‘Shadow inventory’ looms over housing market

WASHINGTON, D.C.
December 17, 2009 1:21pm

There was a 1.7-million-unit pending supply of residential housing inventory being held off the market in the third quarter by lenders and others stuck with foreclosed properties, according to an estimate Thursday from First American CoreLogic.

That’s up from 1.1 million a year earlier.

The “shadow inventory” estimates the amount of real estate owned (REO) 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 is not included in 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.

Methodology

First American CoreLogic utilized its databases to size the number of 90+ day delinquencies, foreclosures and REOs. Roll rates, which measure the proportion of loans that were in one stage of default that rolled to the next stage of default over a period of time, were applied to the number of loans in default by each stage of default. This calculation allowed for estimating the number of loans that were proceeding from earlier to later stages of default. Then the compnay calculated the share of loans in default that are currently listed on MLS by matching public record properties in default to MLS active listings. It applied the percentage of defaulted loans that are being listed to its estimate of outstanding loans that will proceed to further stages of default to calculate the pending supply inventory by stage of default and added that to the visible inventory that is reported for existing homes and new homes by the National Association of Realtors and the Bureau of the Census, respectively.