What Is Shadow Inventory and Absorption Rate?

News headlines are filled with words that we do not use everyday. Two recent terms are shadow inventory and absorption rates. What is shadow inventory? What is absorption rate?

Shadow inventory is not easily defined. It has different definitions depending on who is making the definition. Standard and Poor's defines it as "outstanding properties whose borrowers are 90 days or more delinquent; properties currently or recently in foreclosure; and properties that are owned by the lender but have not yet been resold, or REO." Simply put, these are homes that are about to be in foreclosure, in foreclosure, or just foreclosed but not yet resold.

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In a healthy market the shadow inventory absorption is about 20 months. I read a report today that puts it at 44 months as of the end of the 3rd quarter 2010 to the tune of $450 Billion. Yes, that is with a huge capital B. As we know foreclosure were on hold a bit in the 4th quarter due to foreclosure gate so in the first half of 2011 it will climb.

What is absorption rate? Absorption rate is the amount of time it would take to sell all of the houses in a market if no new houses were added to the multiple listing services. In a healthy market the absorption rate should be between 4 and 6 months. Currently in San Diego the absorption rates for homes are between 6 months for the lower half of the listing prices on homes and 14 months for the upper half of listing prices for houses.

What does this mean to you and I am home owners? It means we are in this for the long haul and it will not get better any time soon. Last week I posted a graphic that shows the median home prices in San Diego continuing to drive. http://davidcares.com/2011/01/19/san-diego/median-home-prices-san-diego-ca/

The best we could hope for is for the median prices to slow its drop and stabilize. Truthfully I do not see that happening in 2011. I hope I am wrong but I fear that I am not wrong. The national unemployment rate is around 9.8% and the California unemployment rate is hovering around 12%. With so many people out of work it will be hard for foreclosure rates to drop and for all the homes that have flooded the markets to be sold.

I have seen estimates that homes will drop anywhere from 3% to 12% this coming year. If you find yourself in the need to sell your house now is better then later. Let's say houses will drop 6%; that means it will lose 1% every 2 months. If your house is valued at $300,000 then it is possible that the home will lose $3,000 in value every 2 months. The average time on market is greater then 100 days. The math is simple as it is shocking.

If you have questions on Real Estate in San Diego County I am happy to help. I can even run numbers for your specific neighborhood if needed. If you live outside of San Diego I can answer your general questions or put you in touch with an agent in your neighborhood through my network of agents.

Article on national shadow inventory: http://www.dsnews.com/articles/slow-loan-resolutions-extend-shadow-inventorys-staying-power-sp-2011-01-21

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