What lurks in the future of Northern Virginia's real estate market? With a tip of the hat to the old radio serial of the 1930s, The Shadow Knows.

In this case, we are watching two "shadows" closely: the much-discussed shadow inventory of distressed homes that some believe will flood the market, as well as the long shadow cast by the specter of rising interest rates.

Distressed homes are short sales - those where the owner sells owing more than the house is worth - and foreclosures, broadly defined as those homes lost to the lender because of default on the mortgage. In both instances, a large influx of this type of inventory could put downward pressure on home prices, slowing, or perhaps even reversing, the recovery of the market. In some areas of the country - Nevada and Florida in particular - the overabundance of distressed homes on the market means that any significant price recovery is likely years away. So how are we doing here? One of the measures we look at is the trend in new listings coming on the market in our regional multiple listing system and, as the chart at the bottom right indicates, there is not yet an upward trend in this distressed inventory. Short sales (the yellow bar) constituted 16.6% of new listings in the first 4 months of 2009 and 14.8% in the same time period of 2010. Foreclosures (the red bar) were 7.2% of all new listings in January-April 2009 and just 2.3% so far this year. In addition, foreclosure filings were down in the first quarter of 2010 compared to the fourth quarter of 2009 in the Washington metro region, and mortgage delinquency rates (90 days or later) also dropped in Q1 2010 after 12 consecutive quarters of rising delinquencies. This doesn't mean there's nothing to worry about and that the recovery is in full swing. We know that many home owners are still upside down on their mortgage, the region's unemployment rate is still double what it was in 2006, and banks are sitting on inventory they'd like to move but can't because of a still somewhat sluggish market. Nonetheless, we are encouraged that the "shadow" inventory isn't exploding, and the concerns about the local market suddenly becoming flooded with distressed inventory may be a bit overblown.

Frankly, we're convinced that rising mortgage interest rates will have more impact on the region's market recovery than distressed inventory, but even here we're tempering our concern for two reasons. First, fixed rates have remained at or near the 5% mark all year, and we expected they would already be higher. Second, when they do begin to rise, 3-, 5- and 10-year adjustable rate mortgages will become more popular, and their lower-than-fixed rates will help cushion the loss of buying power.