You may have heard this term thrown around lately, but what the heck is it? Shadow Inventory is basically inventory that hasn’t made it to the market yet. There are several components to Shadow Inventory.
First of all, the banks are short staffed, so they can’t file NOD (Notice of Defaults) and complete the foreclosure process as fast as new borrowers are falling into default. The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics. That is the first part to “Shadow Inventory”.
Secondly, a lot of lenders that are taking properties back through the foreclosure process are supposedly holding on to them through holding companies and not releasing them to the market. Their reasoning is actually a valid one. They are afraid that if they release too much inventory to soon, housing values could plummet. And I agree with that assumption, but I am one who prefers to rip the band aid off quickly.
I have heard and read, but never confirmed that there is an estimated 3-7 million units in Shadow Inventory just lingering out there. My question is, how long can they hold into all that inventory.
Another component that I think needs to be added to the overall Shadow Inventory count is all the properties out there that the banks are in the midst of negotiating loan modifications. Half of all loan modifications have defaulted so far. If one was to think about it, shouldn’t those properties also be considered Shadow Inventory? I know what some of you are thinking; “But Mike, they are not in foreclosure yet”. While that may be true, I would say that if it wasn’t for the current administration giving the lenders an incentive to work out loan modifications, that they would be, and let’s face it, statistically, half of them will be shortly.
So far all I have mentioned is residential properties, but what about commercial. Office vacancy rate is currently falling as we speak. According to CoStar GROUP there is an additional 420 million sq ft vacant office space that is currently being leased, but not occupied. The reason for this is all the layoffs from large corporations that are still paying on the leases, but laid all the employees off that used to occupy those desks. What will happen when those leases expire?