What ‘shadow’ inventory?


Reports of the housing market’s demise at the hands of a so-called “shadow inventory,” have been greatly exaggerated.

A host of housing market measures, including the Freddie Mac House Price Index, CoreLogic Home Price Index and the Federal Housing Finance Agency (FHFA) House Price, to name a few, all point to a slow, but rosy housing recovery ahead.

Nevertheless, an ominous inventory of unsold and unlisted homes, supposedly lurking in the shadows, could doom home prices and send the economy back into the dark ages of recession.

Or so the theory goes.

“Pooh,” says Freddie Mac’s “August 2012 U.S. Economic & Housing Market Outlook: The Shadow.”

The housing market isn’t waiting for the other shoe to drop.

Instead, the shadow inventory is becoming, well, a shadow of itself.

“While the shadow inventory persists, there is an important difference in today’s market compared with those of recent years and that’s the substantially reduced amount of excess vacant housing. The housing recovery may finally be coming out from the shadows,” said Frank Nothaft, Freddie Mac’s vice president and chief economist.

Smaller-than-expected shadow

Given there’s no official, standard or even widely accepted definition of “shadow inventory,” Freddie Mac defined as the shadow inventory the supply of single family loans that are 90 days or more past due or already in foreclosure proceedings.

Those homes are typically sold at a discount and that can depress surrounding values. The Mortgage Bankers Association says there are approximately 3.6 million such properties in the shadows, compared to about 5 million from the peak in 2009.

However, the shadow is offset by a decline in overall vacancy rates of homes for rent and for homes for sale. Rental vacancy rates are as low as they’ve been since the second quarter of 2002 and the for-sale vacancy rate harkens back to 2006.

When Freddie Mac further gauged the levels of excess vacant rental and for-sale stock, it found those levels as low as they’ve been in nearly 10 years.

“This continuing shrinkage in excess vacant stock is important because it means that in most markets the REO homes on the for-sale market are not competing with an oversized vacant housing inventory. Thus, REO homes may be more attractive to investors and first-time buyers because fewer vacant homes are available, and REO sales will have less effect on other home sales or home values,” according to the report.

Taking more downward pressure off prices, REO sales declined to 13.5 percent in May, the lowest share since March 2008, according to CoreLogic. A smaller share of REO sales also generates bidding wars, which help boost prices.

Seasonal, judicial state pressures

Freddie Mac says even if seasonal pressures push prices down this winter and fall those cyclical declines likely won’t erase gains the housing market has enjoyed this year.

But seasonal pressures aren’t the only conditions the housing market faces.

Freddie Mac’s scenario does not account for fears that the plodding judicial system in some states will add to the shadow inventory.

The inventory of foreclosures continue to grow in judicial states, according to Standard and Poors’ July report, “U.S. House Prices Should Generally Rise Going Forward, But Not Without Some Dips.”

“We expect these drops to occur in tandem with new foreclosed properties reaching the market later this year,” said credit analyst Erkan Erturk.

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