Shadow inventory: the threat that wasn’t

New York /
Feb.February 02, 2014 10:00 AM

 After the U.S. housing market crashed and the economy spiraled into financial crisis, there were a lot of economists and analysts who warned that the massive “shadow inventory” of homes would keep prices depressed for an extended period of time.

The “shadow inventory” consists of homes that were seriously delinquent or foreclosed on, which banks would keep off of the market for fear that the additional supply would cause prices to crumble further. Housing market skeptics argued that banks would return these homes to the market at a pace that would prevent prices from going anywhere.

Well, just a few years after the bottom, U.S. home prices are up around 23% since the trough.

And this has come as the shadow inventory has tumbled (see chart).

“As of December 2013, we estimate that there were about 2.3mn housing units in shadow inventory, down from 2.9mn units in December 2012,” wrote Barclays Michael Gapen in his 2014-15 US Housing Market Outlook.

The direction of these numbers can only be interpreted as good news.

“Falling shadow inventory, along with lean inventories of existing and new homes, supports a better pricing and building environment,” continued Gapen. “In other words, despite remaining elevated relative to any previous historical episode, excess housing inventory now casts a smaller shadow over the housing market and our forecast calls for that shadow to diminish further.”

As for the bad news, the shadow inventory is still around four times bigger than normal levels.

“Shadow inventory fluctuated a bit below 500,000 units in the years immediately prior to the recession, suggesting that about 1.9mn units need to be processed to normalize the housing market,” added Gapen. “However, we do not see this as happening over the forecast horizon and, instead, we look for the pace of decline in shadow inventory to slow somewhat in the years ahead. A reduced pace of decline in shadow inventory is, in part, tied to our view that many of the higher-quality properties have likely already been transacted and we see demand from institutional investors as slowing in the years ahead.”

Gapen’s shadow inventory estimate consists of foreclosed homes and mortgages delinquent for 90 days or more.

Based on CoreLogic’s estimate, the shadow inventory is closer to 1.7 million properties, which according to them is the lowest level since August 2008.

CoreLogic’s Mark Fleming believes “Healthy market levels of shadow inventory are around 650,000 units, so there is more to be done.”

The upshot to all of this is that while the shadow inventory remains bloated, it hasn’t been some uber price-depressing force in the housing market.


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