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Economist: Declining Shadow Inventory Will Not Help Country’s Short Housing Supply

shadows-four [1]A consistent and steady decline in shadow inventory, which is the number of residential properties that are in foreclosure but not being sold because the owner is waiting for price appreciation, has been a broad trend nationwide, according to National Association of Realtors (NAR [2]) Chief Economist and SVP Lawrence Yun.

Yun wrote on the NAR's blog [3] that a shorter shadow inventory, in addition to the shortage of visible inventory, will not help to relieve the low housing inventory situation.

"With new home construction still sluggish the housing inventory shortage could last longer," Yun said. "Home price increases in many parts of the country are nearly assured as a result. The price gains in some cases will be too fast and not good for the overall health of the local real estate market."

The percentage of all mortgages comprised of shadow inventory has fallen from 10 percent a few years ago at the height of the crisis down to 4.5 percent, which is essentially back to normal when put in terms of foreclosure starts (46 percent) according to Yun. The thin shadow inventory compared with rising home values has caused the share of distressed home sales to drop to single digits. Since there will be fewer properties sold at deep discounts, this will cause home prices to strengthen, Yun said.

"It also means that those practitioners who specialize in foreclosures or short-sales need to start thinking about a change in business models to normal home buyers and normal positive-equity home sellers," Yun wrote on the blog.

Since real estate is local, there are outliers to the general nationwide trend of shadow inventory decline. Shadow inventory remains high in some places such as New York and New Jersey, Yun said, and home prices will rise slowly in these areas. But since shadow inventory doesn't figure to convert into visible inventory in the foreseeable future, what needs to happen to solve the short housing supply problem?

"Investor-owned properties through a flip could show up on the market," Yun said. "However, most institutional investors who bought a few years ago are indicating a long-term hold to get rent gains which have been nice and profitable. The only true source of more supply is from homebuilders. Unfortunately, they are still not ramping up production to meet the market needs. Consequently, home price gains this year could be too fast for the country, easily rising double or triple the rate of income growth."