Shadow Inventory and Its Affect On Chicago Real Estate

You have most likely heard the term “shadow inventory” and may well have wondered what it means. Interestingly enough, while the shadow inventory will certainly affect the Chicago real estate market, opinions vary as to its precise meaning.

foreclosureFor some the term means that lenders may be holding on to foreclosed properties for fear of flooding the market. Others believe that it describes the high number of homes in the foreclosure process which will eventually go up for sale. And still a third group includes the possible flood of properties which will hit the market when homeowners who have been holding off selling finally decide to do so. It is generally agreed, however, that the shadow inventory of Chicago real estate includes all delinquent loans and real estate owned (REO) properties that have not yet reached the market. In any event, there is a strong belief that a very large number of presently unlisted homes will soon cause an overabundance of available properties and thus directly affect prices.

Is There A Glut?

When this glut will occur or its actual impact is also debatable. The number of homes entering foreclosure has recently abated as owners and lenders have pursued loan modification and short sale alternatives. However, as lenders are more efficiently clearing out the backlog of properties in distress, the foreclosure process has quickened, and more and more REO’s are becoming available for purchase.

Many analysts use the “tip of the iceberg” analogy to describe the current situation, feeling that a massive number of distressed properties and underwater loans sits just below the surface. Some believe that the number of potential homes for sale greatly exceeds the number currently on the market, and a Standard and Poor’s recent report predicts that, at the current rate of sales, it will take at least three years to clear out all shadow inventory.

What Does It Mean?

So what does all this mean for Chicago real estate? Actually, two very different viewpoints are emerging in this regard. The first can be seen in a somewhat positive light: because business will increase in the next year, potential investment opportunities will also rise, and sales, too, will increase. It is also possible that competitive bidding will drive prices up, thus averting a second housing market collapse. On the negative side, however, many industry “experts” predict that the weight of the influx of homes for sale will drive prices down at least another 8% by the end of 2010.

And then add to the mix the unknown variable of the unemployment rate, and the future of real estate sales is really anybody’s guess.


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