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"Shadow Inventory" and The Stagnation of the Housing Market

It's going to be awhile before we see some upward momentum.

The U.S. economy is an enormous oceanic barge that is attempting to steam ahead with an anchor still down. That anchor is the housing market. A dark spot in the U.S. economy, despite some more positive outlook by the general public, the housing market still looks much like it did three years ago when the economy sank in the first place. There are a number of variables contributing to the lag in the housing market’s return, and one of them was recently illustrated in a TIME article. Known as “shadow inventory”, millions of homes still sit idly by, not even on the market, dragging down neighboring home prices as banks wait to offload the toxic properties they already have so they can start clearing them out.

There’s broad consensus among real estate experts and economists that housing prices will not start nudging up again until the more toxic properties, foreclosed homes and short-sales, are cleared from the market. Banks are willing to take losses (sometimes significant losses) on these homes so that they are no longer liable for them. Thus other people and businesses are forced to sell lower to stay competitive. However, that shadow inventory, millions of homes that are just waiting to go on the market, are in a similar state and will continue to drag prices down with them. The trouble is, they’re not even listed yet. They’re simply vacant (sometimes not, with owners just waiting to leave their already foreclosed upon home until the bank can list it), and waiting for  an auction sign in their yard.

Banks hole on to these shadow properties for a number of reasons. For one, it costs money to put hoems up for sale, even at auction, and they may be having trouble keeping the homes they’ve already got for sale. Also, many banks withhold some of these properties because flooding the market with even more distressed properties will futher drive the cost down. Obama’s recent efforts to help people underwater on their loans may help to relieve pressure, at least temporarily, for people that are struggling under the pressure of their mortgages, but if these distressed properties are not offloaded soon, within the next couple of years, it could have seriously detrimental effects on the people already living “on the bubble”.

It’s likely that as other sectors rebound more readily, some of the extra inventory in the housing market will be consumed simply for commercial, industrial, or new residential properties. Some of that can be taken care of with new federal incentives, as well as some rezoning on the part of municipalities. However, it’s still likely that we are years from seeing an upturn in the housing market, perhaps a decade.