Shadow Inventory – An Explanation

Posted by MoneySavvy on May 25th, 2010 | no comments home title

These are very uncertain times indeed. Our economy is in a serious state of recession and shows few signs of turnaround. Many people have found themselves with mortgages that are far above what their budgets allow them to pay.

Some are in this state through over-borrowing during the housing boom. The most common cause though is a loss or reduction of regular income. Unemployment could easily be blamed for our nation’s most serious financial crises.

With the exception of the Great Depression, more Americans are out of work than ever before. Many people realize that they need to escape the overburden of high mortgage payments. However, this is not a seller’s market and folks are anxiously awaiting a recovery before trying to sell. There seems to be no way to win, and too many families are upside down in their mortgages. Even if they did sell they would still be left with a loan balance because their property has lost its value.

Another huge problem is the unprecedented numbers of foreclosures within recent years. Here again, few are buying with the exception of some well-to-do home flippers. Also, many homeowners have either borrowed more than their home was worth or the property has lost value. This leaves banks holding onto notes which are nothing more than toxic assets.

All of these factors have created a shadow inventory within the housing market. This shadow inventory only compounds the problem and inhibits recovery. There appears to be a downward spiral occurring within the current economy with no way out, at least not in the foreseeable future.

These toxic assets are not a part of the visible housing market. They are for the most part illiquid. With most of their worth tied up in unrecoverable loans, they sit dormant for many months at a time within the shadows of the active inventory of more saleable homes.

The Federal Government has tried to at least lessen the burden with such provisions as Mortgage Modifications. This is not a favorable move as far as some politicians are concerned. The debate continues on whether the Government should step in and buy up some of the shadow inventory. With unemployment still on the rise though, some experts agree that this will only worsen the problem. After all, the Federal Deficit is already considered to be teetering on the brink of disaster.

Many feel that the American Government should stay out of private industry and allow the declining economy to recover in its own due time. No one can say for sure just what the correct solution is. It’s a matter of trial and error with serious negative consequences in the case of error.

One thing is certain though, and that is the need for adaptation. Retraining the workforce and putting the unemployed back to work will increase the likelihood of recovery in the housing market and a reduction of shadow inventory.