Shadow Inventory Shrinks for Fifth Consecutive Month: Barclays

That ominous shadow inventory of distressed homes that's been hanging over the industry for some time now was trimmed in July, according to the analysts at ""Barclays Capital"":http://www.barcap.com.
[IMAGE] It marked the fifth straight month the company has recorded a decline in the shadow supply. Barclays says it shrank 1.2 percent in July, to 3.92 million homes. At the same time, the research firm's assessment of the nation's REO inventory ticked up 0.2 percent to 538,000 bank-owned properties.

Barclays’ analysis of remittance reports from July’s existing-home sales â€" which plunged nearly 30 percent month-over-month after the expiration of the homebuyer tax credit â€" reveals that distressed liquidations fell 7 percent, from 126,000 to 117,000. Voluntary sales took

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an even harder dive, down an alarming 37 percent, from 429,000 to 272,000 in July.

The distressed share of sales rose from 23 percent to 30 percent, resulting in July housing numbers that more closely resemble those of a typical December, according to Barclays’ analysts.

The company says the sudden rise in distressed share should pressure home prices starting with the upcoming July measurements, and will likely result in a 2 percent home price depreciation nationally over the next three months.

“We believe investors should pay particular attention to the ‘distressed gap,’ defined as the difference between aggregate home price indices and those based only on voluntary sales,” Barclays said. “We find that this gap is highly correlated with distressed share, and we therefore expect it to widen significantly over the coming months.”

The company explained in its report, “Even if voluntary prices remain flat after the tax credit expiration, which we consider unlikely, aggregate home prices would fall due to a widening discount. Regions currently with moderate levels of distressed activity are particularly vulnerable.”

Barclays noted that as the foreclosure pipeline gradually returns to normal levels, the same distressed gap that is cause for concern in the near term will converge to zero, bringing aggregate home prices up with it.