I guess the answer lies in what “shadow inventory” is. If you only consider it to be houses that have been taken back by the bank, but are not for sale on the MLS, then there would be a question of ‘why sell anything?’ Why not just withhold inventory until prices reach par with the loan?
If you think of shadow inventory as all the houses that are in serious default, but not already REO on the market, then you realize that many many houses may be caught up in a limbo where banks are unable to process them in a timly manor, and as such only a certain number of them reach the market at any given time. That number is the amount the banks are able to process, both functionally and politically. The rest just live in limbo for another day/week/month/year.
Remember banks are not in the property management buisness. They are in the loan buisness. They dont want your property, they dont want to have to resell houses. They want your monthly payment, and only resort to taking the house when they have to try to get something of the cash they loaned you back.
