Shadow Inventory not so Ominous Anymore

Despite what it termed “decidedly goodrnnews over the past quarter” regarding house prices, Frank Nothaft, ChiefrnEconomist of Freddie Mac said today that “the ominously termed ‘shadowrninventory’ is casting a pall of uncertainty over recent signs that home valuesrnhave bottomed out.”</p

There are indications everywhere that thernmarket is strengthening he said in his office’s August U.S. Economic and Housing Market Outlook.  It cited the 4.8 percent gain in FreddiernMac’s House Price Index, the 2.5 percent June-to-June increase in the CoreLogicrnhouse price index, and the annual gains in the Federal Housing FinancernIndex.  So, the report asks, “have wernarrived at the house-price inflection point or is there a shadow inventoryrnlurking ready to send house prices tumbling again?”</p

Various measures suggest that whilernthere is a shadow it is not so foreboding and, in fact, has shrunk.  Even if some local markets continue to bernlopsided, the nation as a whole may be about to return to a healthy supply andrndemand balance.</p

Although there are still a lot ofrndelinquent mortgages out there and the shadow persists, the report says therernis an important difference between the market today and that of recent years -rnthe excess supply of vacant homes has been substantially reduced.  The most recent Census Bureau report showed arndecline in overall vacancies in homes both for sale and rent and rental vacancyrnrates have fallen to the lowest point since 2001 and for sale vacancies to thernlowest point since 2006.</p

As can be seen in the chart below, thernvacant “overhang’ grew rapidly to close to two million dwellings from 2006rnthrough 2009 and this oversupply of housing stock exerted considerable downwardrnpressure on rents and home values from the middle to the end of the firstrndecade of the 2000s.   The overhang alsornsuppressed homebuilding so the relatively small amount of new construction andrnnew household formation has allowed much of the excess inventory to bernabsorbed.  This is of course a localrnaffect with many tight markets and others with continued excess stock butrnnationally the for-rent market is in relatively good balance.</p

This continuing shrinkage in vacantrnstock is important because it means that in most markets the bank-ownedrnproperties (REO) on the market are not competing with an oversized vacantrnhousing inventory and thus may be more attractive to investors and first-timernhomebuyers.  With fewer vacant homesrnavailable REO will also have less effect on other home sales and values.  Further, increased home sales overall mean arnsmaller proportion of sales are of distressed properties which then have lessrnimpact on prices.  CoreLogic reported thatrnREO had declined to 13.5 percent of sales in May, the lowest share since Marchrn2008.  In many markets short sales andrnloan modifications have also slowed the growth of REO inventories.</p

Nothaftrnconcludes that “Recent data continues to suggest that the bottom in the U.S.rnhouse-value cycle may have been reached. rnEven if national indexes dip in the seasonally weak autumn and winterrnmonths, the declines probably won’t be big enough to erase the goodrnsecond-quarter news on home values.  Thisrnmeans the housing recovery may finally be coming out from the shadows.”

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