by Calculated Risk on 8/02/2009 01:51:00 PM

First, lifted from the comments on Corus: "Too toxic to fail." by Rob Dawg

On shadow inventory from Reuters: "Shadow" inventory lurks over U.S. housing recovery (ht Denny)

[A] massive supply of unsold homes is waiting in the wings and could easily swamp the recovery before it can gather speed.

"The number of homes listed officially on the market, while still at historically high levels, might be only the tip of the iceberg," said Stan Humphries, chief economist at real estate website Zillow.com in Seattle, Washington.

According to Zillow's latest Homeowner Confidence Survey, 12 percent of homeowners said they would be "very likely" to put their home on the market in the next 12 months if they saw signs of a real estate market turnaround, 8 percent said "likely," while 12 percent said "somewhat likely."

There are several categories of shadow inventory:

REOs. There are bank owned properties that have not been put on the market yet. Several sources have told me the number is growing - no one knows why except possibly for accounting reasons (the banks might have to take an addition write down when they sell the property).

Foreclosures in process. The delinquency rate has continued to rise, and this will probably lead to many more foreclosures later this year. The number of foreclosures depends somewhat on the success of the modification programs. Last year many delinquent homeowners listed their homes as "short sales" - so those homes were not shadow inventory, however fewer delinquent homeowners are listing their homes now as they try to work with their lenders on a modification. Some percentage of these homes are shadow inventory.

New high rise condos. These properties are not included in the new home inventory report from the Census Bureau, and do not show up anywhere unless they are listed.

Homeowners waiting for a better market. This was the group mentioned in the Reuters story (the article also mentioned foreclosures). These are homeowners waiting for better market conditions to sell.

Inventory is usually the best metric to follow for the housing market - and according to recent releases inventory is declining for both new and existing homes - however shadow inventory clouds this picture.