We hear a lot of talk these days about the effect of shadow inventory (also known as pending supply) on the housing market. Statistically a large percentage of American homes in distress (in default on their loan payments) will eventually be foreclosed upon or go through a short sale. A recent report suggests that the combination of current market properties and this “shadow” inventory adds up to a worrying 20+ months of supply in some areas of the country which obviously creates concern about further downward pressure on prices.
What does this mean for our local 95032 market? Do we have a pending supply just waiting to flood the market and depress prices here?
Currently in 95032 there are 123 properties active on the MLS. Records also show that there are 75 “distressed” properties in the same area. Of those distressed properties some of them are already listed on the market or in contract to sell leaving about 60 not actively on the market. The question we need to ask is how many of those are likely to end up on the market as REOs or short sales? Looking at foreclosure outcomes over the last 12 months give us an insight into that.
In 95032 40% of all pending foreclosures since Oct 09 ended up reverting to bank ownership or being sold to a 3rd party at the trustee sale. The remaining 60% of foreclosures over the last 12 months were cancelled, meaning the owners either worked out a loan modification with the bank, brought the loan current or sold the home and paid off the loan. If we assume the same cancellation and foreclosure rate going forward we can expect 24 of the 60 currently distressed homes to become REO listings over the medium to long term. Of the remaining 36 foreclosures that are likely to be cancelled we can expect some to hit the market as regular sales or short sales. If we assume 50% try to sell that’s 18 additional market listings. So, of the 75 distressed properties that we currently know about we can expect about 42 of them to come to market at some point over the next few months. However, bear in mind that these will not all come to market at once and are likely to come available over a several month period. Also, given that current inventory levels reflect seasonally normal sales plus the previously released shadow inventory it’s quite likely that this new shadow inventory is coming available at a rate that can be absorbed without pushing the inventory levels even higher. i.e. the 123 inventory level is already elevated sufficiently to take into account the shadow inventory.
So what does that mean, well my impression is that 95032 does not have a potential shadow inventory market crisis looming and prices won’t be adversely affected to any great extent by the local shadow inventory that currently exists here. Other areas may not be so lucky.