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Impact of Shadow Inventory on Income Property Investing

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I saw some stats today regarding the extent of the foreclosure problem in the US.  As of the end of September 2010, there were a whopping 1.7 million homes in at least the early stages of foreclosure.  All told, S&P estimated that it would take over 3.5 years to sell off that entire inventory at current run rates.  Although these stats mainly apply to primary homes, you can rest assured that investment properties will be impacted as well.

The backlog is worse than previously thought because banks are simply struggling to keep up thanks to the economy which as you know has been sputtering the past 3 years.  Adding to the huge backload is the fact that banks are also trying to modify as many mortgages as possible as a preventative measure. 

This previously hidden foreclosure inventory has been dubbed “shadow inventory” by people smarter than me  The state with the largest amount of shadow inventory is New York, which is estimated to take 10 years to deplete.  Boston and Miami come in second and third with a 62 month and 60 month supply, respectively.

Generally speaking, this wave of foreclosure property is both good and bad news for income property investors, depending on how you look at it.  On the downside, if you plan to sell property in the next few years, you will probably face some stiff price competition.  The glut of foreclosed houses will simply create too much supply in the market, thus driving prices down. 

And that leads to the obvious upside; if you plan to buy you should have plenty of affordable options to choose from.  The way I see it, the market can’t possibly be anything other than a buyer’s market for at least the next 4-5 years.  Everything is cyclical and eventually we will experience another seller’s market, but for now the buyers are the ones with all the negotiating power.

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