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Shadow Inventory: A Thorn in the Side of Market Recovery



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By : David Abernathy    99 or more times read
Real estate shadow inventory is comprised of homes that have been foreclosed on but have not yet been put out on the market by the bank who owns the home. While the actual numbers are very hard to calculate, it is estimated that there are between three and seven million homes currently in the shadow inventory.

The reasons why a bank might choose to hold stock back in their shadow inventory vary; sometimes they will hold stock off the market so that it is not flooded with homes for sale and they might hold back some homes in hopes that prices will increase enough for them to get a better return on the price of the house when the market is depressed. In fact, if every bank owned home were on the market right now, the discrepancy between supply and demand would lower the already depressed prices of homes across the nation.

As the shadow inventory is put on the market, it is likely going to have some effect on the price of homes for some time to come. Some experts think that the current stash of shadow inventory will take almost three years to clear up if buying rates stay the same as they are now. The main problem with that estimate is that the current rate of buying is supported by government stimulus programs that are holding interest rates low and giving tax credits to buyers. When those programs are gone it is quite likely that the rate of home buying will drop; most serious buyers are aiming to have their closing finished before these programs expire so that they can take advantage of the offers.

Part of the problem with market recovery across the nation is that when the real estate market was booming, many people had secondary homes. Since the bubble popped, however, there are fewer people who can afford second homes. Also to blame were the wantonly poorly thought out loans that were available to many buyers who couldn’t afford them, stimulating the building industry to pump out more homes.

Consequently, there are currently more homes than are actually needed in the country; this discrepancy is likely to have a large impact on where the level of stock on the market balances out eventually. Banks cannot hold on to this inventory forever; it is far too costly. It just may be that some vacant homes will need to be repurposed for other markets instead of letting them languish.
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