When the Bottom Arrives, A Flood of “Shadow Inventory”?

Just as news of increasing home sales are hitting our ears and possible early signs of a bottom are evident in a few hard-hit markets, a contingent of American homeowners seems to be poised to add their own homes to the already-high level of inventory in the market – a move that could stall any recovery in home values.

Almost one-third of homeowners (31 percent) said they would be at least somewhat likely to put their homes on the market in the next 12 months if they saw signs of a recovering real estate market, according to Zillow’s first quarter Homeowner Confidence Survey. Maybe these homeowners have outgrown their homes, or are dreaming about living in a new neighborhood or town, but don’t like the prospect of selling in the current market.

The chart below shows the breakdown of responses (they don’t total 100% because of rounding).

This “shadow inventory” will likely be one of the contributors to a recovery that is more “L”-shaped than “V”-shaped. As sales rise and inventory is cleared off, many homeowners will start to test the waters again by putting their homes on the market, thus keeping supply levels higher than they would be without this pent-up inventory. These sustained supply levels will serve to keep downward pressure on prices, which can only increase as demand begins to outstrip supply. We here at Zillow expect to see a long, drawn-out bottom, with any upward bumps in value tempered by new inventory coming into the market. Even if those who are “somewhat likely” to sell decide to hold onto their homes, substantial amounts of new inventory will be added if large numbers of those indicating their are “likely” or “very likely” to sell end up putting their homes on the market.

It’s important to note that a lot of these home sellers will also be buyers, so they will help some of the inventory cycle through. But it’s probable that some will decide to rent after being battered by declining home prices, or because they are baby boomers looking to downsize, so it’s likely that this “shadow inventory” represents more supply than it does demand.

Among those homeowners who said they were at least somewhat likely to sell their homes in the next 12 months, when asked what they would consider to be signs of a real estate market turnaround, the results were as follows:

Homeowners are optimistic about the future, we found out from the survey, so it’ll be interesting to see when and how this plays out.

Dr. Stan Humphries is a real estate economist and real estate expert for Zillow. Stan is in charge of the data and analytics team at Zillow, which develops housing market data for most major metropolitan statistical areas in the U.S., and provides economic research for current real estate market conditions. He helped create the algorithms for the popular Zestimate® home value and the Zillow Home Value Index (ZHVI).