Is Shadow Inventory Affecting the Chicago Real Estate Area?

Posted by Judy Orr on Wednesday, June 16th, 2010 at 3:38am.

What is Shadow Inventory?

shadow inventory for real estateMost of us will agree that "shadow inventory" comprises of properties that are bank owned that are not on the market for sale yet and can also include homes that will fall into foreclosure when loan modifications or short sales are not transacted.

Where Does the Chicago Market Stand?

I just read an article that referenced an analysis of “Shadow Inventory” published by Standard & Poor's Rating Services. The analysis did not include any mortgages backed by Fannie Mae or Freddie Mac. I was eager to see if Chicago would be listed in the article, and it was. The areas that were hit the hardest, such as Phoenix, Las Vegas, Detroit, San Diego, San Francisco, etc., currently have the least amount of shadow inventory. It is deemed that the reasoning behind this is because their shadow inventories peaked back in 2007/2008, while other areas are just starting to see their inventories increase.

And yes, Chicago is now one of the areas that shows the highest amount of shadow inventories, at 44.3 months of supply. Compare that to Phoenix which is down to 18.5 months and the Chicago area has a way to go. Other areas with current high shadow inventories include Miami at 61.8 months supply, Seattle at 43.8 months and Washington, D.C. at 34.2 months. Areas in between these high figures include Boston, Dallas, Los Angeles and more.

What Does Shadow Inventory Have to do With Current Active Listings?

There are several negative factors caused by shadow inventory. The first is the fact that the homes that have already been foreclosed on are sitting vacant and boarded up. The more of these in a particular area, the more blighted the area becomes.

Foreclosures hit every price range. Imagine being in a moderate to upper price range area and have a boarded up home in the subdivision. It's even worse if it's on your block or right next door. It's not for sale yet so no one can purchase it to fix it up and either sell it or move into it. The longer it sits, the more damage can occur, making the property worth even less than the discounted foreclosure price.

bank owned homes
Once these homes do hit the market, most of them are listed at lower than market values to make up for the neglect and any damage. For the most part, the banks and investors now want to get rid of the property. Again, depending on how many of these foreclosures are in a particular area, this will bring prices down for everyone. Might sound good for buyers, but in the long run the area could be blighted for a long time.

That's another problem. Having these shadow inventories sitting around delays the housing market recovery. If too many hit the market at any given time, prices continue to decline. It is simple supply and demand, too much shadow inventory released at once to compete with the already high amount of properties for sale causes a bloat of inventory with few ready, willing and able buyers to purchase them.

Read a previous blog I wrote titled Illinois in Top Ten Foreclosure States.

Judy Orr sells distressed and non-distressed properties. If you're looking for an investment property to rent or sell or if you're looking for a place to call home, give Judy a call at 708-536-8200. Feel free to do a Home Search and better yet, get listings sent automatically to your e-mail.

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