The SF Chronicle had an excellent article today on the shadow inventory in the residential real estate market.

A vast “shadow inventory” of foreclosed homes that banks are holding off the market could wreak havoc with the already battered real estate sector, industry observers say.

Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.

“We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market,” said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. “California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You’d have further depreciation and carnage.”

This is classic bubble mentality.  Prices drop dramatically and you get the vultures swooping in to pick up what appears to be cheap assets.  But the same problems persists in EVERY bubble: supply remains too high.  This mountain of supply will flood the market over the coming two years as the economy remains weak and the shadow inventory owners look to shore up cash.  This sort of a blip occurs in every bubble.  It’s what I refer to as the false dawn.  This remains a simple Econ 101 story.  The supply will remain far too high and will simply overpower demand in the coming years.   The result will be immediately lower house prices followed by years of stagnant growth.