The Forecast of Future Home Values Given Shadow Inventory

There have been many estimates of what could be the amount of foreclosed homes that banks are holding off the market, keeping prices artificially high. Some estimates are as high as over a million units. The term "shadow inventory" represents the amount of homes that are in foreclosure and have yet to hit the market. Once these homes are put on the market for sale it will represent a large price impact to the current inventory of homes as supply will increase and prices will decrease. Shadow inventory has never been clearly estimated, but now reports are beginning to surface on how big this inventory could be given the amount of 5 year ARM and subprime mortgages that were originated between 2006 and 2007. In 2004 to 2007 up to 80% of mortgages originated were ARM loans.

News estimates are being provided my Morgan Stanley that a much higher range between 1 million and 8 million units could enter the market in 2011-2013. One million units could be absorbed into the current market place without much impact, but 8 million units could spell catastrophic numbers for home values over the next 2 years. Some of these homes will never be brought back to the market as they are in very undesirable, blighted areas or remote locations. These homes could be bulldozed and converted into parks, recreational areas or left as open space for future development.

Keeping shadow inventory under control is one of the big banks main objectives. At GMAC Mortgage memos have been sent to executives to halt the evictions tied to homeowners in more than 20 states, easing tensions and supporting prices. Banks views have begun to change to slow foreclosures and keep homeowners in their homes during a time of record seizures.

Real estimates of shadow inventory will be around 3 to 3.5 million units that will enter the market in the coming months and nowhere as large as the 8 million units predicted. Further estimates are that 1 million units per year could be absorbed without a significant impact to home prices. Given this estimate it should take 3.5 years for a normal supply/demand home market to return. This seems like a very long time, but given how bad the banking crisis really was, it is not as bad as it could have been.

Economy Shows First Signs of Growth

We are seeing the first signs that the US economy is showing growth. Though US gross domestic production remained flat in its August 2010 report, other economic gauges are showing that the US economy is increasing production. In it's Beige Book report released on September the 8th the US Commerce Department said that tourism, agriculture, consumer spending, non-financial services and transportation numbers expanded while manufacturing eased. Most of these industries were in decline through the summer and now are showing signs of increased production.


The real estate industry numbers were not as optimistic. As a result of the expiration of the home buyer tax credit in June, the real estate industry continues to show weakness. Median home prices and sales dipped in July and August. Business contraction is also weighing in on the commercial real estate industry. Tenants' shrinking business profits are overshadowing the sector. New pessimism is beginning to emerge as commercial real estate owners seek refinance and banks remain tight on underwriting guidelines. Increased vacancies and banks unwillingness to ease lending policies will increase commercial property foreclosures in 2011 driving the sector into further decline.

The good news in all of this is the Obama Administration latest economic proposals were received as one of the first long term solutions to a declining economy. The plan will stimulate small business growth through decreased payroll taxes and business investment tax credits. Though the plan is not enough stimulus to drive small business into the profit margin, it will provide the initial push the economy needs to increase business investment and hopefully job growth.

States Forecasted for Highest Unemployment

It is such good news to hear that the Obama Administration is starting to get it right in regard to economic stimulus. Today several key financial incentive announcements were unveiled that target business investment tax credits, extensions of the research and development tax credit and infrastructure spending. The stimulus targets the engine that creates cash flow and commerce for millions of Americans; small business. This news arrives in time to counter balance the latest unemployment rate numbers. Compiled below is a top 10 list of the US states that should see unemployment rates rise greater than other states:

1. Nevada 14.3
2. Michigan 13.1
3. California 12.3
4. Rhode Island 11.9
5. Florida 11.5
6. South Carolina 10.8
7. Mississippi 10.8
8. Oregon 10.6
9. Ohio 10.3
10. Illinois 10.3