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2. 2
Introduction
Is this guide for you?
A word about KCM
Chapter 1:
Let’s Bring Shadow Inventory into the Light
How shadow inventory is calculated
Where to find the details on shadow inventory
Chapter 2:
How Shadow Inventory Affects YOU
The truth about supply and demand
Chapter 3:
Uncovering the Shadow Inventory in Your Area
How to find the information you need
What KCM recommends
Bonus Chapter:
How to Discuss Shadow Inventory With Your Clients
Use visuals to make your point
Conclusion:
Help is Just a Click Away
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3. 3
introduction
Over the past few years, the term “shadow inventory”
We’re here has been making its way into the vocabulary of many real
to confirm estate agents. In fact, the topic has become quite volatile,
with agents from all over the country debating whether
that shadow shadow inventory actually exists.
inventory not
To help you make sense of it all, in this guide we will…
only exists,
• Define what shadow inventory means
but that it
• Show how shadow inventory is calculated
will also have • Explain why every real estate agent needs a basic
an impact on understanding of shadow inventory and how it affects a
market
all markets
• Provide resources for uncovering the shadow inventory
for quite in your market
some time.
And, if you stick with us to the end, we will share a bonus
section where you’ll find ways to discuss this topic with a
buyer and seller without them (or you) getting a migraine.
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4. 4
is this guide
fo r yo u ?
Some people believe that shadow inventory only affects
people in the previously named “sand states”: Florida,
Arizona, California, and Nevada. So if you live and work in
one of those states, then you’ll definitely want to read this. Consumers in
all markets are
But here’s the truth…
hearing about
If you list and sell property for a living anywhere in the shadow inventory
United States, then you should read this guide because in the news.
consumers in all markets are hearing about shadow
inventory in the news. You owe it to your clients to know
what’s going on and to explain what the impact of shadow
inventory will be in your market.
So how do we know so much about shadow inventory?
That’s certainly a valid question. Because we are
constantly reporting on the changes and updates in
the real estate industry via our KCMblog.com and our
Keeping Current Matters™ program, we have a unique
and in-depth view of the market. We examine national
trends and how they affect the industry as a whole.
Additionally, in January 2011, the founder of KCM, Steve
a word Harney, appeared on Fox Business (at the peak of the
confusion about shadow inventory) to clarify some of
the common misunderstandings about shadow inventory
about and to provide an analysis of the market at that point.
KC M
So you could say that KCM is a company that put
shadow inventory in the spotlight! Now, let’s shed some
light on the topic for you.
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5. 5
chapter one
Let’s Bring Shadow
Inventory into the Light
The first and most natural to doubt the validity of shadow inventory. Many cite the
question is: “What is shadow banking organizations’ reports and statements that
inventory?” they are not holding back inventory from the market.
Here’s the definition we Realize that the bank-owned properties account for only
like to use: some of the shadow inventory. There are many more
houses that “are not yet for sale that will eventually come
“Shadow Inventory refers to market in the near future,” as the definition states.
to the inventory of homes
not yet for sale that will So let’s look at what is included in shadow inventory.
eventually come to market Once you have the full picture of what it includes, it’s
in the near future.” hard to refute its existence.
When the concept of shadow
inventory first emerged, many
doubted it was real. But as
“Shadow Inventory
more and more homes became
distressed and went into refers to the inventory
foreclosure—with some listed of homes not yet for
for sale right away while others
sat in the shadows—the concept
sale that will eventually
became more mainstream. come to market in the
Still, some people today continue near future.”
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6. 6
How shadow inventory is calculated
Shadow inventory includes 3 categories The percentage of those who do catch
of houses: up on their mortgage payment is
often referred to as the “cure rate.”
1. Properties already foreclosed on but Unfortunately, the cure rate is incredibly
not brought to market yet low in this new market reality. From
2. Houses currently in the foreclosure 2000 to 2006, the cure rate averaged
process 45%. Since then, the cure rate has
3. Properties where the homeowner been at record lows of less than 5%.
is seriously delinquent on their
mortgage payment (at least 90 days
behind)
Categories 1 and 2 seem obvious
for inclusion, but why category 3 –
properties where the homeowner is
seriously delinquent on their mortgage
payment? We include these because
studies show that 95+% of all those
who fall 90 days behind on their Since we now have a less than 5%
mortgage payment never catch up, and cure rate, not including delinquent
these properties do eventually come to properties in the calculation would be
the market as distressed sales (either misinformation and a disservice to the
short sales or foreclosures). real estate industry and our clients.
