Archive for September, 2009

Massive “Shadow Inventory” Overhang Will Keep Pressure on House Prices

Wednesday, September 30th, 2009

From The Business Insider, Sept. 30, 2009:

Houses prices, like everything else, are a function of supply and demand.

The inventory (supply) of houses on the market has dropped significantly in recent months, fueling hope that the housing bust is over and done with.

Unfortunately, the inventory of houses listed for sale may severely understate the actual inventory of houses owners want to sell This, in turn, may be creating a far too rosy picture of supply and demand..

Amherst Securities has produced a scary analysis of this “shadow inventory” overhang, which Amherst estimates is a shocking 7 million houses.  (The consensus is only 2-3 million).

Seven million houses represents 1.4-times the number of houses currently sold in the country each year.  So this represents a massive overhang.  As these houses hit the market in future years, they will keep pressure on house prices.  This will likely either lead to further declines in prices or delay the recovery.

The build-up of shadow inventory, according to Amherst, is the result of three factors:

  • High “transition” rates. More mortgages that fall behind by 30 and 60 days are progressing through to default.
  • Low “cure” rates. Fewer delinquent mortgages than usual are returning to performing loans.
  • “Liquidations” of delinquent loans are taking much longer than usual. The banks are taking longer to foreclose and holding foreclosed properties to avoid putting pressure on prices (and thus triggering writedowns).  Mortgage mods are delaying foreclosures.  Many houses are early in the foreclosure process.

We have wrapped many of Amherst’s charts into the presentation below.  Here is the firm’s bottom line:

We are concerned that, in light of this housing overhang, the stabilization we have seen in home prices the last few months is temporary.

Official house “inventories” are still high…but they’re dropping

As this chart from Calculated Risk shows, existing house inventory peaked in 2007 and has drifted lower since.

Importantly, however, this chart shows houses listed for sale.  It doesn’t show:

  • Houses that owners want to sell but have decided to “rent for a year until the market comes back”
  • Houses in the foreclosure process
  • Houses owned by banks after foreclosure (REO) but not for sale
  • Delinquent loans that are likely to become foreclosures

Source: Calculated Risk

Current home sales are now a normal 5 million a year

During the boom, sales of existing homes soared to 7 million a year.  Now they’re back to a more normal 5 million.

At the current rate of sales, it would take 8.5 months to clear all the inventory on the market.  This is still high.  Normally “inventory-months” averages about 6.

If Amherst Securities is right, meanwhile, there are another 7 million houses of “shadow inventory” that will hit the market in the next couple of years.  It would take 16 months to sell this inventory.

Source: Calculated Risk

“Shadow Inventory”: 7 million homes

Amherst Securities arrives at its estimate of 7 million units of “shadow inventory” by assigning a probability of eventual “liquidation” to different classes of delinquent mortgage loans.

Loans that are in the foreclosure process, for example (4.3% of mortgages), are almost certain to be liquidated.  Loans that are 90+ days delinquent (3.9% of mortgages) are 99% likely to be liquidated.  And so on.

Add it all up, and Amherst estimates that nearly 7 million housing units will eventually be liquidated.

Source: Amherst Securities