The shadow inventory is creating uncertainty about the recent indications that home values have reached their bottom levels. The news regarding home prices has been good during the last quarter.
The House Price Index of Freddie Mac showed a good 4.8% increase from March to June, the best quarterly rise in the last eight years. Furthermore, things improved on a relatively broad level - 34 states as well as District of Columbia experienced higher values in the 12 months through Jun this year.
The improvement in market conditions is also recognized by other home-price metrics. There was a 2.5% increase from June-to-June in the Core Logic index (and up 3.2% when the distressed house sales are excluded). Different inventory measures indicate the presence of a shadow, however, it is not so foreboding. As a matter of fact, there has been a decrease in the shadow inventory. And, it is expected that the U.S. market may return to a good supply and demand balance in the near future, even if some local housing markets remain lopsided.
There is no widely accepted definition of "shadow inventory." One metric is the single-family housing loans that can be considered seriously delinquent - loans at least 90 days past the due date or going through the foreclosure process.
According to the National Delinquency Survey of the Mortgage Bankers Association, there are about 3.6 million loans (after an adjustment for about 88% survey coverage) that can be considered seriously delinquent as of Mar 31 of the present year. This number is about 1.4 million lower compared to the peak level at the end of 2009, but it is still considerably higher than the pre-2008 levels. These loans cast a long shadow on the housing market.
While there still remains the shadow, there is a difference between the current market and the market situation in the recent past: There has been a considerable reduction in the excess supply of vacant houses. According to the Census Bureau, the rate of rental vacancies has decreased to 8.6%, the lowest it has been since 2002's second quarter, and the for-sale rate of vacancy has fallen to 2.1%, the lowest it has been since 2006's second quarter.
The immense oversupply put a lot of downward pressure on home values and rents during most of the middle part to end of the first ten years of the 2000s. This scenario caused suppression of homebuilding. However, the comparatively small amount of new construction and the increased household formation has resulted in the absorption of the excess vacant inventory during last two years. At the national level, the for-rent market is now apparently in a comparatively good balance, with the rental stock in proximity to the overall rental demand.
This continuing decrease is important as it results in the real-estate-owned (REO) houses for-sale not going in competition with an oversized vacant home inventory in majority of the markets. Thus, investors may find REO houses more attractive as less number of vacant homes are available, and REO sales will have a lesser impact on other house sales or house values.
Furthermore, with the increase in overall sales in 2012 so far, REO makes a smaller portion of the sales: According to CoreLogic, REO had decreased to 13.5% of all sales in the country in May, the lowest share since Mar 2008. That's a good development as a smaller REO sales share usually increases house values, as either purchaser demand increases REO prices or decreasing REO volume decreases downward price pressure on other houses on the local housing market.
Even if there is a decrease in national indexes in the seasonally weak autumn and winter, it is expected that the dips would probably not be sufficient to cancel out the good second-quarter result on house values, meaning that the shadow on the housing market may finally be disappearing.
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Orignal From: US Economic & Housing Market Outlook - August 2012
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