An estimated 2.1-million distressed homes make up the shadow inventory, representing a huge decline of properties that make up the inventory of homes that have not yet been formally foreclosed and listed for sale, according to Core Logic, a real estate research firm.
The inventory makes up part of the more than 18-million vacant homes that the U.S. Census Bureau says are sitting empty across the nation. The flood of soon to be foreclosed properties are also not yet counted by bankers and mortgage companies as losses on their balance sheets since they are not accounted for by new accounting regulations until properties are formally foreclosed and re-sold.
Delays can last up to three years for banks and mortgage servicing companies to formally foreclose homes, hundreds of thousands of which are left vacant by their mortgage holders long before banks formally repossess them. The shadow inventory of residential properties exceeded 6 million earlier this year, but bank servicing companies negotiating with mortgage holders and investment trusts taking huge “lots of inventory” have slashed the shadow inventory by more than half, according to an accounting of troubled homes in 30 states.
Hundreds of thousands of homes are not yet formally being foreclosed by lenders until agreements are struck with real estate trusts to purchase the homes at discounted prices, according to industry insiders.
Some 4.2 million residential units are available for sale on the open market, according to Core Logic. The over-supply of homes presents another proverbial shoe to drop for the housing market.
The shadow inventory is composed of homes with delinquent loans, bank owned properties, homes not yet formally in the foreclosure pipeline and foreclosures that are not yet accounted for under banking regulations. Home values are being pressured as a result and are expected to depress prices in most of the country, but the drop in the number of homes composing the shadow inventory is also good news for the market, indicating that prices may not drop as much as first believed.