Tuesday, October 18, 2011

Housing: A comment on Shadow Inventory

by Calculated Risk on 10/18/2011 06:10:00 PM

Several readers have sent me an article by Toluse Olorunnipa at McClatchy Newspapers: Millions of homes lurk on bank inventories, casting doubts of rebound

This article is decent if you understand the numbers (ignore the headline). Unfortunately some commentary about this article is wrong.

First, what is "shadow inventory"? There are different definitions for shadow inventory, but this is usually considered inventory that will be coming on the market soon, but is NOT currently listed for sale. Inventory that is listed for sale is "visible inventory".

An all encompassing definition of shadow inventory would probably include bank owned property (Real Estate Owned), properties in the foreclosure process, other properties with delinquent mortgages (both serious delinquencies of over 90+ days, and less serious), condos that were converted to apartments (and will be converted back), investor owned rental properties, and homeowners "waiting for a better market", and a few other categories - as long as the properties were not currently listed for sale. But many of these properties will not come on the market for several years, and that isn't exactly "soon".

A more conservative estimate would just be the number of 90+ day delinquencies, properties in-foreclosure and REOs not currently listed for sale. That is CoreLogic's approach - they compare the addresses of REO and delinquent properties with current listings and at the end of Q2 CoreLogic reported:

Of the 1.6 million properties currently in the shadow inventory, 770,000 units are seriously delinquent, 430,000 are in some stage of foreclosure and 390,000 are already in REO.
Now compare those numbers to the McClatchy article:
Calculating the size of the shadow market has proved difficult, and estimates range from 1.6 million to 7 million homes.
...
The McClatchy analysis found the following shadow inventory:

* 644,000 houses already owned by lenders but not yet for sale.

* 2.2 million homes whose owners have received initial foreclosure notices or notices of default but haven't yet been foreclosed on.

* 1.9 million properties whose owners are 90 days or more behind on their payments but haven't yet been served with foreclosure notices.
The first number appears to come from RealtyTrac. This number is too high. The total REO is probably lower and a number of those are listed for sale. As the McClatchy article notes:
... Fannie Mae, Freddie Mac and the Federal Housing Administration hold about 250,000 homes. ... at least 100,000 of those aren't yet on the market
That suggests close to 150,000 are listed for sale for just Fannie, Freddie and the FHA. The 250,000 is based on the same sources I use, and we can see how CoreLogic came up with the 390,000 REO not listed for sale.

The in-foreclosure and seriously delinquent numbers come from LPS Applied Analytics most recent report for August. LPS reported in August that there were:

• 1.87 million loans 90+ days delinquent.
• 2.15 million loans in foreclosure process.

That is just over 4 million loans, but many of these are listed for sale and are not "shadow inventory". The McClatchy article incorrectly stated they were all "shadown inventory".

CoreLogic estimated that 430,000 of the in-foreclosure properties are not listed for sale, and 770,000 of the 90+ day delinquent properties are not listed for sale. Note: CoreLogic compares addresses of delinquent properties with listed properties.

CoreLogic's estimate might be low (their estimate seems reasonable based on their definition), but the range given in the article of "1.6 million to 7 million homes" of shadow inventory is absurd. The only way to get to 7 million is to add the 'less than' 90 day delinquencies (2.38 million loans), 90+ day delinquencies (1.87 million loans), in-foreclosure (2.15 million loans) and total REO (and their estimate for REO is too high). And that ignores the visible inventory and that a certain percentage of loans will cure - especially for the shorter delinquency loans.

Although this article is a decent overview of several housing issues, it is unfortunately misleading and contains obvious errors. The "644,000 houses already owned by lenders but not yet for sale" appears too high. And the article incorrectly includes all of the properties in-foreclosure and with seriously delinquent loans as "shadow inventory" even though many are listed for sale.