http://www.KeepingCurrentMatters.com

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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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Over the past few years, the term “shadow inventory”

has been making its way into the vocabulary of many real

estate agents. In fact, the topic has become quite volatile,

with agents from all over the country debating whether

shadow inventory actually exists.

To help you make sense of it all, in this guide we will…

• Define what shadow inventory means

• Show how shadow inventory is calculated

• Explain why every real estate agent needs a basic

understanding of shadow inventory and how it affects a

market

• Provide resources for uncovering the shadow inventory

in your market

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.

We’re here to confirm

that shadow inventory not

only exists, but that it

will also have an impact on

all markets for quite

some time.

i n t r o d u c t i o n

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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.

But here’s the truth…

If you list and sell property for a living anywhere in the

United States, then you should read this guide because

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

Harney, appeared on Fox Business (at the peak of the

confusion about shadow inventory) to clarify some of

the common misunderstandings about shadow inventory

and to provide an analysis of the market at that point.

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.

Consumers in all markets are hearing about

shadow inventory in the news.

a w o r d a b o u t K c M

i s t h i s g u i d e f o r yo u ?

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The first and most natural

question is: “What is shadow

inventory?”

Here’s the definition we like to use:

“Shadow Inventory refers

to the inventory of homes

not yet for sale that will

eventually come to market

in the near future.”

When the concept of shadow

inventory first emerged, many

doubted it was real. But as

more and more homes became

distressed and went into

foreclosure—with some listed

for sale right away while others

sat in the shadows—the concept

became more mainstream.

Still, some people today continue

to doubt the validity of shadow inventory. Many cite the

banking organizations’ reports and statements that

they are not holding back inventory from the market.

Realize that the bank-owned properties account for only

some of the shadow inventory. There are many more

houses that “are not yet for sale that will eventually come

to market in the near future,” as the definition states.

So let’s look at what is included in shadow inventory.

Once you have the full picture of what it includes, it’s

hard to refute its existence.

“Shadow Inventory refers to the inventory of homes not yet for

sale that will eventually come to market in the

near future.”

Let’s Bring Shadow Inventory into the Light

c h a p t e r o n e

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Foreclosed but not on

market

Seriously delinquent

homes(at least 90 days behind)

In the foreclosure

process

Shadow inventory includes 3 categories

of houses:

1. Properties already foreclosed on but

not brought to market yet

2. Houses currently in the foreclosure

process

3. Properties where the homeowner

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 mortgage payment never catch up, and

these properties do eventually come to

the market as distressed sales (either short sales or foreclosures).

The percentage of those who do catch

up on their mortgage payment is

often referred to as the “cure rate.”

Unfortunately, the cure rate is incredibly

low in this new market reality. From

2000 to 2006, the cure rate averaged 45%. Since then, the cure rate has

been at record lows of less than 5%.

Since we now have a less than 5%

cure rate, not including delinquent

properties in the calculation would be

misinformation and a disservice to the

real estate industry and our clients.

How shadow inventory is calculated

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Searching for information about shadow

inventory can be a lot like searching for

a needle in a haystack. It’s there, but

it’s extremely hard to see. So before

you go spinning your wheels trying to

find something definitive, keep in mind

that 3 key companies provide regular,

detailed information about shadow

inventory. They are:

1. CoreLogic’s Negative Equity Report

2. LPS’s Monthly Mortgage Monitor

3. S&P Indices (quarterly reports)

Others that report on shadow inventory

from time to time include:

1. Barclays Capital

2. Capital Economics

3. Calculated Risk Blog

But beware! You’ll find different

numbers and figures for shadow

inventory depending on which source

you use. Why?

When compiling their information, each

organization uses the numbers and

data they have access to, and this

information is not always the same

for each reporting agency. Also, each

organization uses slightly different

methodologies to get their numbers.

So which numbers should you believe?

At KCM, we use CoreLogic’s numbers

for shadow inventory, which tend to

be lower than what the others report.

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.

Where to find the details on shadow inventory

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As a real estate professional,

you need to have at least a

basic understanding of shadow

inventory … regardless of where

you live and work. This knowledge

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 you as the listing agent:

1. Can you sell my house?

2. Can you get me the best price

available?

3. Can you do this in the shortest

time possible?

4. Can you take care of all the

hassles that will occur during

the selling process?

In order for you to get the best price available for your seller, you need to understand what will impact pricing in

the next 6 months. In the near future, the release of this

shadow inventory will certainly have an impact. Why? It all

comes down to supply and demand.

In order for you to get the best price available for your seller, you need to understand what will

impact pricing in the next 6 months.

How Shadow Inventory Affects YOU

c h a p t e r t w o

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The law of supply and demand is in effect every day in every industry. For example, when farmers have a low harvest of their crops, food prices go up (the demand for the food is high but the supply is low). But when they have “bumper” crops and produce more than anyone expected, food prices go down (the supply easily meets the demand).

In real estate, the price of a property is dependent on supply and demand as well. As an educator in the real estate industry, you simply cannot forget this concept and how it impacts

future pricing in your market.

Here’s why…As shadow inventory comes to market,

it adds to the supply in that market.

How that additional inventory affects you

depends on your current market condition.

Here’s a simple analogy we like to use

to put it in perspective: Think of your

market as a town. Within that town is

a river (inventory) running through it.

The clouds in the sky are the shadow

inventory waiting to be released to

market. When it rains (when the shadow

inventory releases), it fills the river (the

inventory levels) to new heights.

