Shadow inventory is a term used for houses that have not yet hit the active real estate market. These homes are usually pending foreclosures, 90 days past due, short sales and REOs (real estate owned) and can bring neighborhood prices down, due to discounted prices, if too many are made available at the same time. Reports have shown that shadow inventory has actually shrunk which may indicate a return to a normal supply and demand housing market. With the help of several mortgage programs, many homeowners have been able to avoid default and, therefore, avoid foreclosure which has ultimately helped reduce the shadow inventory.

According to Freddie Mac's August 2012 U.S. Economic & Housing Market Outlook, the shrinkage of excess vacant inventory is significant because it signals that in many areas the REO homes on the market are not competing with shadow inventory which makes the REO homes more attractive. REO homes for sale then have a lesser impact on home sales and prices. According to CoreLogic, REO dropped to 13.5% of all U.S. sales in May which was the lowest share since March, 2008. According to the Freddie Mac report, short sales, loan modifications and other foreclosure alternatives have reduced the flow of properties into REO inventory. With less shadow inventory and fewer REO'S, home market values have had the chance to increase and hopefully will not be erased with the upcoming fall and winter seasons. While much of the excess inventory has been absorbed over the past several years, some markets have shown rents rising and home values increasing. Shadow inventory still exists, but at a different level today as was the case several years ago. The Census Bureau vacancy data shows a decline in U.S. home vacancies that are currently for sale or rent. Rental vacancy rates have fallen to 8.6%, the lowest since the second quarter of 2002 and the for sale vacancy rate has dropped to 2.1%, the lowest since the second quarter of 2006.

Several mortgage programs were introduced to help eliminate the shadow inventory problem that was strangling the housing market several years ago. HARP, the Home Affordable Refinance Program, was established and now expanded into what is known as HARP 2.0. With this program, underwater borrowers who have mortgages that were sold to Fannie Mae or Freddie Mac prior to June 1, 2009, can refinance to historic low mortgage rates without the need of an appraisal since loan to value caps have been removed. In addition, many other verifications have been removed to make it even easier for borrowers. This program has help many homeowners avoid default or foreclosure by reducing their monthly mortgage payments, thus putting more money into their pockets at a time when every penny counts. For the month of June, 2012, HARP mortgages reached 33% of total refinance volume which was reported in the latest Refinance Report released by the Federal Housing Finance Agency.

FHA also officially made the FHA streamline refinance with lower upfront and annual mortgage insurance premiums available in mid July for existing mortgages that were endorsed prior to June 1, 2009. With no cash out, there is no appraisal necessary and documentation and verifications are eliminated. FHA have had a significant impact on keeping homeowners in their homes. According to FHA'S Single Family Outlook report for June, FHA refinance applications increased 198.3% from May to June.

Traditional mortgage refinances have also continued to be strong in numbers as low mortgage rates have persisted and attracted homeowners to lower their monthly payments, increase their equity or shorten the term of their loans. RealtyTrac's U.S. Foreclosure Market Report for July, 2012 showed that foreclosure filings, default notices, scheduled auctions and bank repossessions were reported on 191,925 properties during the month of July, a decrease of 3% from the prior month and a 10% decrease from July, 2011. This decrease also results in a reduction of shadow inventory in many areas which are now becoming sellers' markets as less homes become available to the buying public.

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