Shadow Inventory: Defined

Shadow inventory is a real estate term that estimates:

the number of properties owned by banks, PLUS

the number of additional homes that have been foreclosed but are not yet on the market, PLUS

properties where the owners are behind on their payments and will probably end up in foreclosure.

As real estate professionals and homeowners we care about the numbers of properties in the housing shadow inventory because it gives an idea of the amount of time it might take before the housing market returns to “normal”. I put that in quotes because we’re not convinced that there IS such a thing as a normal real estate market anymore.

(For a detailed look at how Selma Hepp, a Research Economist for NAR, the National Association of Realtors estimated the national shadow inventory, please see the in-depth article posted on NAR’s Economists’ Outlook website, State by State Estimate of Shadow Inventory.)

Shadow Inventory in Texas

According to Hepp’s analysis, Texas ranks at #5 in sheer (estimated) numbers of properties in the shadow inventory, coming in behind Florida, California, Illinois and New York and slightly ahead of New Jersey and Ohio.

Hepp’s report indicates that it may take as many as 11 months to clear Texas’ shadow inventory, compared to a high of 51 months in New Jersey down to a low of 7 months in Nevada.

Two other interesting points to note, taken from NAR’s Mortgage Delinquencies by State Presentation (for 2010) is that in Texas, 1.9% of mortgage were in the foreclosure inventory for the 4th quarter of 2010 (below the median rate) and that 5.1% are considered to be seriously delinquent, which is also below the median.

What does the Texas Shadow Inventory Mean to Texas Homeowners?

If you’re planning to sell your home, you may be competing with properties that were foreclosed that are now on the market.

New foreclosures may hit the market after you list your home for sale.

Some of these homes are being sold by the bank, and some are being sold by investors who bought them at auction, fixed them up a bit and are hoping to make a return on their investment.

Investor-owned homes are usually priced to sell quickly, a little below actual market value.

Foreclosures being sold by banks are also frequently priced below market value.

What Can Texas Home Sellers Do?

For your specific situation, your best bet is to talk to one or more knowledgeable Realtors who are very familiar with your local market.

You will want to set aside several hour-long appointments with different agents so that you have time to review the numbers with them before selecting an agent to represent you if you decide to sell.

Some markets in Central Texas are selling very well this spring, and yours might just happen to be one of them.In other words, the shadow inventory might not make much difference to your chances of selling your home at a decent price. Or, local foreclosures might be a serious problem in your area. How do you figure out which is which?

If you are someone who likes to know hard numbers, some questions to ask might include:

What do you consider to be the local market area for my home (which neighborhoods, subdivisions, areas)?

How are homes selling in this area (for this first quarter of 2011, compared to the last 6 months of 2010)?

Specifically for homes that would be considered competition for YOUR home if you were to list it for sale:

How many comparable homes are currently for sale?

How many have sold in the last couple of months (3 months, 6 months) and how does this compare with the number of homes that sell in a typical month?

(What you’re asking about is the absorption rate and inventory. If 6 houses sold in the last 6 months and 3 are currently for sale, then your absorption rate is 1 home per month (6 in 6 months) and your area has 3 months of inventory. You care because if you want your home to be the one most likely to sell in a given month, it has to be the best one for the best price.)

Tell me about the foreclosures that are considered to be comparable to my property and how they might affect the ability of my house to sell quickly and for top dollar.

The agent you decide to work with will need to know and understand the answers to the above questions and should be able to explain the answers to you in simple terms.

He or she should also be able to show you real numbers for how homes are selling in your area, and more specifically – homes that are similar to yours, so that you have an idea of how easily your home might sell (or not).

[podcast]http://theappraisaliq.com/wp-content/uploads/2011/03/Texas-Housing-Shadow-Inventory1.mp3[/podcast]