Association of Realtors'® (NAR) have taken a stab at estimating just how wide and deep the much
discussed "shadow inventory" of housing may actually be.
Shadow inventory is generally described as the
number of homes in bank inventory waiting to be sold plus the homes in that
have been foreclosed but for a variety of reasons (redemption periods, marketing
or legal reasons) are being held off the market and homes where the mortgages
are delinquent and are likely to eventually be foreclosed. The shadow inventory
is considered to be a marker for how long it will take for a depressed housing
market to return to normal.
conducted by NAR Research Economist Selma Hepp, estimates shadow inventory on a
state-by-state basis using the following data sources:
Numbers of 1st lien loans in the foreclosure inventory and a share of
delinquent loans anticipated to enter foreclosure based on Lender Processing
Services (LPS) roll rates.
The share of delinquent loans already on the market based on NAR's
Realtors Confidence Index (NCI) in which Realtors report what share of their
sales were short sales or foreclosures.
Loan modifications as estimated from the Office of Comptroller of the
Currency/Office of Thrift supervision Mortgage Metric Q3 2010 report; the
assumption is that 30 percent of the state level number will default.
- REO not currently on the
market based on state level share of existing sales that are foreclosures from
the NAR's RCI.
Hepp points out
that the foreclosure epidemic, while a national problem, has not been evenly
distributed across the country. Four
states, Arizona, California, Florida, and Nevada have suffered highest
foreclosure rate and account for 42 percent of the foreclosure inventory today;
adding in Illinois, New York, and New Jersey brings that number up to 60
percent. Delinquencies seem to be
easing; in the last quarter of 2010 serious delinquencies fell in all but four
states and the national rate is down 38 percent. As a general rule those seriously delinquent
loans did not begin to perform, rather they entered into loan modifications, were
sold pre-foreclosure or progressed from delinquent to foreclosed. As a result of
the last disposition foreclosure inventories in all states rose between the
third and fourth quarters of 2010.
The two states with the largest shadow inventory are Florida (441,461)
and California (227,964), followed by Illinois (121,226), New York (107,485),
and Texas (93,761). The issue in
Florida, Hepp says, stems largely from the sheer size of the foreclosure
inventory which takes a long time to clear while in both Florida and New York
the pending foreclosures are inflated because of an extended time for
delinquencies to reach foreclosure. On
the other hand, Nevada and Arizona, despite ranking in the top three states for
foreclosures for several years, are 16th and 11th in
shadow inventory because their inventory is moving faster through the pipelines
and makes up a larger share (55 percent in Arizona and almost 70 percent in
Nevada) of all home sales.
However, the actual number of homes in the shadow inventory is not the
problem. The difficulty lies in how long
it will take before those homes are cleared.
Until that happens, they will continue to exert downward pressure on prices
and increase the marketing time of non-distressed properties.
Hepp derives the number of months for each state to rid itself of its inventory
by dividing the inventory by the monthly number of distressed sales. The numbers range broadly from seven months
in Nevada to 51 months in New Jersey. Much depends, Hepp says, on the
saturation of distressed sales. As New Jersey has reported that about 20
percent of existing home sales over the last year were distressed sales it will
take a longer period for the shadow inventory to clear than at Nevada's 70
percent rate mentioned above. At that
rate the current shadow inventory would clear in 7 months. While no other state comes close to New
Jersey, other states facing protracted number of months to clear inventories
are New Mexico (38), New York (34) Colorado and Rhode Island (32), and Delaware
The study concludes that it is very likely that saturation of
distressed properties will continue to vary widely among states but also vary
within states from month to month. Also, the months' supply estimate is
dependent on levels of monthly home sales by state. The estimate presented here
is based on 2010 existing home sales, thus any change in existing home sales
would impact clearance of shadow inventory. And finally, there continue to loom
various issues which may also affect shadow inventory and how long it takes to
clear it. One current issue is the controversy over banks' foreclosure
processes and documentation which has a significant impact on what happens with