‘Shadow’ Inventory Put at 1.7 Million in 3Q

As of September 2009, First American CoreLogic estimated there was a 1.7-million-unit pending supply of residential housing inventory, up from 1.1 million a year earlier.

Pending supply, sometimes referred to as “shadow” inventory, estimates real estate-owned by banks and mortgage companies, as a result of foreclosures and other actions, such as deeds in lieu, as well as real estate that is at least 90 days delinquent.

Normally shadow inventory would not be included in the official measures of unsold inventory. At the current sales rate, the pending supply is 3.3 months, up from 2.4 months a year ago. The months’ supply measures how quickly the inventory will run off given the current sales rate.

The visible supply of unsold inventory was 3.8 million units in September 2009, down from 4.7 million a year earlier. The visible inventory measures the unsold inventory of new and existing homes that are currently on the market. The visible months’ supply fell to 7.8 months in September 2009, down from 10.1 months a year earlier. The total unsold inventory (which combines the visible and pending supply) was 5.5 million units in September 2009, down from 5.7 million a year ago. The total months’ supply was 11.1 months, down from 12.7 a year earlier.

This indicates that while the visible months’ supply has decreased and is beginning to approach more normal levels, adding in the pending supply reveals there is still quite a bit of inventory that will impact the housing market for the next few years, especially in the context of the current increase in home sales, which is in part due to artificially low interest rates and the homebuyer tax credit.

While the Obama administration has worked to quell foreclosures, high unemployment continues to plague the real estate market and, as a result, according to an article in The New York Times, an estimated 2.4 million foreclosed homes will be added to the list of 2010 foreclosures. This will lead to prices going down even more — another 10% or so.

"It appears that we may be seeing a surge of 'shadow inventory' properties appear on the market," says Simon Campbell, real estate analyst for Bank Foreclosures Sale, a foreclosure listing service. "These are properties that, as of yet, have not been calculated into official inventory numbers. They include homes repossessed by lenders through foreclosures and similar actions and homes where owners are 90 days or more delinquent on payments."

However, statistics do show that lenders may finally be closer to finding a solution for the home mortgage crisis. "The question now remains," says Mr. Campbell, "about how fast can they work to stem these potential foreclosures. Until we see a reduction in the number of foreclosures, we cannot get too hopeful about restoring housing industry stability."

Even with this progress, unemployment remains at a record high. And congressional leaders continue to look for ways that millions of people who have lost their jobs will be able to stay in their homes. For instance, Rep. Barney Frank, D-Mass., wants $3 billion to be allocated to such a program to help stem foreclosures.

In California, the housing market for 2010 is going to deal with the heavy flow of alt-A and option ARM products hitting in conjunction with prime mortgages that are no longer able to remain current in this troubled economy, according to the website doctorhousingbubble.com.

“Banks are lagging and when you only look at REOs, then it doesn’t look so bad. Yet this assumption falsely sits with the notion that the NODs and auctions are somehow going to miraculously cure with some programs like HAMP. Yet the data on HAMP is proving otherwise with roughly 4% of trial modifications becoming permanent. Add the shadow data and you get a hidden inventory that is nearly three times the MLS data. The difference is three months of inventory vs. nearly 14 months of inventory,” the website says.

“There is a tremendous amount of property in distress. Until this calms down the market is going to remain highly volatile. More troubled areas have a larger number of shadow inventory but you’ll be surprised how many ZIP codes have more shadow inventory than MLS data.”