Shadow Inventory Drag

We’ve saying it form months that “Shadow Inventory” or the mortgages that have yet to go throgh the foreclosure process even though the borrowers have quit making the payments will be a drag on home prices in most of the nation for years to come.

As of today we now know it will be atleast four years. According to Standard & Poor’s recent study the banks especially the big four Chase, Wells Fargo, Citimortgage, and Bank of America will need at minimum four more years to clear their shadow inventory. As long as the banks have this much shadow inventory it will be difficult for home prices to appreciate. In fact we feel that opposed to the talking heads on CNBC, MSNBC, and others that prices will still slide before they level out,a nd once they level out don’t expect much more than slight appreciation. The fact is that for the most part we still have an over-supply of homes.

The one thing that could help alleviate this shadow inventory problem is mobility. That is the ability for particualaly buyers but also sellers to relocate. The problem is that many people are upside down on their mortgage and cannot move.

Another problem is the Obama administration’s medeling in the housing market by making all of these funds avaialbe for people that are late on their mortgage to refinance. The problem is even after refinancing they tend to go back into defaualt again. See this directly from the Standard & Poor study: The agency also includes 70 percent of the loans that became current, or “cured,” from 90-day delinquency within the past 12 months because S&P says these loans are more likely to re-default. Paying your bills on time is a habitat just as not paying your bills on time is a bad habitat. Human nature says it’s difficult to change behaviors regardless of the incentives.

The bottom line is that Shadow Inventory is a hindrance to home prices rising on a national basis for the

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