Declining Shadow Inventories Help Housing Recovery

Shadow inventories posted the largest quarter-over-quarter decline since the housing crisis began, and dropped 23 percent year-over-year, according to Compass Point Research & Trading.

Shadow inventories — homes at risk of default that have yet to hit the market — once posed a big threat to the housing recovery. At its peak in March 2010, shadow inventory was at about 5.5 million loans, according to data compiled by the Mortgage Bankers Association and Bloomberg. For the second quarter of 2013, shadow inventory has fallen to 2.99 million.

In comparison, shadow inventory loans totaled about 800,000 in March 2000—considered a more normal average.

There has been a large decline in 90-day-plus past due loans, which has helped lead to the drop in shadow inventories. Also helping to lower shadow inventories is the rise in home prices, lower unemployment rates, the higher number of loan modifications, and tightening of underwriting standards that has led to an improvement in mortgage credit quality, economists note.

“The shadow inventory is quickly being worked off and is no longer a significant weight on the housing market in most parts of the country. The key exceptions would be pockets in Florida, parts of the Midwest, and the middle Atlantic,” says Mark Zandi, Moody’s Analytics chief economist.

The decline is expected to continue as more home owners stay current on their loans.

Source: “Shadow Inventory Decline Begins to Accelerate,” HousingWire (Aug. 23, 2013)