Shadow Inventory

Tom Brezsny
- Tom Brezsny

Shadow Inventory

Does anyone else remember when “Shadow Inventory”was a thing? It was a common leitmotif during the Great Recession and for those not quite old enough to remember, that was when real estate was mired in a long, torturous death spiral. Between  2008 and 2011, close to 40% of all listings qualified as “Distress Properties.” 

By default (pun intended) “distress property” was the name that stuck for all of those failed subprime loans, toxic assets, short sales,  REOs.  foreclosures,  zombie subdivisions  etc. For me, the phrase that best captures the crazy roller coaster ride of the market from 2003-2011 is Garbage In and Garbage Out.  

On the input side, we had all those no income/no asset verification, negative amortizing, adjustable rate mortgages fueling the market frenzy between 2003-2007. And when the house of cards started to fall, the market was forced to reabsorbed all those same homes/loans back into the supply between 2008-2011.  It was a classic binge and purge cycle with lots of “garbage” on both ends. 

The recession also saw a staggering number of underwater homeowners walking away from their homes or losing them in foreclosure. There were so many, that the banks were suspected of manipulating the supply of foreclosures to keep inventory down and prices up. There was a huge Shadow Inventory sitting out there, the theory went, casting a pall over the recovery as banks dribbled homes onto the market a few at a time to limit their losses.  

But then a funny thing happened … that Shadow Inventory never saw the light of day.  We kept waiting for that wave of bank-owned properties to hit the market and crater prices but the active supply never reached the flood stage. By the start of 2013, there weren’t many “distress properties” left. Most of the bad debt had been reabsorbed and the economy was on its way to recovery.  

In March of 2013, real estate launched on the tear that has now become the longest running, highest appreciating up market ever.  And over the last decade, the one most  significant driver behind it all has been: low inventory. 

With a relatively new market norm defined by ultra-low inventory and steep competition it’s fair to ask:   Why is the supply so low? Where did all the homes go? Are they ever coming back?  Is there some kind of Shadow Inventory still lying in wait?  What would release it? Is  ultra-low inventory just a fact of life we have to get used to?  Should buyers give up on the idea of ever having more listings to choose from? 

Next Week: Low Inventory ad infinitum ad nauseum.. struggling to figure out where all the listings went. 

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