So it seems to be the new buzz word swirling through the Arizona real estate market these days, but what is the Shadow Inventory? To put it simply, Shadow Inventory is the residential homes that have been given back to the banks(foreclosed on) and processed by the banks, yet have not been put back on the market.

So is the Shadow Inventory buzz true? And wouldn’t it be in the best interest of the banks to sell the homes quickly and make their money faster? The short answer, No. While conventional wisdom would say the quicker the banks get their money the better, in the case of foreclosed homes the opposite seems to be true for two reasons.

  1. Stopping the Bleeding – This is the obvious one, the real estate market has been in a free fall for quite a while now, if the banks dumped all the distressed homes onto the market right now it would devastate an already battered real estate market.  Reducing the inventory of distressed properties will help slow the downfall, and help stabilize the sector.   This helps make the banks remaining inventory more lucrative.
  2. Cooking the books – This is the not so obvious one, the banks have a massive amount of homes being returned to them daily.  When the homes are returned to them they are on the companies books for the price of the loan.  However when the homes are listed and sold the bank must then change the books to reflect the accurate value of the home.  If big banks were to show their true worth, the companies equities and their stock prices would plummet.

Recent studies have compared the amount of foreclosed homes to the amount of listings from the banks.  The result was that only 30 percent of the foreclosures were making it to the market.  The remainder of these homes is what is known as the “Shadow Inventory”.

The revelations of this Shadow Inventory bring up another scary thought.  Is the bottom that we have been experiencing in the market real or is it a false bottom.  Will the bank eventually have to flood the market? Or will their efforts work and stabilize the market indefinitely?

One response

  1. 1. Stopping the Bleeding – well more like using leeches in the middle ages. Just prolongs the problem from hitting bottom.

    2. Cooking the books – Keeps the lie alive so that it’s business as usual.

    Is the bottom that we have been experiencing in the market real or is it a false bottom. btw that should end with a ?.
    I don’t know why knowledgeable Realtor s would ask this question.
    You know it’s just simple economics.
    Supply and demand. You started this discussion over the “Shadow Inventory”.
    So, as long as there is a Shadow Inventory then the bottom is no where in sight. Again simple economics.

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