Shadow Inventory Decreases

Market data coming from the Market Realist (MR) states that shadow inventory of distressed homes has been decreasing.

According to MR, “shadow inventory is an estimate of the supply of distressed homes that are in foreclosure or 90-days delinquent but are not yet bank-owned. It’s an estimate of the number of homes that are coming up for sale in the next year. Real estate owned (REO) isn’t counted because those homes are usually already for sale.”

MR data shows that “pre-bubble” shadow inventory averaged around 1 million units, with inventory peaking at 5.4 million units at the depths of the foreclosure meltdown in the first quarter of 2010. At the end of 2012 shadow inventory stood at 3.7 million units. MR states that, “Although the shadow inventory has fallen pretty far from its heights, it’s nowhere near normalcy.”

The Market Realist continues with the analysis by noting that “market watchers” see some disconnect in the current market because “supply is being constrained in the face of high shadow inventory.” The reason given is that there has been a divergence between judicial states, where a judge has to approve a foreclosure, and the non-judicial states, where no judge is involved in the process. The latter means a much shorter timeframe for the foreclosure to complete.   “For non- judicial states, the forclosure pipeline has been largely dealt with and prices are rising at a fast pace. For judicial states (New York and New Jersey especially), the pipeline is still full and prices have been more or less stagnant.”

There is an impact on the market says MR since increased foreclosure activity affects homebuilders by depressing real estate prices and competing with new homes. Lower home prices mean lower average selling prices for builders. “For homebuilders in non-judicial states, shadow inventory isn’t really going to affect them. For homebuilders in judicial states, another year of sluggish pricing may be on the horizon until shadow inventory is worked off.”