Shadow Inventory Real or Imaginary

[Michael Zuber]

As a buy and hold investor I am looking forward to buying several additional properties in 2010. But one question I have to ask myself is whether or not the Shadow Inventory I hear about all the time is real or imaginary.

I figure given all the experience on this board that we might be able to figure it out for ourselves. Do you see Shadow Inventory coming on the market or is it all gone and just a dream.

What do you think??? Real or Imaginary??

[Will Barnard]

Michael,

There is no question that "shadow inventory" exists, it is not imaginary or a made up thing by the media. Just look at the number of foreclosures that happen which are sent to the courthouse steps fro auction. Of those, many go back to the bank and become REO's. These REO's have been hoarded for several reasons by the banks.
The number 1 reason is simple: the all mighty dollar. It has been more beneficial to sit on thme than liquidate them quickly.
Why? - For one, because they have been able to manipulate many markets across the country, especially here in SO CAL. This has stabalized the property values, prevented further rapid declines, lowered invesntory levels creating more demand than supply, and thus, all this translates into more savings for the bank. The other factor is by holding the properties, their only costs are the taxes and insurance, so keeping the asset on the books allows them to keep the balance sheet stronger and thus allows them to lend more money to make more money.

The real question is and has been for the last 4-5 months - When will they start to release a large sum of them and how will they do it?
Nobody knows for sure - just ask the media! It was posted that the banks would dump their inventory in September 09, then the story was October, it thne moved to November and now the word is January.
What do I think? I feel they will continue to do what is in their best financial interest regardless of how it negatively affects us or the economy. That said, they must liquidate the massive amounts of inventory they do have as they expect to get more this upcoming year from the next wave of foreclosures, the option arm loans, the loans with balloon payments coming due, etc. I don't feel that they will dump all at once, but I do think we can expect to see more of a flow from the banks come early next year.