Shadow Inventory – What Will Its Impact Be on The Charlottesville Real Estate Market

My definition of Shadow Inventory, specific to the Charlottesville market -

Homes that are still for sale but have been withdrawn from the market for any number of reasons – to make the home appear less “stale,” to take a break for the holidays, or most likely – because the seller was unable to sell the home and was able to rent it, even though that rent may or may not pay the monthly mortgage …

However, one component that is likely to contribute to an even higher shadow inventory number is foreclosures and Real Estate Owned properties (REO); courtesy of Sacramento Real Estate Statistics -

A hidden source of resale inventory, or “shadow inventory”

Foreclosures add a substantial and toxic form of inventory to the market, one that is not fully apparent from traditional inventory metrics used to evaluate the resale market. When bank-owned homes are sold, they do predominantly show up in resale transaction volumes. Thus, 40%+ of transactions in bubble markets have been reported to be distressed homes and more than 1 in 4 nationwide. In terms of inventory however, bank-owned homes frequently do not show up in resale inventory, or MLS listings. The extent to which bank-owned homes do not appear in MLS listings is difficult to quantify because it depends on each bank or servicer’s timeline and approach in handling foreclosed properties. In order to provide some sense of the extent to which MLS listings ignore distressed inventories we do a simple comparison analysis below.

MLS listings are missing large amounts of distressed inventory

The foreclosure wave has added another way in which MLS listings are not accurately reflecting true resale inventory conditions. Based on our analysis, MLS based listing inventory is significantly understating the extent of foreclosure inventory in many markets. In Figure 19 below, we compare distressed inventory vs. MLS listings in major metro areas across the US. A certain portion of distressed inventory is included in MLS listings – if it were all included we would expect MLS listings to be higher than distressed inventory…

In a perfect world, I would be able to replicate the charts found at the Sacramento site. I’m working on finding how many housing units we have in the Charlottesville area … as I noted earlier this year, Albemarle County and the City of Charlottesville had .03% and .02% respectively of housing inventory as being in foreclosure … if that were to triple (and I suspect this might be likely), we’d have a real shadow inventory issue to deal with.

Big Picture on Shadow Inventory:

Now for the really scary part: Shadow Inventory. The glut of homes for sale is likely much larger than reported. Inventory counted by the Realtors group only includes foreclosures that have been listed on the multiple listings service. The enormous number of REOs, auction properties, defaults and foreclosures not listed ARE NOT IN THIS DATA.

Because foreclosures aren’t included in the data at all (they are not sold through realtors’ MLS service) it is likely that the total inventory of houses for sale is APPRECIABLY HIGHER THAN REPORTED.

I expect we will be hearing more about the Shadow Inventory over the next few quarters . . .

Impact of shadow inventory -

- Misleading indicators of real housing inventory and absorption rates of current housing that is “for sale” on the open market (MLS)

- Prices depressed because as shadow inventory moves from the shadow onto the open market, that will keep supply high. While demand is likely to stay the same or go down a bit, shadow inventory’s addition to the Charlottesville market will have a real, measurable impact.

- If you’re seeking to buy, buy smart.

- If you’re looking to sell, what you “need to make” does not matter.

I’m hoping to add the City of Charlottesville to the above spreadsheet as soon as I get their data.

* Data source and assumptions for the above graph -

- Albemarle County information sheet for 2007 (pdf)

- 3rd Quarter Building Permit report of Albemarle County (pdf)

- My post from earlier this year, assuming foreclosures have doubled (which may or may not be accurate)