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The Lingering Impact of Shadow Inventory

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I wrote about the so-called shadow inventory a few weeks back.  Shadow inventory is a term that describes the wave of distressed properties that have been held up in the bank foreclosure process but that are now hitting the market in record numbers. 

Last week the National Association of Realtors (NAR) released a report showing this shadow inventory on a state by state basis.  As expected, Florida currently has the highest number of unsold bank-owned properties and has nearly twice as many as the state that is in second place, California.  Florida has over 440K REO properties compared to about 228K for California, which is twice as many as the state holding the #3 position, Illinois (124K).  Rounding out the top 4 is New York, which has 107K units.  These are the only 4 states with a shadow inventory north of 100K.    

The good news is that states that have made a concerted effort to sell off this inventory as quickly as possible are making rapid headway.  One example is Nevada, where a whopping 70% of existing home sales involve foreclosures or distressed properties (those that are at risk of foreclosure but are still going through the process).  Another example is Arizona, in which 55% of all home sales are of the distressed variety.  This is actually good news for these states, as the rapid depletion of shadow homes will result in a quicker recovery in these areas.  Conversely, states like New Jersey, where only 20% of all home sales involve distressed properties, will take much longer to recover.

Overall, current estimates predict that it will take the US economy anywhere from 2-5 years to absorb this inventory.  Hopefully you have adopted a long term investment strategy just like me so you can ride this out until it’s time to sell.  The market WILL fully recover, trust me.  And when it does, you will be in a perfect position to capitalize on your investment property holdings.

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