Foreclosed In the Seriously
but not on foreclosure delinquent
market process homes
(at least 90 days behind)
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7. 7
Where to find the details on
shadow inventory
Searching for information about shadow But beware! You’ll find different
inventory can be a lot like searching for numbers and figures for shadow
a needle in a haystack. It’s there, but inventory depending on which source
it’s extremely hard to see. So before you use. Why?
you go spinning your wheels trying to
find something definitive, keep in mind When compiling their information, each
that 3 key companies provide regular, organization uses the numbers and
detailed information about shadow data they have access to, and this
inventory. They are: information is not always the same
for each reporting agency. Also, each
1. CoreLogic’s Negative Equity Report organization uses slightly different
2. LPS’s Monthly Mortgage Monitor methodologies to get their numbers.
3. S&P Indices (quarterly reports)
So which numbers should you believe?
Others that report on shadow inventory
from time to time include: At KCM, we use CoreLogic’s numbers
1. Barclays Capital for shadow inventory, which tend to
2. Capital Economics be lower than what the others report.
3. Calculated Risk Blog That’s because CoreLogic is the only
firm (that we know of as of this writing)
that actively scrubs their information
against what is currently on the market.
This creates a truer report of what
inventory is “in the shadows.” So as far
as we can tell, they are providing the
best and cleanest data regarding this
market segment.
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8. 8
chapter two
How Shadow Inventory
Affects YOU
As a real estate professional, In order for you to get the best price available for your
you need to have at least a seller, you need to understand what will impact pricing in
basic understanding of shadow the next 6 months. In the near future, the release of this
inventory … regardless of where shadow inventory will certainly have an impact. Why? It all
you live and work. This knowledge comes down to supply and demand.
will play a big role in how well you
do your job.
For example, when you’re working
with a seller, he or she will have 4
key questions about working with In order for you to get
you as the listing agent:
the best price available
1. Can you sell my house? for your seller, you need
2. Can you get me the best price to understand what will
available? impact pricing in the
3. Can you do this in the shortest next 6 months.
time possible?
4. Can you take care of all the
hassles that will occur during
the selling process?
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9. 9
The truth about supply and demand
The law of supply and demand is in Here’s why…
effect every day in every industry. For As shadow inventory comes to market,
example, when farmers have a low it adds to the supply in that market.
harvest of their crops, food prices go How that additional inventory affects you
up (the demand for the food is high
depends on your current market condition.
but the supply is low). But when they
have “bumper” crops and produce
Here’s a simple analogy we like to use
more than anyone expected, food
to put it in perspective: Think of your
prices go down (the supply easily
meets the demand). market as a town. Within that town is
a river (inventory) running through it.
In real estate, the price of a property The clouds in the sky are the shadow
is dependent on supply and demand inventory waiting to be released to
as well. As an educator in the real market. When it rains (when the shadow
estate industry, you simply cannot inventory releases), it fills the river (the
forget this concept and how it impacts inventory levels) to new heights.
future pricing in your market.
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10. 10
Scenario A:
If you have an extreme shortage of And let’s not forget one important
inventory (1-2 months), then it’s like point: This is not just any supply
you’re in a drought and the river is very coming to market. Many, if not most, of
low. You need some rain to replenish these listings will come to market as
the river so everything can go back to distressed properties (short sales and
normal. In this case, the additional REOs). In other words, their prices
inventory could be much needed will be naturally lower. So unless your
because the supply is low and the market is in dire need of inventory,
demand is high. these additional distressed listings
can certainly soften prices in your
Scenario B: area. Both you and your clients need
If you have normal inventory (5-6 to understand this important point
months typically), when it rains the because it will affect pricing across
river will crest slightly, resulting in the board.
some flooded roads and some water
in basements. In this case, real estate
prices will soften, but it probably won’t
be catastrophic. Supply and demand
will be roughly equal.
Scenario C:
If you have far too much inventory (7+
months), then any new rain will cause
major flooding throughout the entire town,
with some houses literally going under
water. In this case, real estate prices will
drop because the supply will be abundant
as compared to the demand.
As shadow
inventory
comes to
market, it adds
to the supply in
that market.
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11. 11
chapter three
Uncovering the Shadow
Inventory in Your Area
Now that you realize shadow inventory is real and can affect pricing in your
area, you need to get a handle on how much shadow inventory is coming in your
particular market.
How do you do that?
90 Day Delinquent
Remember, you have to look at 3
key areas: Foreclosure Process
1. Properties where the Foreclosure
homeowner is seriously
delinquent on their mortgage
payment (at least 90 days REO on the Market
behind)
2. Houses currently in the
foreclosure process
3. Properties already foreclosed
on but that have not been
brought to market yet
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12. 12
• CoreLogic has a paid service that can
get you information down to the zip
code level.
• The Mortgage Bankers Association
(MBA) has a paid service that can get
you different numbers at the county
level.
• RealtyTrac has both free and paid
services depending on your state,
county, and what information you’re
looking for.
