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Shadow Inventory in June

  • Shadow inventory – defined as the number of properties in the foreclosure process or in serious delinquency status – fell modestly in June from the prior month and is well below the level of one year ago.  The overall trend is far fewer scary properties in the pipeline.  That automatically means fewer distressed property sales in the future and should also mean a better appraisal process.
  • Here are the fresh numbers according to Black Knight Financial Service:
    • Seriously delinquent or in foreclosure was 4.17% in June, up from 4.22% in May, but down from 5.6% one year ago.
    • The number of foreclosure starts did increase to 88,314 from 86,258 over the month.  But this is not a trend but the timing of when states are initiating the foreclosure process, particularly in judicial states.
  • NAR’s data from the REALTORS® Confidence Index shows a marked decline in distressed property sales.  The number of foreclosure sales made up only 8 percent of all sales while short sales comprised only 4 percent.  REALTORS® who specialized in this market segment should be aware of declining business opportunities in the months ahead.  The comparable figures this time next year will be about half of today’s distressed figures.
  • Some states have made spectacular progress.  Shadows in Arizona and California have been all but burned off.
  • Some states still have looming shadow inventory and hence will be lagging behind in home price recovery.  New Jersey and New York are prime examples of where the court system has been very slow to move turn the property into an REO.  Anecdotal stories abound of “distressed homeowners” still in a home even after not paying mortgages for more than 2 years.  Some are said to game the system, such as leaving the residence and finding a renter: paying no mortgage and collecting rental income.  Do not be surprised therefore if current mortgage borrowers in NJ and NY are paying higher mortgage rates to compensate for this type of lender risk.

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Lawrence Yun, PhD., Chief Economist and Senior Vice President

Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.

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