Shadow Inventory Put At 1.7 Million in 3Q
10:57 UTC 04 Jan 2010 
7 Comments
A study done by First American Core Logic released by CAR (California Association of Realtors):
“Shadow Housing Inventory” Put At 1.7 Million in 3Q According to First American CoreLogic.
Summary:
- As of September 2009, First American CoreLogic estimated there was a 1.7‐million‐unit pending supply of residential housing inventory, up from 1.1 million a year earlier. Pending supply, sometimes referred to as “shadow” inventory, estimates real estate owned (REO) by banks and mortgage companies, as a result of foreclosures and other actions, such as deeds in lieu, as well as real estate that is at least 90 days delinquent. Normally shadow inventory would not be included in the official measures of unsold inventory. At the current sales rate, the pending supply is 3.3 months, up from 2.4 months a year ago. The months’ supply measures how quickly the inventory will run off given the current sales rate.
More info and charts on full post….
- 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.
- The total unsold inventory (which combines the visible and pending supply) was 5.5 million units in September 2009, down from 5.7 million a year ago. The total months’ supply was 11.1 months, down from 12.7 a year earlier. This indicates that while the visible months’ supply has decreased and is beginning to approach more normal levels, adding in the pending supply reveals there is still quite a bit of inventory that will impact the housing market for the next few years, especially in the context of the current increase in home sales, which is in part due to artificially low interest rates and the homebuyer tax credit.
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 theCensus, respectively.
They can pump all they want, but unless INCOMES rise, the government (via Fannie and Freddie) will end up owning all these houses.
http://thetaildoesnotwagthedog.blogspot.com/2010/01/new-thinking-on-why-financial-system-is.html
Then what? We pay the rent to the government?
Someone please point out where I am wrong on this…
I agree with you on the income levels and housing prices and the huge disconnect.
But I would like hear more on what your thoughts are behind “paying rent to the govt”. It seems like whenever fannie/freddie homes come on the market via Homepath in our area (So Cal) they get snatched up right away. But this is a trend as of late… which may change once this “shadow inventory” starts oozing out.
The way I see it most of those involved here think the tail wags the
dog. That is, high asset prices (stocks, bonds and RE) equal a healthy
economy. I found the “smoking gun” where this insane notion was
inserted into the Fed/Treasury/Government and noted it here:
http://thetaildoesnotwagthedog.blogspot.com/2009/07/in-end-tail-does-not-wag-dog.html
The problem is that a bond’s value is ultimately determined by it’s
ability to pay with interest, a stock’s value is determined by it’s
ability to eventually pay dividends, and RE’s value is determined by
incomes/wages (and the supply of RE on the market at that time). High
prices on all of these may increase leverage in the short term (by
providing something to lend against), but ultimately something is only
worth what someone else will pay.
So with RE, prices are always determined by what the prevailing income
is in that area. Traditionally it’s been 3x your annual income. Now
it’s something like 5x?!
I would guess that the reason these FanFreddie homes are being sold
quickly is because the banks are keeping most of the inventory off the
market, and only releasing them to be sold in dribs and drabs. I
understand why they are doing this, as if all the shadow inventory came
on the market at once, it would collapse RE, destroy their balance
sheets, and the whole system goes into a deflationary black hole.
The problem is that deflation cannot be fought with more debt. It just
adds to the deflationary environment. Because we don’t even have a fiat
currency, we have a *fiat debt-based* currency, the imbalance just grows.
You can’t cure a junkie by giving him more dope. Unless of course, you
give him enough that he overdoses. Which is what IMO they have done,
it’s just that this junkie is going to take another two years to die.
Sorry, I forgot to answer one of your questions: When I wrote “pay rent
to the government”, I meant that Fannie and Freddie will be
nationalized, and since the government will be holding the paper (and
the houses will be unfordable), they will have to rent them out… To us.
Assuming of course that the whole thing doesn’t crash and we have to
push the ‘reset’ button.
It seems like the 1.7 million is a low number … to what I was expecting from all of the carnage out there.
Seems like the Govt knows something about rising foreclosures this year. Probably due to the resets this summer and more people finally giving up on their homes. To keep the consumer alive, Obama is implementing HAFA, which in turn has the potential to inflate the pending inventory much higher. Again, the government never thought people would actually purposely miss payments to get into HAMP because of moral hazard and the “importance” of your credit rating. Ultimately, moral hazard goes away in communities when others are breaching it…which is why I believe more people will eventually say “enough is enough” and walk. Currently, 10% of loans are delinquent and a quarter of all homes are under water (30% or more in California). This leads me to believe that home prices should be relatively stagnant for the next 2-3 years. Plus I cannot see unemployment dipping below 7-8 percent in that timeframe.
On the flip side, housing can make a rebound quicker than expected. Interestingly, the last decade has been heavily dominated, at a historical rate, by investment in homes within the 55 and older demographic. Historically, rising interest rates mean higher home prices, which is actually opposite of what we are told (affordability index). I actually believe that rising interest rates mean the rich (hence the over 55 group) need to invest their money into hard assets to avoid inflationary taxing. International investors can also scoop up properties.
I am interested to hear your thoughts on this and whether it will continue or if you believe the historical trend will change…
http://www.therealestatebloggers.com/2008/04/29/united-states-has-1294-million-homes-186-million-of-whom-are-vacant/
http://www.npr.org/blogs/thetwo-way/2009/11/one_in_four_us_homes_underwate.html
Its crazy out there in the real estate market right now in the so cal area at least. It has been a big time sellers market where bidding wars are happening and people are swarming new construction developments. Its like deja vu all over again… maybe its a mini bubble created by the low interest rates and low inventory levels due to the slow drip from the banks. I know this sounds crazy, but its happening. Check out this video:
http://www.bubbleinfo.com/2010/01/24/cv-in-demand/
Any thoughts?