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3 Years of “Shadow Inventory”

Another analyst company came out with their guess of how much shadow inventory there is. Shadow Inventory are the homes yet to move through the foreclosure process. Standards and Poor looked at 20 metro areas and found that it would take an average of 3 years, at current sales pace, to clear the shadow inventory. What they found was there was a big difference between areas from a low of 18 months of inventory for Phoenix to 103 months in New York City.

Read the news article here

Yesterday I read an article from some Mortgage analyst stating that interest rates will gradually rise to 6% by the end of next year. I’ve seen other economic predictions that median home prices will flatten out and start rising next year.

It’s really fascinating to me to read some of these analyst predictions. I really don’t think some are looking at all the factors that may effect where the housing market will be in the next few years before they make their prediction.

Here are the main factors I see that will drive any local real estate market in the upcoming years.

– Inventory
Simple supply and demand economics. More inventory = increased competition, especially when the sales pace is slow.

– Sales Pace
The sales pace determines Months of Inventory which is how much time it will take to sell the existing inventory.  Using the Months of Inventory calculation, 6 months is a neutral market, above 6 months is a Buyers Market (which typically means homeowners need to lower their price if they want to sell).

– Foreclosures
It’s already been proven that REOs are priced aggressively, bringing down home values in a neighborhood. SLO County is between 30-40% of recent sales in the MLS being distressed (REO or Short Sale). That’s a pretty hefty percentage.

– Mortgage rates
If interest rates go up, people can afford less of a house. If 1% change effect 7% of what someone can afford, who’s going to pay for the 7% hit? The Buyer or Seller?  To me, it will depend on what’s going on with inventory, sales pace, and foreclosure percentages!

I don’t know if anyone has a crystal ball to predict where all these factors are headed.

What I do know is that every real estate market is different.  Even in SLO County, we’re seeing different inventory level trends and foreclosure rates between individual cities.

Written by Keith Byrd - Go to Keith's Website/Profile