Minnesota Real Estate Investors Association, Inc.

Minnesota Real Estate Investors Association, Inc.

What is the Real Estate “Shadow Inventory”?


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?




mfork555@gmail.comI think it would be better to sell them shortly and then the problem can be eliminated.

short sale investing student8/27/2010

vicki@reijunkie.comJust confirms my conviction that there is money still to be made in short sale investing.

Mike Jacka8/4/2010

mikej@realestatepromo.comThat is a good question, I wish I had a crystal ball that could forecast the future, but unfortunately we can only guess based on what has happened in the past. Real estate will rebound and values will be were they historically should be. I think it will be more difficult for investors to work around government regulations, but the creative, out side the box thinking investors will do very well over the next 5-10 years. I also think that there will be a lot of millionaires and a billionaires created in the next 10 years from discounted / defaulted paper, notes.

Office Cubicle8/4/2010

leslieleroy@sify.comWhere do u view us in next 10 years as far as Real estate industry is concerned? Can u pls explain?

Mike Jacka7/28/2010

mikej@realestatepromo.comThat is a part of the overall shadow inventory.

Bob Barrie7/28/2010

BobB@kw.comThe shadow inventory I see, is the regular sellers that are holding off selling now because they do not like the prices they would get if they went on the market now.

Mike Jacka6/8/2010

trackbackDo you think the First Time Home Buyers Tax Credit had an Affect? Do you think the First Time Home Buyers Tax Credit had an Affect?

Fl Loan6/7/2010

peterjohnston887@gmail.comYeah Seth, short sell them.. lol

Mike Jacka6/5/2010

mikej@realestatepromo.comI think it is already getting there. I have heard two different media sources use that term so far.


Ryan@MnREIA.comSo when do you think the shadow inventory will become a the next buzzword for the public media ?


Seth@SethWoolard.comLets short sale them all and end the problem

Mike Jacka6/3/2010

mikej@realestatepromo.comthat's a valid point Eric. Normally I would say just get it over with, but with such a large quantity of shadow inventory, the market may not be able to absorb it, which would cause a huge problem.

Eric Hempler6/3/2010

ehempler@kw.comI can see your point regarding just getting rid of these and to get it over with. Although, I'm wondering if we even have enough buyers to absorb the next wave or would we be prolonging the buyer's market?

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