Here in the Greater Phoenix, Arizona area, “foreclosures” has been the buzz word for at least the last two years. So much so that most home buying clients that come to us, now ask for them by name. “More Ovaltine, please” is now “Show me foreclosures, please.” The problem is that the once very large, seemingly unending supply of foreclosed homes (also known as REOs) has shrunk very dramatically in just the last 12 months. According to The Cromford Report, a well-respected local resource which provides daily real estate market updates, the inventory of lender owned properties in the Phoenix metropolitan area was at 12,965 on February 10, 2009. Now, it’s at just 5,816. Granted, that is still higher than the historical average for our fair Valley of the Sun, but it’s also not the very large, seemingly unending supply to which everyone had become so accustomed. Now, when new clients come to us asking to see all those foreclosures they’ve been hearing so much about, they need to expect the competition from other buyers to be fierce, and therefore, to pay at or very close to the list price.

So….where have all the foreclosures gone?

It would seem, at least temporarily, that they’ve been bought up! Taking a look back at 2009, lender owned properties only ever accounted for 25% – 30% of the available homes for sale, yet they often accounted for 65% – 70% of the monthly sales! At that rate, at some point, our inventory of foreclosures was bound to run out. I’m not suggesting that it is going to run out this year, though. There are still too many unknowns in the market for me to predict that.

One very pressing unknown is this thing called our shadow inventory – the inventory of foreclosed homes, or homes to be foreclosed upon, that has not reached the active market yet, but must eventually. One might say that short sales belong to or will belong to that shadow inventory. After all, with a success ratio of just 41.6%, the average short sale in Maricopa or Pinal County is not getting approved, and ending up in foreclosure. Standard & Poor’s published an article on February 16, 2010 asserting that the current shadow inventory of homes could take 33 months, nearly three years, to sell, once it hits the market. It is their opinion that the only reason these homes have not reached the market already is due to “court delays, servicing backlogs, and political pressure to keep borrowers in their homes.” I cannot prove this notion either, but my own experiences lead to me to believe it is true. I know of one homeowner in Scottsdale who has not paid his mortgage payment in 11 months, and still has not received a notice of foreclosure on his home. Eventually, he will, though, and eventually that home will come out of the shadows.