One of the new buzz words to have sprung from the collapse of the housing market is “shadow inventory,” and when most industry “experts” report the numbers, they are referring to distressed properties that have yet to hit the market. Primarily, these are REO properties (homes that have changed ownership from individuals to lenders) and pre-foreclosures (homes that are in the process of being foreclosed upon and are 90 days late or more).

The reason the term “shadow inventory” was coined is because these homes are not out in the open, rather they are hidden from the market by owners who have ulterior motives that prohibit them from being listed. These motives are not sinister, they are just self serving.

Lenders do not want to flood the market with distressed properties and exert even greater pricing pressure than the glutted market is already experiencing. Some homeowners who are in pre-foreclosure are living in their homes and not paying on their mortgages. Why would they want to sell? These will soon become foreclosed properties, and many will remain in the shadows.

But there is another group that is not reported in the “shadow inventory count.” And from my measurements (perhaps only anecdotal evidence, but I suspect it holds true in most markets), we have homeowners who tried to sell their homes in the recent past, but failed to sell.  In the past 365 days, roughly 60% of homes listed for sale in the MLS failed to sell, and many have not yet returned to the market.

By my measurements, this subset of the shadow inventory is more than a year’s supply and is not being reported when reports discuss the glut of homes that need to be cleared before we see a true housing market recovery. Look to a longer than projected recovery period, with continued “surprises” as more and more homes languish on the market.

Many lenders put foreclosures on hold for the holidays, but now that the new year is here most of those voluntary lender foreclosure freezes are being lifted.  With the holiday foreclosure freeze coming on the tail of the robo-signing scandal freezes, the foreclosure market has gone months with an artificially low number of foreclosure homes coming to market.  Our preliminary tracking data concurs with what most analysts are saying – January and the 1st quarter of 2011 are lining up to be record quarters.

The first quarter of the year is traditionally the best time to be a foreclosure buyer as the inventory of homes tends to see a regular seasonal surge.  This year’s flood of shadow inventory to the market should be one to remember.  Keep checking back throughout the month as more and more homes come to market – if the property you want isn’t available yet, we’ll be the first to let you know once it is.

– Shannon Caldwell

The Josh DeShong Home Selling Team – 972-438-7653 – Shannon@joshdeshong.com

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