Should You Be Afraid of Shadows?

The two most important factors whenever you price anything is the demand for that item and the current supply of that item. It is well known as the supply and demand curve. Real estate is no different.  So, as we are about to head into 2010, let’s look at the potential demand for residential housing and the possible supply levels.

DEMAND

Because of low interest rates and the tax credits available today, home sales have remained strong over the last several months. According to the National Association of Realtors, year-over-year existing home sales are up by 23.5% and pending sales are up 31.8%. That is great news.

Yet, we must realize that there is a strong possibility that interest rates will start to increase after March 30, 2010. And, we already know the tax credit does not apply to any house going into contract after April 30th. For those two reasons, buyer demand will wane after the first quarter of next year.

That’s the demand side of the equation. Now let’s look at the supply side.

SUPPLY

A term you have probably heard on the television or read in the newspaper recently is ‘shadow inventory’. That will be a key component to the home pricing equation throughout next year.

What is ‘shadow inventory’?

These are the properties that are not yet currently on the market but potentially will be coming to market in 2010. Such properties include:

• houses taken over by banks and mortgage companies
• houses where the loans are at least 90 days delinquent (over 99% of these will become distressed properties that will be up for sale)
• houses whose sellers have waited for the market to improve

The number of homes that may be in the pipeline for a sale because of foreclosure and delinquency alone climbed about 55 percent to 1.7 million, according to estimates by First American CoreLogic. In their study, they found:

“While the visible month’s supply has decreased and is beginning to approach more normal levels, adding in the pending supply (shadow inventory) reveals there is still quite a bit of inventory that will impact the housing market for the next few years.”

Also Zillow, in their Q3 Homeowner Confidence Survey, found:

“The level of pent-up supply – a component of “shadow inventory” — remained relatively steady from the second quarter to the third. Nearly one-third (31 percent) of homeowners indicated they would be at least somewhat likely to put their home up for sale in the next 12 months if they saw signs of a real estate market turnaround.”

If we take the number of possible foreclosures coming to the market (1.7 million homes) and add it to the potential sellers ready to put their house on the market (several million), we can see that housing supply could increase dramatically next year.

Again, using the theory of supply and demand, we can see that the best prices will be gotten in the first quarter of the year when demand is up and before the supply of ‘shadow inventory’ comes to market.

Tagged as: Foreclosures, Home Sales, Interest Rates, Shadow Inventory, Tax Credit