Housing: How Big Is the Shadow Inventory?

Bloomberg has a story about shadow inventory in the housing market. They make some claims based on an online survey:

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.”

The survey of 2,123 adults aged 18 and older, of whom 1,357 are homeowners, was conducted online.

Survey results could translate into around 20 million homeowners trying to sell their homes, a startling number given that the Census bureau indicates there are 93 million U.S. houses, condos and co-ops, Humphries said.

According to the National Association of Realtors, the market is currently on track to sell 4.89 million homes annually.

“At this pace, it would take about four years to run through this amount of backlogged inventory,” he said.

Adam York, economist at Wells Fargo Securities in Charlotte, North Carolina, said 20 million may be too lofty a number, but contends that the amount of homes that have not yet been listed for sale could be around 4-5 million.

“That is still an extremely high number,” he said. “Supply is and will continue to be one of the main obstacles to a housing market recovery in the year ahead.”

I think a lot depends on your definition of a “market turnaround.” I remain unconvinced that the general public has been disabused of their belief that housing has only suffered a setback and is destined to go off on another run. I suspect among those that responded positively to the survey there are quite a few who have false expectations of what their house might fetch in a sale.

Nevertheless, there is bound to be some pent up supply that will come on the market given stablization. I just don’t think it’s anywhere near the magnitude mentioned in this article.

Quite the contrary, I tend to think that this debacle and its aftermath are going to suppress the resale market for some time as many people seem to be hunkering down in an effort to repair personal balance sheets.

Comments

[BullnBear:]

I'm not sure about the title of this article.

The term "Shadow Housing" in relation to housing has been used a great deal recently to describe the massive inventory of foreclosed homes that the banks are sitting on.

These homes are not being released back into the market in order to control volume and for the banks to get creative with the accounting, valuation, etc.

Google “shadow housing inventory” and you will see what I’m referring to.

Aug 03 10:09 AM

[HunterGVL:]

Nice point made in the post, but I agree with BullnBear that when I opened this I was expecting enlightenment on the Banks inventory of foreclosed homes obscured or hidden from their balance sheets.

Still, the information was useful. I myself am a homeowner and if I thought I could sell my house right now, I would. On my street, three houses were on the market in the last year until they finally took the ForSale signs down with no buyers to be found. I'm sure they would sell given the slightest chance. Doesn't sound like a recovery or even grounds for an uptick on the housing chart in June.

Aug 03 10:58 AM

[Tom Lindmark:]

There are several categories that contribute to real estate shadow inventory. I chose to focus on the pent up supply represented by owners who have been deferring the sale of their house. The Bloomberg article referenced does include a short discussion of foreclosures that might not yet have hit the market.

Frankly, I've read a number of articles about the banks withholding foreclosures from the market. I keep seeing conflicting data, so I don't know to what extent this shadow inventory actually exists. It might be significant or it might be the stuff of urban legends. I can't get a handle on it.

Aug 03 11:54 AM

[OptimizedPrime:]

Excellent observation, Tom!

I never thought of things this way, but you are absolutely right.

So the gigantic population of people waiting for "the market to turn around and prices to return to 2007 levels" (let's just call them, "shitheads" for short) are part of the Shadow Inventory which will drag on prices for a long, long time.

Or to put it another way, the ONLY houses that have gone on the market in the past 18 months have been those that absolutely HAD to sell (and a few smart people). Anybody who thought they could wait, waited. (And now the market is down even further and their house is worth even less--any arguments over calling them "shitheads" yet?).

I hereby dub this portion of the Shadow Inventory pie, "the Shithead Inventory". :-)

Vocabulary. I love it.

Ok, so to come off the perma-bear rant, I would have to point out a minor flaw in this analysis.

You see, not everybody "deferring" the sale of their house are Shitheads. They are only Shitheads if the deferment of their sale conflicts with their lifestyle AND selling (even at a reduced price) would improve their lifestyle.

For example:

Shithead Inventory: A retiring couple with plenty of equity (even at a reduced price) who want to move to a smaller cheaper home closer to the grandkids and die waiting for the market to come back and the kids never get to know grandma and grandpa.

NOT Shithead Inventory: the retiring couple who would have liked to pocket a huge windfall and be set for life in a cheaper place instead stays in their home because there is no longer reason to move.

Shithead Inventory: a moron renting out a house "until the market comes back" while paying huge interest payments to a bank and for taxes, upkeep, etc.

NOT Shithead Inventory: underwater homeowners that CANNOT move even if they wanted to.

So I don't think it's as simple as saying there are "20 million" Shitheads out there. Five million? Maybe...

But if you ask people, "if you can have your 2007 fantasy price for your home would you sell it?" the answer is going to be YES quite a lot of the time.

One thing you cannot discount, however, is that those non-Shitheads used to be Upgraders. Now they are just "stagnant" homeowners. There were a LOT of them, and THEY were the drivers of the high-end of the market. Now they are gone. And so is the high-end.


OP

Aug 03 02:45 PM

[Griz:]

I'm sticking to my price. I've listed at 2007 levels and I will get the price listed for my Mcmansion, dammit. If not, I will wait for the government's plan to buy houses at listed values, in which case I will raise the price on my house 20% and make a handsome profit at the expense of the taxpayers... Only kidding of course, but possibly some of the shitheads are thinking this. If this were to happen then I would initiate campaign mayhem.

Aug 04 11:29 AM

[pitchingpen...:]

Tom,

Not an urban legend. Contolled release of fannie/freddie foreclosures to the listing market is confirmed directly by the owner of a title company here.

-Lassez les bon temp roulet!

Aug 04 02:18 PM

[akutach:]

Doesn't there have to be some complicity by all banks to withhold resales to create shadow inventory? If one big bank (or a bunch of small ones) wants to get value on their property wouldn't they rush to sell foreclosures before the other banks do the same? Our local paper publishes home sales records including seller and buyer names and I see a distribution of predominantly big bank names among the financial institution sellers suggesting uniformity among all banks in releasing properties to the market.

It puts the question of "Why the foreclosure shadow inventory exists?", despite banks' insistence that they are not in the business of holding real estate, into either a more scandalous or mundane light: Is the shadow inventory a result of collusion, or is it a result of clerical and legal limitations. I am very skeptical that banks could enforce such an alignment of purpose and action among themselves.

Finally, do the altered rules on mark-to-market accounting make it now sensible for banks to hold inventory whereas in the past it was not? Is the slow bleed of covering non-performing assets better than the blow from realizing losses upon resale or do they realize the loss upon completion of the foreclosure? Sorry I'm not too savvy on bank accounting rules.

Aug 10 01:30 AM