The Shadow Inventory

The Shadow knows...   Most of us of a certain age can remember these haunting words at the end of each episode of "The Shadow".  What I want to talk about is the shadow inventory and what it may mean for housing prices moving forward.  We all learned in Economics 101 that if the supply of a product increases, the demand for the product decreases.  The result is the manufacturer must reduce the price of the product in order to sell it.  Real estate works the same way.  Our supply is measured by the inventory of homes for sale.  These figures are published regularly in every market in the country and are used by realtors in pricing their listings and in helping their buyers determine what to offer to purchase homes.  However, what these figures miss is the "shadow" inventory.  The shadow inventory refers to the properties that have been foreclosed by lenders but have yet to be placed on the market.  The National Association of Realtors (NAR) published a great article that details the percentage of distressed sales (short sales and foreclosures) in 2010, the remaining shadow inventory for each state, and the effects this inventory will have on prices in the upcoming months http://bit.ly/dJHxU4.  For California, the results are mixed.  While over 50% of all sales in 2010 were distressed sales, it is estimated that the remaining shadow inventory will be absorbed over the next 11-20 months, which is much sooner than in other parts of the country. 

So, when you are asked by friends how long it will take before we get back to a normal real estate market, it would be safe to lean over and whisper in their ears..."Only the Shadow knows"...