NAR Estimates Shadow Inventory by State

by devteam March 31st, 2011 | Share

The NationalrnAssociation of Realtors’® (NAR) have taken a stab at estimating just how wide and deep the muchrndiscussed “shadow inventory” of housing may actually be. </p

 Shadow inventory is generally described as thernnumber of homes in bank inventory waiting to be sold plus the homes in thatrnhave been foreclosed but for a variety of reasons (redemption periods, marketingrnor legal reasons) are being held off the market and homes where the mortgagesrnare delinquent and are likely to eventually be foreclosed. The shadow inventoryrnis considered to be a marker for how long it will take for a depressed housingrnmarket to return to normal.  </p

The study,rnconducted by NAR Research Economist Selma Hepp, estimates shadow inventory on arnstate-by-state basis using the following data sources:</p<ul class="unIndentedList"<liNumbers of 1st lien loans in the foreclosure inventory and a share ofrndelinquent loans anticipated to enter foreclosure based on Lender ProcessingrnServices (LPS) roll rates. </li<liThe share of delinquent loans already on the market based on NAR'srnRealtors Confidence Index (NCI) in which Realtors report what share of theirrnsales were short sales or foreclosures. </li<liLoan modifications as estimated from the Office of Comptroller of thernCurrency/Office of Thrift supervision Mortgage Metric Q3 2010 report; thernassumption is that 30 percent of the state level number will default. </li

  • REO not currently on thernmarket based on state level share of existing sales that are foreclosures fromrnthe NAR’s RCI. </li</ul

    Hepp points outrnthat the foreclosure epidemic, while a national problem, has not been evenlyrndistributed across the country.  Fourrnstates, Arizona, California, Florida, and Nevada have suffered highestrnforeclosure rate and account for 42 percent of the foreclosure inventory today;rnadding in Illinois, New York, and New Jersey brings that number up to 60rnpercent.  Delinquencies seem to berneasing; in the last quarter of 2010 serious delinquencies fell in all but fourrnstates and the national rate is down 38 percent.  As a general rule those seriously delinquentrnloans did not begin to perform, rather they entered into loan modifications, werernsold pre-foreclosure or progressed from delinquent to foreclosed. As a result ofrnthe last disposition foreclosure inventories in all states rose between thernthird and fourth quarters of 2010.   </p

    The two states with the largest shadow inventory are Florida (441,461)rnand California (227,964), followed by Illinois (121,226), New York (107,485),rnand Texas (93,761).  The issue inrnFlorida, Hepp says, stems largely from the sheer size of the foreclosurerninventory which takes a long time to clear while in both Florida and New Yorkrnthe pending foreclosures are inflated because of an extended time forrndelinquencies to reach foreclosure.  Onrnthe other hand, Nevada and Arizona, despite ranking in the top three states forrnforeclosures for several years, are 16th and 11th inrnshadow inventory because their inventory is moving faster through the pipelinesrnand makes up a larger share (55 percent in Arizona and almost 70 percent inrnNevada) of all home sales. </p

    However, the actual number of homes in the shadow inventory is not thernproblem.  The difficulty lies in how longrnit will take before those homes are cleared. rnUntil that happens, they will continue to exert downward pressure on pricesrnand increase the marketing time of non-distressed properties.</p

    Hepp derives the number of months for each state to rid itself of its inventoryrnby dividing the inventory by the monthly number of distressed sales.  The numbers range broadly from seven monthsrnin Nevada to 51 months in New Jersey. Much depends, Hepp says, on thernsaturation of distressed sales. As New Jersey has reported that about 20rnpercent of existing home sales over the last year were distressed sales it willrntake a longer period for the shadow inventory to clear than at Nevada’s 70rnpercent rate mentioned above.  At thatrnrate the current shadow inventory would clear in 7 months.  While no other state comes close to NewrnJersey, other states facing protracted number of months to clear inventoriesrnare New Mexico (38), New York (34) Colorado and Rhode Island (32), and Delawarern(30). </p

    The study concludes that it is very likely that saturation ofrndistressed properties will continue to vary widely among states but also varyrnwithin states from month to month. Also, the months’ supply estimate isrndependent on levels of monthly home sales by state. The estimate presented herernis based on 2010 existing home sales, thus any change in existing home salesrnwould impact clearance of shadow inventory. And finally, there continue to loomrnvarious issues which may also affect shadow inventory and how long it takes tornclear it. One current issue is the controversy over banks’ foreclosurernprocesses and documentation which has a significant impact on what happens withrnshadow inventory.

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  • About the Author


    Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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