New Housing Report: 'Shadow' Inventory of Homes Dips

Last Updated Jun 22, 2011 9:24 AM EDT

The National Association of Realtors reported yesterday that there are 3.72 million homes now listed for sale, which works out to a stiff nine-months backlog of unsold homes given the current anemic sales pace. That backlog is 50 percent more than the six-month level that is considered normal for a healthy market. Not too much to cheer there.

But a report released today that tracks the nation's "shadow" inventory of foreclosed homes that have yet to hit the market, as well as homes in the foreclosure pipeline and those whose owners are seriously delinquent, offers a glimmer of hope. CoreLogic reports today that as of the end of April, there were 1.7 million homes in its shadow inventory database, down from 1.9 million a year ago. Moreover, the current shadow inventory is now 18 percent below it's all-time high in January 2010.

The Less-Bad Housing Market
To be clear, these are still god-awful ugly statistics. There's no way you can state with a straight face that there is anything good about shadow inventory of 1.7 million. On its own, the shadow inventory represents a five-month supply, or just one month short of what would be healthy inventory for the entire market. But the fact that the shadow inventory trend seems to be less-bad is an encouraging sign that the worst may be over. CoreLogic also reports that the combined total of regular "visible" inventory plus shadow inventory is 5.7 million homes. That's well more than a year's worth of supply, but even that ugly data point is 6.2 percent lower than where it stood a year ago.

Mark Fleming, chief economist for CoreLogic noted that a decline in the flow of delinquent loans is a big part of the story here. LPS Applied Analytics, which tracks nearly 40 million mortgages, issued a preliminary report yesterday showing that the mortgage delinquency rate (mortgages at least 30 days late) in May was 18 percent lower than a year earlier. And a joint report from S&P/Experian out yesterday shows the default rate on first mortgages in April is nearly 40 percent below the year-earlier level.

Still, no one is breaking out any champagne. As CoreLogic's Fleming pointed out, "it will probably take several years for the shadow inventory to be absorbed given the long timelines in processing and completing foreclosures."

That may well be true. But as noted in 7 Reasons Why Now is a Good Time to Buy a Home, not every state is buried in foreclosures. For example, while 53 percent of recent sales in Nevada were foreclosures, they represent just 7 percent of the New York state sales.

The Big Wild Card
There is one other market driver that could spell the most surprise for the housing market, and not in a good way. CoreLogic reports that there are nearly 11 million homeowners with negative equity, meaning their mortgage is higher than their home's value. And 2 million of those underwater homeowners are more than 50 percent underwater. Those are the big wild cards in whether the recent less-bad news about the housing market continues, or we get smacked with another leg down. And a lot of that is going to be determined not so much by the housing market itself, but whether the economic soft patch doesn't ossify and we're able get some meaningful job growth.

But again, just as with the foreclosure data, the negative equity story is also skewed by what's going on a few of the hardest hit states. CoreLogic says that 22.7 percent of all homeowners are underwater. But looking at just the most troubled states -- Arizona, Florida, Michigan, and California -- the share of homeowners that are under water jumps to 39 percent. Outside of those five states, the negative equity share is a still bad (but not nearly as bad) 16 percent.

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