How is the market doing? This is a question I hear several times a day from my clients. While many homeowners faithfully follow the latest statistics trying to get information regarding their home’s value, what they might be missing is the creeping reality of Shadow Inventory.
Shadow inventory can be broken into three categories:
- Properties that lenders have repossessed but haven’t put up for sale. These homes are referred to as real estate owned, or REOs.
- Properties that are caught in the clogged foreclosure process.
- Properties that are severely delinquent in loan payments and almost certainly headed for foreclosure, but haven’t yet entered the process.
Officially, there are 3.5 million homes for sale nationwide. But there are millions more lurking in the shadows—hidden away on banks’ balance sheets, stalled in foreclosure court proceedings or simply occupied by nonpaying owners as lenders wait months or years before taking action.
Wary of seeing such large losses appear in earnest on their books, lenders have been reluctant to deal with bad loans head on. They don’t want to take paper losses. Their books show that they have these assets that are worth ‘X’ amount of money. But those values are not real.
Nationwide, there are 2.2 million homes stuck somewhere in the foreclosure process and many of those cases have completely stalled. Lenders are waiting longer before taking action against millions of homeowners who have stopped paying their mortgages. Nearly 2 million homeowners who haven’t paid their mortgages in three months or more haven’t received foreclosure filings. About 800,000 of those haven’t made payments in more than a year, according to Lender Processing Services.
According to Foreclosure Radar, as of October 31, there were 118 active properties for sale in Pacific Palisades and 45 shadow-inventory properties.
If financial institutions decide to start releasing shadow inventory, adding to the amount of the regular inventory, prices in the Palisades may be adversely affected. Low interest rates and lower home prices for buyers also come into play which helps stimulate the market. But, homeowners considering waiting for the market to rebound before they put their home on the market for sale may want to consider the effect of how the release of shadow inventory will affect their property’s value.
