The Forecast of Future Home Values Given Shadow Inventory

There have been many estimates of what could be the amount of foreclosed homes that banks are holding off the market, keeping prices artificially high. Some estimates are as high as over a million units. The term “shadow inventory” represents the amount of homes that are in foreclosure and have yet to hit the market. Once these homes are put on the market for sale it will represent a large price impact to the current inventory of homes as supply will increase and prices will decrease. Shadow inventory has never been clearly estimated, but now reports are beginning to surface on how big this inventory could be given the amount of 5 year ARM and subprime mortgages that were originated between 2006 and 2007. In 2004 to 2007 up to 80% of mortgages originated were ARM loans.

News estimates are being provided my Morgan Stanley that a much higher range between 1 million and 8 million units could enter the market in 2011-2013. One million units could be absorbed into the current market place without much impact, but 8 million units could spell catastrophic numbers for home values over the next 2 years. Some of these homes will never be brought back to the market as they are in very undesirable, blighted areas or remote locations. These homes could be bulldozed and converted into parks, recreational areas or left as open space for future development.

Keeping shadow inventory under control is one of the big banks main objectives. At GMAC Mortgage memos have been sent to executives to halt the evictions tied to homeowners in more than 20 states, easing tensions and supporting prices. Banks views have begun to change to slow foreclosures and keep homeowners in their homes during a time of record seizures.

Real estimates of shadow inventory will be around 3 to 3.5 million units that will enter the market in the coming months and nowhere as large as the 8 million units predicted. Further estimates are that 1 million units per year could be absorbed without a significant impact to home prices. Given this estimate it should take 3.5 years for a normal supply/demand home market to return. This seems like a very long time, but given how bad the banking crisis really was, it is not as bad as it could have been.