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Chief Economist Frank Nothaft Investigates "The Shadow"

Chief Economist Frank E. Nothaft

Have we hit bottom in house prices or is the so-called “shadow inventory” lurking, ready to send house prices tumbling again? This is a topic we look at in greater detail in our August Economic & Housing Market Outlook.

The news on the economy has been lackluster at best, yet, for a change, the housing news has been encouraging. For example, the Freddie Mac House Price Index logged a 4.8 percent jump from March to June 2012, and a full 1 percent gain over the prior 12 months with 34 states showing higher home values. CoreLogic's House Price Index was also up June-to-June, and the Federal Housing Finance Agency House Price Index posted an annual gain for the U.S. through May.

So why the hesitation with calling the bottom on house prices, and what does the so-called shadow inventory have to do with this?

While there is no generally accepted definition of the shadow inventory, various measures of the housing inventory suggest the shadow is not so foreboding. One could define the shadow inventory as the number of loans that are 90-or-more days delinquent or in foreclosure proceedings. By this metric, the so-called shadow inventory has shrunk by 1.4 million single-family loans since 2009 to around 3.6 million, according to the Mortgage Bankers Association National Delinquency Survey.1 Yes, 3.6 million is a big number. But there is an important difference in today’s market compared with that of recent years – namely, the substantial reduction in the oversupply of vacant homes. As the following chart shows, the for-rent market now appears to be in good balance; rental stock is very close to overall rental demand, resulting in "normal" rental vacancy levels.

Over Supply Vacant Housing Chart

Ongoing shrinkage in the excess vacant housing stock is important because it means that in most markets – though not all – the real-estate-owned (REO) homes (homes that have gone through the foreclosure process) are not competing with an oversized inventory of vacant housing. Thus, REO homes may be more attractive to investors and first-time buyers because fewer vacant houses are available, and REO sales will have less of an effect on other home sales or values in the local market. And even if some local markets continue to be lopsided, the nation as a whole may shortly return to a healthy supply-and-demand balance.

So, even if national indexes dip in the seasonally weak autumn and winter months, the declines probably won’t be big enough to erase the good second-quarter news on home values. This means the housing recovery may finally be coming out from the shadows.

1After adjusting for market coverage, the National Delinquency Survey reported about 5.0 million loans that were 90-or-more days delinquent or in foreclosure proceedings as of December 2009, compared with about 3.6 million as of March 2012.

* Frank Nothaft left his position with Freddie Mac in January 2015


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