Is the Shadow Inventory an Idle Threat?

The fledgling housing market recovery in the United States seems perpetually threatened by a number of factors. One of the most frequently mentioned dangers is the shadow inventory, the aggregate of all Real Estate Owned (REO) properties and other residential units that are in some stage of foreclosure with little hope of getting back on the right track.

To some real estate analysts, the shadow inventory is essentially the sum of all fears for the housing recovery, but it does not seem to have had too much of an impact, at least not yet. In fact, a recent article in Time magazine indicated that this umbrageous inventory fell by as much as 12 percent on annual basis back in October of 2012. Real estate analytics firm CoreLogic calculated the shadow inventory to be a little over two million units, just larger than the current inventory of homes available for sale.

A Shadowy, Yet Active, Inventory

According to an economist from CoreLogic who spoke to Time magazine, real estate investors have been helping themselves to the shadow inventory, but only seasoned investors with powerful means of acquisition have been able to do so. The shadow inventory has been a windfall for many real estate investment trust (REIT) managers who have taking advantage of red-hot rental markets.

These investors swoop down on rock-bottom real estate deals like ravenous birds of prey, quickly putting their newly-acquired assets to work. They operate with the efficiency of a SEAL team, leaving nothing to chance and not allowing homes to sit unsold in the market. Average homeowners or would-be real estate flippers do not generally have the cash nor the tools and resources that REIT managers enjoy to turn a profit.

If the subprime mortgage lending free-for-all of the early 21st century was still in effect these days, thousands of would-be rookie real estate investors motivated by late-night infomercials would be pecking away at the shadow inventory with borrowed money. This would in turn contribute to a bubble-like situation.

The Shadow Recedes

The amount of properties in the shadow inventory could be significantly reduced in 2013 thanks to the mortgage principal write-down provisions of the National Foreclosure Settlement Agreement of 2012 and other initiatives to save borrowers from foreclosure and negative equity situations. Rising real estate prices will also help to reduce the shadow inventory. Even if most borrowers are not able to hold on to their homes, mortgage lenders and servicers know better now than to rush foreclosures, and thus the shadow would become is bound to become less ominous as days go by.