Rancon Reports on Shadow Inventory

Shadow Inventory Haunting Real Estate Market

One thing we’re not short of in the current real estate market is data. Every day we get reports on home sales, new home deliveries, home prices, mortgage applications, foreclosures, notice of defaults; and sort of scary sounding things like “shadow inventory.” Hey, it’s October!

Actually shadow inventory is a very important statistic in today’s market because it tracks the number of housing units that are in the foreclosure pipeline, but not yet on the market.

In late September, CoreLogic, a Southern California-based real estate data firm, released a report that showed shadow inventory on the national level fell from 1.7 million units in April to 1.6 million units in September. The good news is that the supply of shadow inventory appears to be heading downward, and has fallen 22 percent from January 2010. The not-so-good news is that it is still the major contributing factor to the stagnation in home prices.

The paradox is that the longer it takes banks to process the foreclosures, the longer prices will remain low, but if the process were to speed up there might be a glut on the market that would drive prices even lower.

According to a USA Today article (October 2, 2011), Standard & Poor’s estimates the current shadow inventory of 1.6 million units nationwide will take four years to cycle through the sales process. California has an estimated 270,000 units, according to RealtyTrac.

One homebuilder trying to mitigate the shadow inventory factor is Lennar. Rialto Capital Management LLC, a wholly owned subsidiary of Lennar Corp, is actively buying, improving and selling distressed properties. In fact, Rialto has been steadily earning profits for the company and reported earnings of $25.1 million in the fiscal fourth quarter of 2011, according to Managing REO, an industry related website.

At the Rancon Group we admire companies such as Lennar that are taking the initiative to meet the current inventory challenges, and we encourage others to come up with innovative solutions. We will continue to follow the industry trends and look for profitable opportunities in the current real estate market.

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