from the boom/bust effect. The effect has been that of a wet blanket, weighing down some otherwise positive numbers coming out of sub-prime victims like San Diego and Phoenix over the summer.

Oh, and according to a survey announced by Zillow this week, as many as 20 million homeowners may be waiting for conditions to improve before entering the market. Though some may not like what they see and pull out, the market nevertheless will be further flooded with inventory for a time.

Uvestor Opportunity:
One of the fundamental principles of investing is to buy when prices are low. This glut of inventory should keep prices down anywhere from months to years, creating buying opportunities at most value levels. In the foreclosure market, investors will be competing with cash, so be prepared to stake your claims amongst other investors.