The housing market across the country has been on fire over the past decade. Prices remain elevated; but many people insist that’s because there aren’t enough homes available. But is this really the case? Does shadow inventory impact the housing market and prices?
There are numerous factors in play in the housing market such as supply and demand, regional economic conditions, unemployment rates, shadow inventory, and mortgage rates. The last two take on special significance in the current housing scenario. Let’s take a closer look at these to see how they are likely to influence prices in the future.
The Impact of Shadow Inventory
The term “shadow inventory” refers to the homes which are kept off the market in an attempt to increase demand. Limited inventory will push up demand which in turn boosts prices. A report released by CoreLogic, a leader in information, analytic, and business services, states that the current residential shadow inventory remains elevated. This shadow inventory includes properties which are seriously delinquent, in foreclosure, and those held as real estate owned (REO) by lending institutions.
Florida, California, Illinois, New York, and New Jersey account for nearly half the properties that make up the shadow inventory. In simple terms, this means that shadow inventory has not had the negative impact on the housing market that many had expected. Todd Bezemos is an economist and housing credit advisor with lease to own housing aggregation service HomeStarSearch. In his capacity working directly with first time home buyers, Bezemos is afforded a unique perspective on the current housing market. He posits that “many homeowners are wary of selling because they have a low interest rate mortgage. And this has prevented the market from being swamped by an excess supply of homes.”
The Mortgage Rate Factor
Mortgage rates also play a significant role in determining which way the housing market will move. When mortgage rates are abnormally low as they were between 2010 and 2021, it’s due to excessive government bond buying. Also known as quantitative easing (QE), this is an attempt to hike the price of mortgage-backed bonds which will reduce the interest rate on these bonds. Another reason for low interest rates is the US economy.
Future Prospects
The foreclosure process can be a long one in many states. This supports the theory that the market will avoid a flood of bank-owned properties that will sink prices yet again. As homes gradually enter the market upon foreclosure, eager buyers line up to close on a fabulous deal. This ensures that the demand outpaces supply and prevents prices from sinking. Barring any kind of major political or economic setback, analysts foresee interest rates remaining at current levels. Bezemos says this is because the main purpose of keeping interest rates low during tough times is to provide a boost to the housing market. But when the market recovers – and it has been healthy for many years – there is no further need for rates to remain low.
The housing market is clearly in a time of transition. Although the buyers’ market of the past decade seems to be on its way out.
Photo Credit: Casey Serin
I read last month in one of the local paper that New England housing market has not lost much yet.
Shadow inventory is done in some third world countries on a regular basis. However, it’s mostly the edibles (wheat flour, sugar, tea, coffee and other that are not easily perishables.)
Even though shadow inventory is against the law in some Asian countries but folks do it anyway.
United States has more rules and regulations than most others. I don’t know how shadow inventory happens in housing market.
From what I’ve been reading, it seems that there are two different housing markets going on simultaneously. For some neighborhoods, it’s a buyers market now. On the other hand, move-in-ready homes that are up-to-date still have a high level of demand.
Very interesting times.
I am always interested in how the US property market performs as I see it as a blueprint for the Australian market only 10 years in the future.
I suspect it will still be quite a few years yet before any recovery starts to happen – if at all.
Foreclosures get snapped up pretty fast in my area if they are decently priced. I am glad we got to take advantage of the low rates with the house we are currently purchasing. I hope the market goes up from here as we will be staying put for a long while.
I’ve been looking for an investment property in Florida and totally agree with you. I was invested there before the last crash and thankfully got out on time. When I contacted my realtor again, she laughed. She proceeded to give me the down low in FL. She said the large dumping of REO and foreclosures never materialized, there are some, but nothing like it was expected.
Get this – the banks are bundling REOs and selling them to Hedge Funds, aha the same people who brought the crash. Can you believe it? So institutional investors are at it again. She also said that houses are receiving multiple offers and that in cases when the appraisal is not enough for the loan, the buyer/investor pays the difference, sounds familiar? I do see some houses sitting for a while, but the good ones that are nicely priced are gone quick, in less than a week.
I almost put an offer on an REO last week. Pretty little house that I know will appreciate nicely. But changed my mind because according to my realtor it takes 60 to 90 days to get a decision from the bank. You may or may not get it. But, in the mean time I’m in a bind, on a contract. If I decide not to get the property if awarded, I’ll be in default. So I changed my mind, I don’t want to wait 3 months so the bank can make up its mind and then I may not get the thing anyways.
I’m still shopping, but getting a little frustrated. Because in the areas where I want to invest, there ins’t a lot of inventory to look at.
My friend is trying to buy a house in the city where I live. His realtor said that homes are still selling fast, but the frenzy is long gone. Says sellers are getting 97% of asking price.
But I think it’s a buyers market in certain areas.
Wow, interesting points, especially about calculating mortgage rate factor. Great post!
We have been shopping in Oakland, Berkeley, and Alameda, CA. Many houses are still listed on the MLS with price reductions.
The rub is it is very hard to get lenders to lend on anything now that isn’t turn-key. What makes this all so different is the tiny housing stock in most places. When we bought a house in 2010 in Sonoma, there were about 60 houses for sale at the same time. Those days are gone.
Where there ARE a lot of houses up for sale is Oakland. And considering the property tax there [about 1.4% +$800-$1,400 or so in special assessments] and what you get for it, that’s not too surprising. But on small multi-family [3 units or less] there is no rent control for owner-occupied, so it may still makes sense for a small investor if you can find one in a neighborhood you like.
The housing market in Portland generally lags CA a few years. It’s still hot here too.
People are not just talking about it, they are doing it.