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The inventory of unsold existing homes remained unnervingly high in May, raising questions about the price outlook for the balance of the year, especially in light of an immense backlog of foreclosed properties, known as the "shadow inventory," that will certainly have a depressing effect on prices as those homes begin to come on market.

Supply is High as Shadow Inventory Looms

The inventory of unsold existing homes remained unnervingly high in May, raising questions about the price outlook for the balance of the year, especially in light of an immense backlog of foreclosed properties, known as the “shadow inventory,” that will certainly have a depressing effect on prices as those homes begin to come on market.

The months supply of unsold home decreased slightly from April to 8.3 months in May. The first-time homebuyer and repeat buyer tax credits temporarily impacted supply as sellers listed their homes and buyers took advantage of the credits. In spite of the demand generated by the credits, May marked the second consecutive month of a year-over-year increase in inventory and the high level of homes still on the market is creating concern about the near term outlook for prices.

A normal market has less than six months of supply. According to the Calculated Risk site, as a general rule when months-of-supply is below six months, house prices are typically rising. Above six months-of-supply, house prices are usually falling.

The “shadow inventory” will add to the downward pressure on prices. In some markets, backlogged properties are probably coming on market now, but the bulk are yet to come, according to RealtyTrac’s Rick Sharga. Speaking at the National Association of Real Estate Editors conference in Austin June 5, Sharga said the shadow inventory will equal in intensity the subprime crisis of 2007 and 2008 and will reach its peak early next year.

Estimates of the shadow inventory vary from 2 million to 8 million. High estimates usually include repossessed homes that have not yet been listed for sale, homes that have been moved from delinquency and into foreclosure, and homes that are more than 60 days delinquent. This year some 5.7 million existing homes will change hands at current rates. Sharga estimates the real estate markets will feel the impact through 2012.

The impact of the shadow inventory as it comes to market is difficult anticipate. This wave of foreclosures resulted primarily from unemployment, not bad loans, and their geography will differ. They’ll predominate in the most depressed markets of the nation where the local economy will be least able to absorb them. Not all shadow inventoried homes will be repossessed. Many, 15 percent or more, will not be sold by lenders but by owners through short sales.

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