Housing’s Dark “Shadow” Inventory

Even with exchange traded financial products there are “dark pools” of liquidity. These are sources of liquidity available in peer-to-peer direct transactions between institutions. This kind of liquidity is not necessarily made available via the exchanges but instead flows off-exchange often to help facilitate certain structured deals for clients. This is not illegal despite the shady sounding name given to this kind of liquidity. It’s simply another aspect of how markets work off the exchange.

That said, it wouldn’t be too hard to believe that a similar type of liquidity (inventory) exists for homes. Though this is still being debated I believe it’s plausible. If so, then the housing market is probably a lot worse off than the official data shows. The data only reflects known inventory…it doesn’t account for shadow “off market” inventory and houses that have been placed into default.

It’s an interesting theory and you can read more about it here.