What KCM
recommends
How to find
To thrive in the real estate industry (even
with the influx of shadow inventory coming
the information to market), you need to do 3 key things:
you need 1. Understand the basics of shadow
inventory and how it will impact supply
Knowing what information you need to
and demand for the next 6 months.
gather is certainly a good first step.
We discussed these topics in chapters
Next you need to know where and how
1 and 2 of this guide.
to find the data.
2. Know the key indicators for shadow
inventory nationally and in your state.
Unfortunately, getting accurate
Take that information and combine
information about delinquencies and
it with your knowledge of your local
foreclosures at the local level (down
market to determine the impact
to specific cities, zip codes, and even
shadow inventory will have on your
neighborhoods) is difficult and often
clients. We discussed this topic in
expensive. With that said, though,
chapter 2.
there are a few places you can go
3. Prepare well enough so you can
to find some of this data at different
simply and effectively explain shadow
levels of localness.
inventory and its impact on your
market to a buyer or seller. We’ll
discuss this in the next chapter.
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13. 13
bonus chapter
How to Discuss Shadow
Inventory With Your Clients
Make no mistake … your clients based on your research and understanding, explain
are hearing about shadow what impact (or lack thereof in some markets) shadow
inventory on the news and from inventory will have on them.
other sources. Your job is to help
them separate the facts from Whatever you do, don’t ignore the topic of shadow
the hype so they can make an inventory when talking with clients. Don’t try to sweep
informed decision. The question it under the rug, imply it’s not important, or downplay it
is, how? any way. Your clients have already heard about it. They
may be confused about it. They may have questions
It all comes down to open and about it. Ignoring it will not help them make an
honest communication. When educated decision. Talk about it openly and honestly.
you’re working with a client—
whether a seller or a buyer—you
need to bring them through an
educational process, like we did in When you’re
this guide with shadow inventory.
working with a
To do this, explain to them that client you need to
you have shadow inventory in bring them through
your market (and thus a greater
supply than is visible in the an educational
MLS), and then explain why this process.
excess inventory is there. Finally,
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14. 14
Use visuals to make your point
You’ve likely heard the saying, “A picture is worth a thousand Both are correct, but the
words.” That phrase is truer today than ever before. With picture description is
so many people busy and overwhelmed with information, easier and more effective.
conveying something in a simple yet powerful visual is often Why? Research at 3M
more persuasive than an hour-long conversation. Corporation concluded that
people process visuals
For decades researchers have been looking at how 60,000 times faster than
people process information and what types of messages text. Other studies have
promote understanding. And for decades the research has found that the human brain
continually been coming back to one key point: People deciphers image elements
process and remember visuals better than words. simultaneously, while
language is decoded in a
For example, if you had to describe what a circle was to linear, sequential manner,
someone, which of the following two approaches is easier meaning it takes more time
and more effective: to process and understand
1. Give a visual explanation: words than images.
And in terms of people
actually remembering
the information, research
shows that people
2. Give a textual explanation: remember visual messages
A curved line with every point equal six times better than verbal
distance from the center messages.
The Value of Visuals
A curved line with every
vs. point equal distance
from the center.
(visual explanation) (spoken/written explanation)
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15. 15
Research shows that people remember visual
messages 6 times better than verbal messages.
Without looking, can you recite back the
textual description of what a circle is?
Most people can’t.
Therefore, don’t just tell people about
shadow inventory; show them what they
need to know. Use strong visuals during
your conversation that reinforce key
messages. Keep these images on your
tablet or smart phone so you always
have them when you need them. • Finally, show your client how the
potential of additional inventory
• Show them the process of homes can affect their months supply.
going to foreclosure. For example: For example:
90 Day Delinquent
Foreclosure Process
Foreclosure
REO on the Market
• Show them a map of your state and
what the shadow inventory numbers, The more visual you can make the
foreclosure numbers, and month’s communication, the better your
supply of inventory numbers are clients will understand and remember
for various areas of your state, the information. When you and your
including your own area. clients are in complete alignment
and agreement on key factors of the
listing, the transaction will progress
much smoother.
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16. 16
Conclusion
Shadow The agents who understand shadow inventory and
adequately communicate it to their clients will fare much
inventory is better in the coming months.
real, it’s not
going away any So here’s your action plan:
time soon, and 1. Educate yourself as much as possible about shadow
it will affect inventory—what it is and how it can (and will) affect
your clients.
you and your
2. Get a handle on how much shadow inventory exists in
market in your area. Use the sources provided as a start.
some way. 3. Practice the key informational talking points your
clients need to know about shadow inventory.
4. Create strong visuals to reinforce the key messages
your clients need to know, and keep these visuals with
you at all times (on your smart phone or tablet).
5. Integrate this information into all your client
presentations.
And remember that KCM can help you make sense of it all.
We not only information every month,
but we also provide you with many of the visuals you need
to bring the information directly to the consumer.
Ready to learn more about KCM?
Go to whatisKCM.com
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