1.7 Million “Shadow Inventory” Looms Over Housing Industry

An interesting housing industry report surfaced yesterday, stating there is an estimated “1.7-million-unit pending supply of residential housing inventory”, which is up from 1.1 million from just a year ago.

Shadow Inventory looming over housing industry

This housing inventory is often referred to as “shadow inventory”, which is based on estimates of real estate owned (REO) by banks and mortgage companies, as a direct result of foreclosures and other actions, such as deeds in lieu, as well as real estate that is at least 90 days delinquent. It is also worthy of noting that shadow inventory is not included in official measures of unsold real estate inventory.

Based on the current sales rate, the estimated supply is 3.3 months, which is up from 2.4 months a year ago. The months’ supply is a measure of how quickly the inventory will run off based on the current sales rates.

A document, found on First American CoreLogic, states,

“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.”

Methodology:

First American CoreLogic utilized its LoanPerformance Servicing and Securities 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 we calculated the share of loans in default that are currently listed on MLS by matching public record properties in default to MLS active listings. We applied the percentage of defaulted loans that are being listed to our 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.

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