Are banks really holding on to inventory?

[John Cobb]

There is a lot of speculation whether or not banks are holding back a large inventory of repossessed properties in order to keep prices form tumbling even lower (is there? Isn't there? your thoughts please).

If this is the case and there is an unseen inventory, when this double dip comes screaming around the corner will we see them throwing in the towel and releasing everything back onto the market?

[Eric S.]

Shadow inventory could actuallly mean different things, which I think is one reason why you get different answers.

Technically, it's inventory that the the banks have foreclosed on but not put on the market. I believe that ForeclosureRadar.com has done some good analysis on this and concluded that in fact banks haven't been doing as much of this as people think. It's a popular topic of discussion, thus the attempt at a formal analysis.

However, one thing that is happening is that banks are not officially foreclosing, or they are doing it very slowly. So, if you take a look at the inventory that fallls into this status of you'd-expect-them-to-have-foreclosed (e.g. haven't paid the mortgage in 12 months), then I understand that these numbers certainly are ballooning.

Something else to think about is, what drives prices? The policy makers often seem to assume that's it 's an issue of supply and demand. This may be partially true, but many will point out that it's driven primarily by affordability, not availability -- that is, what a buyer's monthly payments are going to look like. So, in this sense, prices are less sensitive to supply and demand and more sensitive to factors like down payment required, interest rates, other underwriting guidelines, etc. So, for example, the coming inflation many predict will have a huge effect (through interest rates) on home prices that people can afford to make payments on.

Having said all that, if prices fell again I don't think they would release everything back on the market. I think they would hold on to it even tighter. But who knows?