Housing Inventory: Hard and Soft Shadows

CoreLogic, a leading provider of consumer, financial and property information, analytics and services to business and government, reports that the shadow inventory in the residential market has declined.  The shadow is now calculated to be 1.7 million homes, down from 1.9 million homes one year ago.

Shadow inventory refers to pending supply of homes for sale that are not yet actually on the market.  CoreLogic determines the shadow by a summation of the following:

  • Properties that are seriously delinquent (90 days or more);
  • In legal foreclosure proceedings; and
  • Real estate owned (REO) by lenders after foreclosure is completed but not yet listed for sale.

Data highlights from the CoreLogic June report:

  • The shadow inventory of residential properties as of April 2011 fell to 1.7 million units, or five months’ worth of supply, down from 1.9 million units, also five months’ supply, as compared to April 2010.
  • Of the 1.7 million current shadow inventory supply, 790,000 units are seriously delinquent (2.6 months’ supply), 440,000 are in some stage of foreclosure (1.4 months’ supply) and 440,000 are already in REO (1.4 months’ supply).
  • The shadow inventory peaked in January 2010 at 2 million units, 8.5 months’ supply, and stands 18 percent lower than the peak as of April 2011.
  • The total shadow and visible inventory was 5.7 million units in April 2011, down from 6.2 million units a year ago. The decline occurred in both the visible and shadow inventories. The shadow inventory accounts for 29 percent of the combined shadow and visible inventories.
  • In addition to the current shadow inventory, there are 2 million current negative equity loans that are more than 50 percent or $150,000 “upside down.” These current but underwater loans have increased risk of entering the shadow inventory if the owners’ ability to pay is impaired while significantly underwater.

 The CoreLogic data history is seen in the following graphs:

The months’ supply graph reveals that weak housing sales so far in 2011 has created a larger months’ supply inventory than experienced in prior years.  Thus, the decline in the absolute number of the shadow to 1.7 million homes has not resulted in a reduced sales inventory.  This is a result of historically low home sales.

The potential is significant for additional homes to enter the shadow beyond what is defined by CoreLogic.  Corelogic mentions in the June report that there are approximately 2 million homes with at least either (1) 50% or (2) $150,000 negative equity.  They indicate there is a higher probability of future default for these mortgages than for others.

Michael David White, at Housing Story.net, has a graph that shows the larger potential shadow inventory for all delinquent mortgages.  The number as of February 2011 was 6.7 million compared to 3.5 million of current inventory.  The 6.7 million for all delinquencies is 3.7 times larger than CoreLogic’s 1.8 million seriously delinquent at that time.

It seems that there are shadows with some variable boundaries.  But that is they way it is with shadows:  they seldom have sharply defined boundaries compared to the object casting the shadow.  In the case of housing we need to recognize that there are hard shadows that are rather precisely defined and softer shadows with less definition.The following graph and subsequent table show the latest numbers on the housing inventory situation:


  • “Fuzzy Soft” Shadow – Deeply underwater mortgages still current.
  • “Soft” Shadow – Delinquencies not yet in the “Hard Shadow”
  • “Hard” Shadow – Defined by CoreLogic (Seriously delinquent +)
  • Current Inventory – On the market

The current sales rate is 460,000 per month (rounded, unadjusted).

Under most scenarios the long shadows indicate that it will take a long time to work through the incipient inventories.  From the CoreLogic report:

Mark Fleming, chief economist for CoreLogic commented, “The shadow inventory has declined by nearly one-fifth since it peaked in early 2010, in large part due to a reduced flow of newly delinquent loans in recent months. However, it will probably take several years for the shadow inventory to be absorbed given the long timelines in processing and completing foreclosures.”

On top of the fuzzy soft shadow there is another even less defined potential shadow:  There are many, possibly millions, who have equity in their home, even at today’s lower prices, who, while they are not forced to sell, would like to do so and are delaying because of the depressed market.  Many of these would buy again if they sold their current residence, but some would downsize to a rental.
And, of course, there are an unknown number of two residence owners who would like to sell one of the homes and have put it off.  These owners who would sell in a normal market, and are not offering for sale in the current market, have been accumulating now for several years and will probably continue to accumulate until the current buyers’ market runs its course – possibly for several more years.
The two preceeding potential additions to the shadow have been pointed out repeatedly by Steven Hansen over the past three years.
Finally, eventually many of the distressed residences that have already been sold and converted to rental properties will return to the for sale market.
When these additional shadows become real there may be several million more properties listed for sale than would be if the bubble had never grown and burst.  The realization of these additional properties on the market are likely to be seen over a period of many years.  If 2-3 million additional “above normal numbers” of residences become available, it is likely they may appear over a significant number of years.  For example, 2 million over five years is only 400,000 a year.  This type of “surplus” is a small burden for the market, which likely to be 5-6 million (or more) sales per year in the coming decade.

The bigger problem is the potential for foreclosure and short sales hitting the market at a rate likely to exceed 1 million (possibly significantly exceed) in each of the next 2-3 years.

The “soft shadow” (even without the “fuzzy soft shadow”) is nearly as big as the total of current inventory and the “hard” shadow.  When the “fuzzy soft” and “soft” are added together (6.9 million), the total is larger than the sum of current inventory and the “hard” shadow.

The soft and the fuzzy soft are necessarily uncertain; some might say they are really unknown and just guesses.  Much depends on how the economy goes in the coming years.  If the recovery continues to bypass Main Street (read that as employment), a significant amount of soft shadow will harden.  In an improving economy a significant part of the soft shadow will simply fade away.

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