Tucson Shadow Inventory

What is Shadow Inventory

The definition, maybe I should say concept of, shadow inventory is based on a shadowy idea about homes owned by banks but not on the market.   Therefore these are homes that will need to come on the market at some time to be sold since banks don’t live in homes.

The theory goes something like this:

Banks own all these homes that aren’t on the market.   What if (please note this is a whopper of a WHAT IF), what if they all dumped them on the market at the same time.   Values would plummet, inventories would raise and the housing market would be in turmoil.   This theory really took off in January of 2010 with a series of articles and talks about the “Shadow Inventory”

Why would a bank dump a lot of properties all at the same time which will hurt their return on investment?

Good questions.   One that I ask often of this shadowy idea.   The answer, they wouldn’t.   What they would do and are doing is putting them on the market when they are ready.   What is “ready”?   It depends, (you love it when someone says “it depends”)   If the house is in good shape and hasn’t been trashed or partially destroyed by the person who was living there the bank can usually get the home on the market rather quickly.   They don’t tend to want to have these properties on the books.   But if there is a need for cleanup and repair the home will begin going through a process of “getting it ready for the market”.

There are companies that exist for this very purpose.   The bank calls them, they go out and make an assessment of the property.   Is the furnace missing, does the plumbing work (or did they pour concrete down the drains) what appliances need to be replaced, carpet? etc.   The company submit the list and cost to get it ready for the market.   The first step usually involves removal of STUFF, if lucky it is dirty stuff, if not it is dirty stinking stuff.   Next, the company makes the repairs and replacements, finally the cleaning crew comes back in.   Once this is done the home is ready for the market.

Depending on how bad the home was left will determine how long it will take to get it ready.   Those weeks or months during this process this home is a part of the “Shadow Inventory”.

For a long time the banks didn’t have a handle on this process.   They took the home back, found an agent, sold it pretty much as is.   But most banks discovered they could actually do better by repairing and replacing and get more ROI in the process.

They also discovered, as we said yesterday, that improving a property before selling it helps when they have others in the area on the market later to Comp.   It creates a win/win for the banks.   While potential buyers might be paying more for these properties they are less likely to find themselves in possession of a money pit.

Seller Dumping Predicted

Over 2 years ago the pundits were saying there were a whole lot of sellers keeping their properties off the market till prices began to rebound and they they would suddenly dump them onto the market and prices would go way down and the inventory would glut.   It didn’t happen.   While the pundits often see and speak of Real Estate as an investment vehicle.   For more home owners, it is a “home”   a place to live.   Unless there is a good reason to move there is no good reason to sell.

Is there a Shadow Inventory ?

I suppose there is, and while not called so probably has been for some time.   Till recently the banks didn’t have the mechanic of how to deal with the homes coming back to them.   They piled up “owned by the bank but not on the market” while the system was devised.   The old way of one or two at a time wouldn’t work.   But it looks like they have a handle on it now.

Will the Banks Be Forced to Dump

Anything can happen and sometimes does.   But the smart, reasoned and logical way to deal with this bank owned inventory is the way they are doing it.   Put them on the market when they are ready and sell them.   And they are selling.   In April there were 342 REO sales with an average sale price of $136,604 and a median of $125,000.   That represented 27.5% of the total sales for April.

Is the “Shadow Inventory” in Tucson something to worry about?

If you need something to worry about, go for it.   I don’t think it is a big issue.   The Seller Dumping didn’t happen, the dumping of REO homes on the market causing Sale prices to plummet is another thing I don’t see happening.