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Angie Chung/MEDILL

Homeowners are renting rather than selling their homes.

'Shadow' inventory weighs on Chicago housing market

by Angie Chung
June 01, 2011


Angie Chung/MEDILL


Springtime is usually boom time for those looking to buy or sell a home. But in 2011, three years into the worst housing bust since the Great Depression, both buyers and sellers are sitting on their hands. 

Take Nikkie Hartmann, whose Albany Park condo is now worth $80,000, 44 percent less than the $143,000 she paid for it in 2006. She carries a mortgage for 100 percent of the purchase price.  

“I am so underwater in my loan that I don’t believe I will be able to sell it for many years,” Hartmann said. She is renting out the property for $850 per month. 

Hartmann’s condo is part of the “shadow” inventory of properties waiting to be sold if and when home prices rebound. Other properties in this category are delinquent, in foreclosure or bank-owned.  

Dale Anderson, broker associate at Weichert Realtors-Nickel Group, says he has several clients in the Oak Park and River Forest area who are holding off on selling their homes. 

In fact, Illinois has the third-largest shadow inventory in the nation, following Florida and California, with 121,266 properties waiting to be sold, according to the National Association of Realtors in a March report.  

Standard & Poor’s Corp. estimated that at the end of the first quarter, Chicago had a 65-month supply of such homes, meaning it would take more than five years to clear the shadow inventory. That compares with an average 52-month supply for the entire U.S. 

The overhang acts as an invisible weight pushing prices down even more and sending more mortgage borrowers under water. Many real estate analysts say housing prices won’t rebound until the shadow inventory is absorbed. 

“It’s very understandable” that potential home sellers would wait to sell, Anderson said. “There’s a prevailing attitude and mindset that people are still scared. They think that the economy will go down more, that housing values are going to go down more.”  

Such pessimism can be self-fulfilling. In the first quarter, U.S. home prices as measured by the Standard & Poor’s/Case-Shiller home price index fell to the lowest level of the housing recession. Chicago home prices fell 7.6 percent to the lowest level in 10 years.   

The Illinois Association of Realtors reported that April sales of existing homes in the Chicago area fell more than 19 percent. The median price of a home fell 15 percent to $162,500 from a year ago. 

Kensington Properties’ broker Edward Flynne said that although now is a great time to buy a house with home prices down and mortgage interest rates low, people are hesitant since there’s a lot of uncertainly about how much property is out there.  

“It’s an interesting thing in real estate,” he said. “People will chase the pricing while it goes up, but when it starts to go down, people will get afraid. It'd be like a store having a sale, people will definitely go there and buy things on sale. But when real estate's on sale at a discount in some areas, people are hesitant. It's interesting how the psychology is a little different in real estate.”  

Foreclosure-related sales accounted for almost 30 percent of all Illinois home transactions in the first quarter of 2011, according to a report released last week by RealtyTrac, the online listing firm for distressed properties. Illinois had 5,529 foreclosure-related sales in the first quarter, down from about 38 percent in the first quarter last year and about six percent lower than in the fourth quarter.  

RealtyTrac said earlier this month that Illinois home foreclosure activity fell about 17 percent in April compared to the previous month. But it pointed out that most of the slowdown can be attributed to delays in processing foreclosures, which implies there are more properties yet to hit the market. 

“Foreclosures, shadow inventory, these are the biggest problems in the housing market,” said Barbara Corcoran, New York-based real estate investor and founder of The Corcoran Group. “Time heals wounds. It will take at least three to five years to clear shadow inventory.”  

The Obama administration has taken many steps to stabilize the housing market including its Home Affordable Modification Program (HAMP) that is designed to help financially struggling homeowners avoid foreclosure by modifying loans to a level that is affordable for the borrowers.  

Opponents say HAMP has only prolonged the housing downturn and built up shadow inventories by delaying foreclosures rather than preventing them. 

Delores Conway, a real estate professor at the Rochester Business School, said there may be some validity to that argument, but that a prolonged housing recession is probably inevitable and even necessary, given the depth of the crisis. 

“Maybe we need to prolong it for a while because prices have dropped too sharply and too quickly and that could create some other problems,” Conway said. 

She predicted it will take at least five years to clear out a lot of the overbuilding that went on. 

“The most recent data shows price declines and continued foreclosures,” Conway said, but housing will recover, albeit slowly.