Shadow Inventory Drops but Supply to Remain High for Extended Period
03/30/2011 BY: CARRIE BAY
The industry’s shadow inventory of repossessed and soon-to-be repossessed homes that aren’t visible as properties for sale has contracted, according to CoreLogic.
Analysis released by the company Wednesday shows that the shadow inventory of residential properties as of January 2011 fell to 1.8 million, down from 2.0 million a year earlier.
CoreLogic estimates current shadow inventory, also known as pending supply, by calculating the number of distressed properties not currently listed on multiple listing services (MLS) that are seriously delinquent (90 days or more), in foreclosure, and real estate owned (REO) by lenders.
While the total volume of properties in the shadows dropped, CoreLogic says the amount of time it would currently take to clear this hidden inventory remains the same as a year ago – nine months’ worth of supply. The company says the unchanged supply calculation is due to the slower pace of home sales the industry has experienced in recent months.
Of the 1.8-million unit current shadow inventory supply, CoreLogic’s study shows that 870,000 units are seriously delinquent; 445,000 are in some stage of foreclosure; and 470,000 are already REO.
For the first time, CoreLogic has examined how loan modifications and short sales could reduce shadow inventory levels. The analysis took into account optimal treatment methods, based on net present value (NPV) calculations, as well as expected severity and re-default rates.
Based on these factors, the company concluded that loan modifications and short sales could potentially reduce shadow supply by one-half. However, low borrower response rates to lender outreach and high modification re-default rates would render even the optimal treatment’s impact to be “small,” according to CoreLogic.
In addition to the current shadow inventory supply, CoreLogic points out that there are nearly 2 million negative equity loans that are currently more than 50 percent “upside down.” The company says these properties will likely become part of the shadow supply in the near future.
Mark Fleming, chief economist for CoreLogic commented, “While the trend of the shadow inventory is improving somewhat, the current level and distressed months’ supply remain very high. The short-term weakness in prices and longer-term weakness in the drivers that affect the housing market imply that excess supply will remain high for an extended period of time.”
The highest levels of distressed months’ supply, which is the ratio of the number of properties that are 90 days or more delinquent to the number of home sales, are in New Jersey, Illinois, and Maryland.
CoreLogic says the driving force behind these states’ elevated supplies of distressed properties is a combination of higher than average 90-plus day delinquencies and low sales activity.
The states with the lowest distressed months’ supply are where the boom/bust did not occur and include North Dakota, Alaska, and Wyoming. The largest state with the lowest level of distressed months’ supply is Texas.