Have you heard about the shadow market? Maybe even shadow demand? What are these and what do they mean for the housing market?
Shadow Market
The concept of the Shadow Market is that there is a large supply of investor or government-owned homes that could flood the market. Recently supply has been really low so home prices have been going up due to competition. If the inventory of homes were to rise sharply, it could slow or even prevent rising home prices.
Is there a Shadow Market?
The government reports that there are just under two million home owners who are behind on their monthly payments of government-backed mortgages. These individuals are potential foreclosures. The consequence of almost two million defaulted loans would be a fresh flood of foreclosures on the market. Will the government default these loans and unleash the shadow market?
It's hard to say.
This would pose a huge financial risk for these federal agencies if they actually seized them. The government has already spent billions of dollars helping home owners manage high-cost loans and stabilize volatile areas. After all of that money, there are still 1.7 million threatening foreclosure. If the government started seizing all these homes they'll need to cover maintenance expenses, contractors, and real estate agents to sell and maintain the properties. So the government must decide what is the more financially sound decision. One approach they've been trying is offering the foreclosures in bulk to investors who will then use them as rentals. The market recovery would add higher value to these homes and outweigh some of the maintenance costs.
Shadow Demand
There are essentially 3 sources of Shadow Demand. Like Shadow Inventory, this represents a large number of buyers who will soon be looking to purchase a home. Because of the economic slump there are many people who have postponed purchasing a home for financial reasons. As the economy recovers more people will be able to buy homes. This is the first source of Shadow Demand. Second, is the group of people who had to short sale their home during the slump are now able to purchase a home again as a first time home buyer. Third are home owners who have been under water. As their home value increases, they will be able to sell and purchase a new home. These three sources of demand may outweigh the influx of homes from a shadow market.
About the Author:
Utah Dave - Daybreak Neighboorhood Expert and Local Resident
My friends nicknamed me Utah Dave in high school because they said it didn't matter where we went in Utah, I would know how to get there and who we needed to talk to. The name sticks today as UtahDave has formed into a professional real estate network of Neighborhood Experts all across the state. I live in Daybreak with my wife and 4 amazing children. I enjoy dancing (which is how I met my wife Dawn) as well as traveling, coaching, and learning.
