Insight into Shadow Inventory

Edit: In my haste to publish, I failed to include the following footnote that belongs with each table:

Source: Realtytrac, Housingtracker, Deutsche Bank

Note: Foreclosure inventory includes pre-foreclosures, auctions and REO. 2/3 of pre-foreclosures are assumed to become foreclosures.
I'm not sure if they reduced the pre-foreclosure number by 1/3 before the calculation was made. that'll teach me not to read the fine print. Thanks CR!


Nishu Sood, a Research Analyst with Deutsche Bank focusing on home builders, regularly publishes research on wide-ranging issues affecting the industry, including how the resale market impacts builder prospects. Now that REO is dominating housing sales in many markets, including Sacramento, his team at Deutsche is focusing on ways to measure the backlog. Nishu kindly gave me permission to excerpt some of their recently published (subscription-only) findings, which I hope you will find illuminating:



Distressed inventory not captured in resale inventories


The foreclosure wave is arguably the most important phenomenon currently affecting the resale market, dominating transactions in many markets, depressing pricing and creating substantial inventory that competes with builders and individual existing home sellers. The pricing effect of foreclosures is evident in the various home prices indexes, which are showing historic declines. The transaction effect is evident as well, with bubble markets showing a dramatic spike in volumes in recent months. The inventory effect, however, is not as evident. In this section we analyze the extent of the foreclosure wave's impact on resale inventories.


A hidden source of resale inventory, or "shadow inventory"


Foreclosures add a substantial and toxic form of inventory to the market, one that is not fully apparent from traditional inventory metrics used to evaluate the resale market. When bank-owned homes are sold, they do predominantly show up in resale transaction volumes. Thus, 40%+ of transactions in bubble markets have been reported to be distressed homes and more than 1 in 4 nationwide. In terms of inventory however, bank-owned homes frequently do not show up in resale inventory, or MLS listings. The extent to which bank-owned homes do not appear in MLS listings is difficult to quantify because it depends on each bank or servicer's timeline and approach in handling foreclosed properties. In order to provide some sense of the extent to which MLS listings ignore distressed inventories we do a simple comparison analysis below.


MLS listings are missing large amounts of distressed inventory


The foreclosure wave has added another way in which MLS listings are not accurately reflecting true resale inventory conditions. Based on our analysis, MLS based listing inventory is significantly understating the extent of foreclosure inventory in many markets. In Figure 19 below, we compare distressed inventory vs. MLS listings in major metro areas across the US. A certain portion of distressed inventory is included in MLS listings – if it were all included we would expect MLS listings to be higher than distressed inventory…



City
MLS Listings
Foreclosure Inventory
% of Listings

Sacramento
14,913
31,219
209%

San Francisco
18,647
35,402
190%

Inland Empire
45,490
82,114
181%

San Diego
18,771
31,168
166%

Los Angeles
62,379
88,843
142%



Figure 19: Local MLS listings vs. distressed inventory (Edited to show only the top 5 markets in the U.S. – Max)


In terms of the scale of distressed inventory vs. MLS listings, the bubble markets top the list, with all five of the top markets in California…


Analyzing distressed inventory at a local level


Foreclosure inventory includes 1.8% of households. Since MLS listings are a poor proxy for true resale inventories (see above section), in this section we compare distressed inventory to other more reliable housing metrics in order to gauge how substantial it is. In Figure 20 below, we compare foreclosure inventories to the number of housing units in each metro. Overall, foreclosure inventory represents 1.8% of homes in the 33 markets we analyze. This list is headed more by the metro areas that experienced the fastest growth in terms of new construction during the recent housing boom, including Inland Empire, Ft. Myers, Las Vegas, Sacramento and Phoenix. In the top three markets, more than 5% of housing stock is distressed inventory. In the bottom 10 markets, less than 1% of housing stock is distressed inventory.


As a reference point, we also include the rate of growth in housing stock in the far right column. This column shows what percent of current (2006) housing stock was added from 2000 through 2006. The top five markets where distressed inventory is the highest as a percentage of housing stock added the most housing units during the boom, with 20% current housing stock added from 2000-2006. This compares with 8% for the bottom five and 10% overall.



City
Foreclosure Inventory
Housing Units (2006)
% Housing Units
Housing Units Added (2000-06)

Inland Empire
82,114
1,400,825
5.9%
15%

Ft Myers
17,914
341,150
5.3%
27%

Las Vegas
39,278
756,161
5.2%
25%

Sacramento
31,219
837,102
3.7%
14%

Phoenix
59,982
1,622,977
3.7%
17%



Figure 20: Distressed Inventory as a % of Housing Units (Edited to show only the top 5 markets in the U.S. – Max)






http://sacrealstats.blogspot.com/2008/0 ... atrick.net