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shadow_inventoryWith all the good news in the market, from strong housing demand to rising prices, we can’t ignore shadow inventory. Not only does shadow inventory exist, it will have an impact on all markets for some time to come. In this time of confusion and misunderstanding, every agent needs to have a basic understanding of shadow inventory and must be able to explain its impact to consumers.

Shadow inventory refers to the inventory of homes not yet for sale that will eventually come on the market sometime in the near future. Although most people believe shadow inventory to be the group of distressed homes in some phase of foreclosure, shadow inventory actually includes three categories of homes:

1. Properties already foreclosed on, but not yet on the market for sale
2. Houses currently in the foreclosure process
3. Properties where the homeowners are at least 90 days delinquent on their mortgage payment

Studies indicate that 95 percent of those homeowners who fall 90 days behind on their mortgage obligation never catch up and their home eventually comes on the market as a short sale or foreclosure. Those who catch up on their mortgage payments are referred to as the “cure rate.” From 2000-2006, the cure rate was 45 percent, while from 2007 to the present, the cure rate is less than 5 percent.

Some of the best sources for harvesting current accurate statistics on shadow inventory include:

1. Core Logic Negative Equity Report
2. LPS’s Monthly Mortgage Monitor
3. S&P Indices (Quarterly Report)

As shadow inventory comes on the market, the total supply (inventory) of homes increases. The increase of shadow inventory homes, however, does not result in an increase in more equity home listings, but an increase in distressed property listings (REOs, short sales, foreclosures) that force the price of existing home listings downward.

Whether consulting a buyer or seller, agents need to separate fact from fiction and explain the effects of shadow inventory in their local markets. They need to communicate the fact that there may actually be a larger inventory of homes than the MLS numbers indicate. Don’t just tell your clients about shadow inventory—show them what they need to know with strong visuals on your PC, tablet or smartphone. Whether you create them yourself or subscribe to a service, you’d be wise to shed light on the shadow inventory in your area.

George “Gee” Dunsten, president of Gee Dunsten Seminars, Inc., has been a real estate agent and broker/owner for almost 40 years. Dunsten has been a senior instructor with the Council of Residential Specialists for more than 20 years. To reach Gee, please email gee@gee-dunsten.com.

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