It feels like I’ve been writing about “shadow inventory” — homes that are in foreclosure but haven’t hit the market yet — forever.  Yet no flood of foreclosures has yet inundated the market, and as a matter of fact, inventory has been quite scarce lately.  Is there anything to this shadow inventory concept?

As Kelly Bennett documented in a recent blog entry, the answer is yes.  Kelly noted as of Tuesday, there were 19,453 San Diego homes that were in foreclosure but that were not yet listed for sale.  That, my friends, is your shadow inventory.

For purely illustrative purposes, let’s try to understand what the effect would be if all these homes in foreclosure were to suddenly hit the market.  That’s certainly not going to happen, and as I’ll discuss below, these homes may never come on the market at all.  But this approach helps understand the scale of what lurks in the shadows.

  • There are currently 11,976 homes listed for sale in San Diego.  If all the shadow inventory were to hit the market, inventory would increase by 162 percent to 31,429.
  • The 11,976 figure in the prior bullet includes active inventory as well as inventory that is marked “contingent,” meaning that the property is a short sale or the like that has an accepted offer that is awaiting lender approval (thus, the property is not really available for sale).  Using only the active inventory of 7,964 homes, shadow inventory would swell the number of homes for sale by 244 percent.
  • Using the average number of sales over the past year, releasing the shadow inventory into the wild would add 7.3 months’ worth of inventory.  By comparison, in November there were 4.6 months of inventory if you count both active and contingent homes, and only 3.0 months if you count just active listings.  So adding all that shadow inventory would increase the number of homes actively for sale from 3 months’ worth to 10.3 months’ worth — more than a three-fold increase.

Shadow inventory is very real, then, in the sense that there are foreclosed (but not yet for sale) homes out there in numbers that would have a substantial impact on the county’s housing supply if they were to come onto the market.

Whether that will actually happen is another question entirely.  So far, foreclosed homes are only making it to the market in a trickle.  The rationale that banks are too swamped to process foreclosures seemed plausible at first, but this has gone on so long that I am increasingly skeptical of it.  So I can only assume that the foreclosures are being held back by some combination of moratoria and other bailout programs (or hope for more of the same), “extend and pretend” (in which lenders put off foreclosure in an attempt to prop up the paper value of their mortgage assets), and political pressure from the folks who run the bailout printing press.

As with other aspects of the housing market, this has become a largely political issue and is accordingly difficult to forecast.  But I think it’s a fairly safe bet that the politicians will find new and exciting ways to throw money at the situation.  (To this point, local housing analyst Ramsey Su has conjectured that the Christmas Eve lifting of the limits on how much money the government will provide to Fannie Mae and Freddie Mac is a prelude to widespread mortgage principal reduction by the two mortgage giants).

It’s tough to know, then, how many of those 19,453 homes will complete the foreclosure process and make it onto the market.  And for the ones that do, we don’t know over what timeframe it will happen.  It’s certainly within the realm of possibility that the government could borrow, print, and spend enough money to substantially lessen the shadow inventory’s potential impact.

It’s within the realm of possibility, but not a sure thing.  And there is no doubt that the shadow inventory is out there in great numbers.  Until the path forward is more clear (and regardless of whether prices are rising right now) shadow inventory is a factor that should not be dismissed or ignored.


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