Rapidly Shrinking Shadow Inventory Reported by the HousingWire — A Look at the Supply Side of the Equation (written September 25, 2012)

Earlier today I wrote about how economic demand for real estate in some small towns was increasing. I stated “Economics 101 teaches us that price changes in assets, goods and services are a function of supply and demand. The economic demand (versus demographic demand) for real estate is a function of job growth and income.”

Now let’s take a look at the other partner of demand — supply.

I can recall in 2005 and early 2006 that, when a listing hit the market, it would have multiple offers greater than the asking price. Hence a genuine bidding war was in play. Since there simply was no inventory available coming to the market, (demand exceeded supply), buyers bid up what was available. Supply, however, in recent years for housing, was a whole lot more than just current listings. There were millions of homeowners that were underwater on their loans or where the borrower simply could not pay off the balloon loan balance created by very short-term, subprime mortgages. Add to that millions more individuals that, due to prices plunging, opted to cease their payments and wait for ultimate foreclosure by the lender. These homes were not listed, but we all knew they would ultimately come on the market. These properties were known as shadow inventory.

Just two years ago a real estate economist estimated that the shadow inventory in October 2010 was 6.97 million residential dwelling units. At that time, existing home sales in the U.S. were running at a seasonally-adjusted, annualized rate of 3.79 million dwellings and there were 3.16 active million listings on the market. Combining the shadow inventory estimate with the current listings in the fall of 2010 indicated a current and pending inventory of 10.13 million dwelling units. That means that for each individual current listing on the market in October 2010, there were 2.2 shadow listings that would eventually hit the market. Stated differently, at the sales rate seen in October 2010, when combining current listings with the shadow inventory, there was an estimated 2.7 years of listings available. In my blog talking about 2010 foreclosure data RealtyTrac was referenced in reporting that a typical foreclosure would sell for 36 percent less than non-distressed properties. Thus prices continued their downward track, and even non-distressed homesellers faced a massive inventory of homes–of which most were selling for significant discounts.

So now the good news. HousingWire, in an article today quoting JPMorgan Chase analysts, reported a significant reduction in the shadow inventory in the first half of 2012. In summary (for the first six-months of 2012):

  • 335,000 short sales were completed
  • 420,000 loan modifications done
  • 470,000 REO properties sold (these three combining for a 1.225 million inventory reduction)

By year end, the Chase analysts stated that for the entire year of 2012:

  • REO sales would reach 950,000 foreclosed properties
  • 670,000 short sales would occur
  • 800,000 loan modifications (with short sales and loan mods being driven somewhat by the $25 billion settlement with the five largest mortgage servicers earlier this year)

That adds to a massive 2.42 million sales of distressed real estate being liquidity off the market in just one year. The Chase economists note that a 10 percent price rise in housing would reduce the current 10.8 million homes underwater to 9 million—an almost 17 percent reduction. Their analysts did acknowledge that loan modification re-defaults and new delinquencies will increase future distressed issues, though current rising prices mute that somewhat.

Further adding volume to improving markets is a second HousingWire article noting that Lenders Processing Services (LPS) reported a 10.6 percent decline in delinquencies in August 2012 compared to the same month in 2011.

If you are into what is going on in the housing and mortgage markets, then click onto HousingWire and read their daily news from a myriad of sources.

The bottom line is that housing continues to improve and is on an upward trajectory. While certainly not back to the lofty levels seen in the midst of the peak of the bubble, (which was not economically sustainable), markets are improving.



  1. Roy

    Mr. Jones,

    May we have your opinion on current Shiller Data that the trend might be strengthening in the short term but steam weakening for the long term?

    Many thanks

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