Shadow Inventory Remains at 1.6 Million Units Nationwide

CoreLogic has reported that the current residential shadow inventory as of October 2011 nationwide remained at 1.6 million units, representing a supply of five months. This total was down from October 2010, when shadow inventory stood at 1.9 million units, or at a seven-months' supply, but approximately the same level as reported this past July. Currently, the flow of new seriously delinquent loans into the shadow inventory has been offset by the roughly equal flow of distressed sales, such as short sales and real estate-owned (REO) sales. CoreLogic estimates the current stock of properties in the shadow inventory, also known as pending supply, by calculating the number of distressed properties not currently listed on multiple listing services (MLSs) that are seriously delinquent (90 days or more), in foreclosure and REO by lenders. Transition rates of "delinquency to foreclosure" and "foreclosure to REO" are used to identify the currently distressed non-listed properties most likely to become REO properties. Properties that are not yet delinquent but may become delinquent in the future are not included in the estimate of the current shadow inventory. Shadow inventory is typically not included in the official metrics of unsold inventory. "The shadow inventory overhang is a large impediment to the improvement in the housing market because it puts downward pressure on home prices, which hurts home sales and building activity while encouraging strategic defaults," said Mark Fleming, chief economist for CoreLogic. Florida, California and Illinois account for more than a third of the shadow inventory. The top six states, which would also include New York, Texas and New Jersey, account for half of the shadow inventory. Nationwide, shadow inventory is approximately four times higher than its low point (380,000 properties) at the peak of the housing bubble in mid-2006. A healthy housing market should have less than one-month's supply of shadow inventory, which would be an easily absorbed stock of distressed assets with little or no discernable impact on house prices, unless the inventory was geographically concentrated. Despite three million distressed sales since January 2009, a period when home prices were declining at their fastest rate, the shadow inventory in October 2011 is at the same level as January 2009. Because shadow inventory is often concentrated in suburban and exurban submarkets, where distressed sales compete with new construction sales, it is one of the reasons why new home sales continue to be weak. In normal times, new home sales account for 12 percent of all sales, but they are currently running at seven percent of all sales. Based on current estimates of the visible inventory (both distressed and non-distressed), the shadow inventory is approximately half of all visible inventory listings. For every two homes available for sale, there is one home in the "shadows."