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2011-04-12 12:24:39
Month's Shadow Inventory: State by State

In our previous BLOG, we reported on the National Association of Realtors’ (NAR) Economists’ Outlook and gave you a map showing the percentage of overall sales that distressed properties represented in each state. Today we want to show you another map from the same NAR outlook. This one shows the number of months shadow inventory by state:

NAR explained their methodology:

The estimate of shadow inventory includes all 1st lien loans in the foreclosure inventory and a share of delinquent loans anticipated to enter foreclosure based on Lender Processing Services (LPS) roll rates. Additionally, delinquent loans already on the market and modifications are excluded from the estimate.

The map shows the number of months it would take to clear the shadow inventory by state. The months’ supply is estimated by dividing the shadow inventory and the monthly number of distressed sales. The numbers range broadly from 51 months in New Jersey to 7 months in Nevada. When looking at months’ supply it is important to keep in mind that this estimate highly depends on saturation of distressed sales. Given that New Jersey over the past year on average reported about 20 percent of existing home sales to be distressed sales, it will take a longer period for the shadow inventory to clear. In contrast, Nevada’s distressed sales averaged a considerable 70 percent share of the existing sales and at that rate the current shadow inventory would clear in 7 months.

What is Shadow Inventory?

First the definition of shadow inventory is up for debate. Depending on who you’re listening to it can mean many different things. The different definitions are some of what’s causing people to debate the subject.

Definition 1 – Foreclosed but not listed. Some analysts say the “shadow inventory” is the homes which the has bank foreclosed on but not sold. These are homes that are not on the market but owned by the bank (REOs not listed on the market).

Definition 2 – Homes in the foreclosure process as well as delinquent mortgages where foreclosure proceedings are imminent.

Definition 3 – All homes delinquent, short sales not on the market, REOs not on the market, and anything in the foreclosure process.

Definition 4 – All of the above plus modified loans (as they have a large percentage of failing anyway, pay option-arms about to be reset, and lots sitting idle with builders in trouble.

Standards & Poor’s definition is most similar to Definition 3, all delinquent loans, not just REO’s.  If you go with this definition, then naturally your focus is to look at delinquency rates which are widely published. So to say we have no way of knowing the true size of the shadow inventory is false as the Mortgage Banker’s Association (MBA) collects this data.

Bottom Line

Appreciation of residential real estate will not take place until a region works their way through the shadow inventory that exists. This map gives you an indication of when that will occur in your state.

 
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