Threat of shadow inventory may be “over-hyped”

December 26, 2012 10:30AM

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Skeptics of what many experts see as the eminent recovery of the U.S. housing market often point to the large shadow inventory of foreclosed homes yet to hit the market, but concerns over an inventory glut may be over hyped, according to the Wall Street Journal.

For one, data shows that shadow inventory is shrinking. This year, shadow inventory fell to 3.4 million units from a peak of 4.7 million in 2009, according to John Burns Real Estate Consulting data cited by the Journal.

Moreover, the inventory of new homes for sale across the nation is at a 50-year low, while listings of previously owned homes are at an 11-year low. And banks have also become more efficient at approving short sales, where underwater homes sell for less than debt owed.

According to the Journal, the problem with focusing on supply is that it neglects demand, which was reinvigorated in 2012 and is expected to remain strong in 2013. Sales of existing homes in November were up 14.5 percent year-over-year, a three-year high, and in September, foreclosures sold for close to 7.7 percent less than traditional home sales, according to Zillow data.

However in some states, like New York, New Jersey and Florida, where the slow-moving judicial foreclosure process has preserved a larger backlog of foreclosures, the shadow may still present a threat.

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