The Myth of the Shadow Inventory

One of the biggest myths floating around the real estate sphere is that of the “shadow inventory.” Proponents of this myth believe there is a large inventory of homes, either empty or repossessed, waiting to enter the market. This idea is especially false in markets that are functioning as they should be, i.e. markets where homes that are for sale are for sale.

What is perpetuating the idea of the shadow inventory? Some experts in the real estate industry believe that banks and mortgage companies are holding up the foreclosure of a large number of homes. As a result of this so-called hold-up, there are hundreds or maybe thousands of distressed homes waiting to flood the market.

However, banks, such as Wells Fargo, and investment firms, such as Barclays Capital, have denied and debunked the existence of the shadow inventory. In fact, in the third quarter of 2013, Barclays Capital reported that only 309,000 foreclosed homes were still on the books of banks and mortgage companies. This is down 16% from 2012 and at the lowest level since 2007.

In a story reported by the Charlotte Business Journal about the 2013 meeting of the N.C. Bankers Association’s American Mortgage Conference in Raleigh, North Carolina, Michael DeVito, the head of Wells Fargo & Co.’s mortgage-servicing business, was quoted as saying, “Our goal is to either work with and help consumers stay in their home or return the capital to investors as expediently as we can.”

Wells Fargo is not the only bank practicing this type of mortgage management. Many other banks and mortgage companies are also working to help keep families in their homes by offering refinancing or mortgage modification. When modification is not an option, they are also moving to foreclose as swiftly as possible in order to get these homes off their books and sold to new owners.

Another reason why the existence of the shadow inventory proves to be untrue is the fact that the demand for distressed properties has increased over the past few years, which means that once foreclosed homes come up for sale, they are quickly snapped up. Which begs the question, why would a bank want to hold on to foreclosed inventory, when they can be making a profit?

Additionally, many states have taken steps to change the foreclosure process, either making it longer or by requiring banks to show actual proof of owning the mortgage before they can foreclose on it.  The Consumer Financial Protection Bureau is also working hard to improve the mortgage service industry by creating new regulations so that everyone has to play by the same rules.

While there are still some issues for distressed cities across the country, these positive signs, in addition to higher interest rates and fewer homes in foreclosure, are helping to put a damper on the idea of the shadow market.

For those that continue to believe in the idea of the shadow inventory, analysts agree, even if it is a possibility, banks or mortgage companies are not going to suddenly dump thousands of homes on the market at one time. There are bigger issues that are of more concern, like what will happen now that home prices have risen.