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Are We an Industry Afraid of Our Shadows?

Estimates of the industry's shadow inventory vary widely, but one thing analysts do agree on is that the overhang is massive and will likely weigh on market dynamics for years to come.

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Measurements of soon-to-be repossessed and foreclosed homes that have yet to hit the market range from 1.6 million by ""CoreLogic's"":http://www.corelogic.com assessment to as high as 8.2 million from ""Amherst Securities"":http://www.amherstsecurities.com. Much of the discrepancy stems from the different calculations used by the various companies and how they determine which loans will inevitably default and sink into the shadows.

The analysts at ""Capital Economics"":http://www.capitaleconomics.com factor into their equation the number of permanently vacant homes that are held off the market as reported by the Census Bureau, but only those over and above the ""normal"" level. They also add in homes that are already going through the foreclosure process and those where the borrower is at least 90 days delinquent on their payments, allowing for what the analysts say is a ""relatively generous"" cure rate of 25 percent.

Capital Economics' assessment falls in the middle of the estimate range, and the company's analysts say ""if anything, by erring on the side of caution our measure is probably an underestimate.""

They put the industry's shadow inventory at 4.3 million homes as of the end of the second quarter of this year. That's down from the company's peak reading of 4.7 million in the first quarter of 2010.

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With more than four million homes waiting in the wings to eventually be added to the supply of properties for sale, any normalization in the visible housing inventory is several years out, which will limit meaningful price gains for the foreseeable future, according to Capital Economics.

The company says even by its cautious measure, it is quite clear that a very large number of homes will be joining the visible inventory at some point â€" a visible inventory that already currently holds an excess of about 1 million properties for sale.

At current rates of sale, it would take more than 18 months to clear both the visible and shadow inventory, according to Capital Economics.

Jed Smith, managing director of quantitative research with the ""National Association of Realtors"":http://www.realtor.org (NAR), says he's seen a leveling off of distressed properties at the multiple listing service (MLS) level in recent months.

Approximately three years' worth of data indicates that distressed sales have settled in the 30 to 35 percent range, according to Smith.

""This suggests that financial institutions are feeding the properties into the market on a relatively constant basis, and given current economic conditions no great surge of shadow inventories has appeared,"" Smith said in a ""recent blog post"":http://economistsoutlook.blogs.realtor.org/2011/11/01/realtors%C2%AE-confidence-index-distressed-sales-leveling-off/.

While a deliberate and calculated release of the shadow inventory limits the likelihood of a detrimental price shock to an already weak market, Smith says the bad news is that the problem appears likely to be with us for the next two to three years, suggesting future price appreciation may be slow.

Capital Economics adds that policymakers have started to think about ways to reduce the shadow inventory in an orderly manner, namely officials within the administration have been consulting with industry stakeholders and inventors on plans to convert the government-owned REO stock to rental properties.

But, Capital Economics analysts say given the sheer number of homes in the shadow inventory, reducing the excess by 500,000 or so will do little more than make a dent in the supply overhang.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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