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Shadow Inventory—The Current Real Estate Myth

First, let’s be clear about what shadow inventory is. These are homes that the bank has already foreclosed on, but which, for no apparent reason, aren’t listed. The implication is that banks are holding REO properties back from the market to restrict supply and prop up prices.

Some buyers have been waiting for the “shadow inventory,” the foreclosed homes the banks are reputedly holding back from the market. They hope and pray that this flood will be unleashed, prices will drop even further, and they will at last find their dream home at, say, year 2000 prices. More buyers have been actively competing in the market, but also praying for the shadow inventory floodgates to burst so they can finally get into a home. Unfortunately, they are all waiting for something that isn’t there. Well, that’s not just my opinion, folks, even the CEO of Foreclosure Radar, Sean O’Toole, believes the shadow inventory is a myth. Check out his blog, www.ForeclosureTruth.com. Here’s an excerpt:
First, let’s be clear about what shadow inventory is. These are homes that the bank has already foreclosed on, but which, for no apparent reason, aren’t listed. The implication is that banks are holding REO properties back from the market to restrict supply and prop up prices. This actually seemed like a distinct possibility a year ago when the banks were clearly holding more inventory than they were listing. But that is no longer the case. In the past year, they have resold far more than they’ve taken back, eliminating any possibility that a shadow remains.
Some observers, who earlier this year warned that this shadow inventory would deluge the market with REO listings, have now redefined shadow inventory to include properties that should be foreclosed on. They continue with misguided warnings of a deluge of REO listings any moment now.
These properties aren’t grinding through the pipeline to foreclosure and into the shadow inventory. They’re not moving at all because we as a society lack the political will to foreclose. Because the national focus is targeted on keeping homeowners in their homes, the drain is bigger than the spigot – REO properties are selling faster than distressed properties are being foreclosed on.


And that is the big issue. All properties are selling faster than people are putting them on the market , because it looks like the pendulum is swinging back towards up, so people who want or need to sell their homes are holding out for better prices. I mean, wouldn’t you if you could? Today in Eagle Rock, 90041 zip code, there are 22 listings active on the MLS. 10 are short sales, 2 are REOS, 2 have been on the market over 1 year. That leaves 8 regular sales. When you consider that good properties are selling in multiple offers of from 3 to 20 at a time, you can see that we are truly in a very hot seller’s market.

So, if you are thinking of selling your house, why shouldn’t you wait?
1. Interest rates are low now.
2. Prices are pretty good now compared to where they were earlier this year. I think we actually hit bottom the first quarter of 2009.
3. Unemployment is still high and rising.
4. Lending guidelines are unpredictable—every time banks seem to adjust to new regulatory systems, more new rules come down the pipeline. Some people who could qualify for a loan last year now can’t because of rule changes.
5. Again, the buyers are here now. Do you really want to chance waiting till next year? They could all lose their jobs and move to San Bernardino for all we know.

In other words, if you have a good reason to move now, waiting a few more months may not make you any more money. Especially if you are going into debt today to stay where you are. Any of the above items can change quickly for the worse and stymie the market once again. As Niels Bohr said, Prediction is very difficult, especially about the future.

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