Jann Swanson, Mortgage News Daily, Aug 8 2012, link
Despite what it termed “decidedly good news over the past quarter” regarding house prices, Frank Nothaft, Chief Economist of Freddie Mac said today that “the ominously termed ‘shadow inventory’ is casting a pall of uncertainty over recent signs that home values have bottomed out.”
There are indications everywhere that the market is strengthening he said in his office’s August U.S. Economic and Housing Market Outlook. It cited the 4.8 percent gain in Freddie Mac’s House Price Index, the 2.5 percent June-to-June increase in the CoreLogic house price index, and the annual gains in the Federal Housing Finance Index. So, the report asks, “have we arrived at the house-price inflection point or is there a shadow inventory lurking ready to send house prices tumbling again?”
Various measures suggest that while there is a shadow it is not so foreboding and, in fact, has shrunk. Even if some local markets continue to be lopsided, the nation as a whole may be about to return to a healthy supply and demand balance.
Although there are still a lot of delinquent mortgages out there and the shadow persists, the report says there is an important difference between the market today and that of recent years – the excess supply of vacant homes has been substantially reduced. The most recent Census Bureau report showed a decline in overall vacancies in homes both for sale and rent and rental vacancy rates have fallen to the lowest point since 2001 and for sale vacancies to the lowest point since 2006.
As can be seen in the chart below, the vacant “overhang’ grew rapidly to close to two million dwellings from 2006 through 2009 and this oversupply of housing stock exerted considerable downward pressure on rents and home values from the middle to the end of the first decade of the 2000s. The overhang also suppressed homebuilding so the relatively small amount of new construction and new household formation has allowed much of the excess inventory to be absorbed. This is of course a local affect with many tight markets and others with continued excess stock but nationally the for-rent market is in relatively good balance.
This continuing shrinkage in vacant stock is important because it means that in most markets the bank-owned properties (REO) on the market are not competing with an oversized vacant housing inventory and thus may be more attractive to investors and first-time homebuyers. With fewer vacant homes available REO will also have less effect on other home sales and values. Further, increased home sales overall mean a smaller proportion of sales are of distressed properties which then have less impact on prices. CoreLogic reported that REO had declined to 13.5 percent of sales in May, the lowest share since March 2008. In many markets short sales and loan modifications have also slowed the growth of REO inventories.
Nothaft concludes that “Recent data continues to suggest that the bottom in the U.S. house-value cycle may have been reached. Even if national indexes dip in the seasonally weak autumn and winter months, the declines probably won’t be big enough to erase the good second-quarter news on home values. This means the housing recovery may finally be coming out from the shadows.”