Shadow Inventory

Submitted By Eden972

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Case analysis: Shadow Inventory

Strategic issues and Problem:
Shadow inventory results in the supply shortage of real estate market in Southern California. When banks hold shadow inventory or sell blocks of foreclosures to investors, buyers will have little choices and many houses are somewhat overvalued in the market.

Evaluation and Analysis:
In Southern California, the demand for houses is huge every year since the economy heremany people live . However, many of the foreclosures that formed during the period of economic crisis were not released to the open market. There were a big gap between the foreclosures on sale and the total foreclosures. In other words, the supply of real estate market was “intentionally” controlled and the shortage has been created. Many buyers now find that it turns to “sellers’ market” and have to bid for the limited amount of houses. As a result, the price they have paid is more than the normal fair market value.

Banks usually sell some foreclosures in blocks to investors to save the maintenance costs and collect money back. The sale often includes agreement that requires investors to hold houses for several years before selling to individuals. Meanwhile, the number of foreclosures that are released to open market is limited. Thus the amount of supply is limited and the demand will rise because of low interest rate, the market price of real estate will remain high in the future. But most of the benefit from speculation is gained by investors, not bank itself. The real estate market should build a way that sells the right number of houses to those who really needs to live in Southern California.

Alternatives:
To reduce the amount of shadow inventories, banks should establish some ways that directly link to individuals. They can hire more agencies to help banks selling houses to individuals rather than investors. In this way banks would

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