The truth about supply and demand

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Scenario A: If you have an extreme shortage of

inventory (1-2 months), then it’s like

you’re in a drought and the river is very

low. You need some rain to replenish

the river so everything can go back to

normal. In this case, the additional

inventory could be much needed

because the supply is low and the

demand is high.

Scenario B: If you have normal inventory (5-6

months typically), when it rains the

river will crest slightly, resulting in

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.

And let’s not forget one important

point: This is not just any supply

coming to market. Many, if not most, of

these listings will come to market as

distressed properties (short sales and

REOs). In other words, their prices

will be naturally lower. So unless your

market is in dire need of inventory,

these additional distressed listings

can certainly soften prices in your

area. Both you and your clients need

to understand this important point

because it will affect pricing across

the board.

As shadow inventory comes to market, it adds to the supply in that market.

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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?

Remember, you have to look at 3

key areas:

1. Properties where the

homeowner is seriously

delinquent on their mortgage

payment (at least 90 days

behind)

2. Houses currently in the

foreclosure process

3. Properties already foreclosed

on but that have not been

brought to market yet

Uncovering the Shadow Inventory in Your Area

c h a p t e r t h r e e

90 Day Delinquent

Foreclosure Process

Foreclosure

REO on the Market

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Knowing what information you need to

gather is certainly a good first step.

Next you need to know where and how

to find the data.

Unfortunately, getting accurate

information about delinquencies and

foreclosures at the local level (down

to specific cities, zip codes, and even

neighborhoods) is difficult and often

expensive. With that said, though,

there are a few places you can go

to find some of this data at different

levels of localness.

• 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.

To thrive in the real estate industry (even

with the influx of shadow inventory coming

to market), you need to do 3 key things:

1. Understand the basics of shadow

inventory and how it will impact supply

and demand for the next 6 months.

We discussed these topics in chapters

1 and 2 of this guide.

2. Know the key indicators for shadow

inventory nationally and in your state.

Take that information and combine

it with your knowledge of your local

market to determine the impact

shadow inventory will have on your

clients. We discussed this topic in

chapter 2.

3. Prepare well enough so you can

simply and effectively explain shadow

inventory and its impact on your

market to a buyer or seller. We’ll

discuss this in the next chapter.

How to find the information you need

What KCM recommends

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Make no mistake … your clients

are hearing about shadow

inventory on the news and from

other sources. Your job is to help

them separate the facts from

the hype so they can make an

informed decision. The question

is, how?

It all comes down to open and

honest communication. When

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

this guide with shadow inventory.

To do this, explain to them that

you have shadow inventory in

your market (and thus a greater

supply than is visible in the

MLS), and then explain why this

excess inventory is there. Finally,

based on your research and understanding, explain

what impact (or lack thereof in some markets) shadow

inventory will have on them.

Whatever you do, don’t ignore the topic of shadow

inventory when talking with clients. Don’t try to sweep

it under the rug, imply it’s not important, or downplay it

any way. Your clients have already heard about it. They

may be confused about it. They may have questions

about it. Ignoring it will not help them make an

educated decision. Talk about it openly and honestly.

When you’re working with a

client you need to bring them through

an educational process.

How to Discuss Shadow Inventory With Your Clients

b o n u s c h a p t e r

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You’ve likely heard the saying, “A picture is worth a thousand

words.” That phrase is truer today than ever before. With

so many people busy and overwhelmed with information,

conveying something in a simple yet powerful visual is often

more persuasive than an hour-long conversation.

For decades researchers have been looking at how

people process information and what types of messages

promote understanding. And for decades the research has

continually been coming back to one key point: People

process and remember visuals better than words.

For example, if you had to describe what a circle was to

someone, which of the following two approaches is easier

and more effective:

1. Give a visual explanation:

2. Give a textual explanation:

A curved line with every point equal

distance from the center

Both are correct, but the

picture description is

easier and more effective.

Why? Research at 3M

Corporation concluded that

people process visuals

60,000 times faster than

text. Other studies have

found that the human brain

deciphers image elements

simultaneously, while

language is decoded in a

linear, sequential manner,

meaning it takes more time

to process and understand

words than images.

And in terms of people

actually remembering

the information, research

shows that people

remember visual messages

six times better than verbal

messages.

Use visuals to make your point

The Value of VisualsA curved line with every

point equal distance from the center.

vs.(visual explanation) (spoken/written explanation)

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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.

• Show them the process of homes

going to foreclosure. For example:

• Show them a map of your state and

what the shadow inventory numbers,

foreclosure numbers, and month’s

supply of inventory numbers are

for various areas of your state,

including your own area.

• Finally, show your client how the

potential of additional inventory

can affect their months supply.

For example:

The more visual you can make the

communication, the better your

clients will understand and remember

the information. When you and your

clients are in complete alignment

and agreement on key factors of the

listing, the transaction will progress

much smoother.

Research shows that people remember visual messages 6 times better than verbal messages.

90 Day Delinquent

Foreclosure Process

Foreclosure

REO on the Market

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The agents who understand shadow inventory and

adequately communicate it to their clients will fare much

better in the coming months.

So here’s your action plan:

1. Educate yourself as much as possible about shadow

inventory—what it is and how it can (and will) affect

your clients.

2. Get a handle on how much shadow inventory exists in

your area. Use the sources provided as a start.

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.

c o n c l u s i o n

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

Shadow inventory is real, it’s not

going away any time soon, and

it will affect you and your

market in some way.