In real estate, the number of homes on the market is commonly referred to as the “inventory”.  If there are a lot of homes on the market, the inventory is high.  If there are only a few homes on the market, the inventory is low.  Back in early 2006, during the height of the crazy market, Maricopa County had an extremely low inventory with only about 6000 homes on the market.  After the economic collaps in 2008, the inventory reversed, soaring to the 55,000 home range!

Now, with the Phoenix market leading the national real estate recovery, our inventory has dropped back to a more balanced number, about 36,000 homes currently on the market.  But I still hear the occassional dire warning from a member of the public saying “Be very careful in this market.  There’s a huge “shadow inventory” of homes out there being held by the banks and they’re going to dump them on the market any day!”  Very scary . . . if it were true!

To be clear, the “shadow inventory” is composed of those homes that have been foreclosed by the banks, sitting as assets on their books, but not yet placed back on the market for sale.  If this shadow inventory is large, and if it were to be dumped back on the market early next year, it would indeed drive prices lower.  But . . . does the large shadow inventory really exist?

Today, all our real estate gurus are saying “No, the shadow inventory is gone.”  Here’s the theory that gets the most credence today.  Arizona is a non-judicial foreclosure state, meaning that banks do not have to go to court to foreclose on a home.  They simply issue a Notice of Deliquency to the homeowner who has stopped paying the mortgage, and 90 days later the home can be sold at auction on the courthouse steps.  Since the process is quick, the banks essentially burned through all their Arizona problem properties quickly, getting them into the hands of new owners.  As a result, Arizona’s foreclosure rate is now quite low, and the banks are sitting on very little inventory!

The good news: most experts believe Arizona real estate prices bottomed out in mid 2010 and are on the way up.  Indeed, in the greater Phoenix area, single family homes selling in the under $200,000 market range have seen their median price rise 30% in the last twelve months!