Where Is The Housing Shadow Inventory?

Where Is The Housing Shadow Inventory?

Over the last several years we have heard whispers that once the housing recover began there was a extra bullet in the gun of the recession; a huge number of bank owned foreclosed homes.  The premise being that on the very day that home prices considered increasing this hidden  inventory will dump onto the market, thus tampering any recovery in home prices.   Its great storyline, but untrue.

The recession generated almost seven million foreclosures and short sales in a very compressed time period.  Certain states, including Florida, had such an overwhelming number than government just stopped processing foreclosures for several months to arrest problematic procedures, and then resume. If you recall, in the depths of the recession President Obama urged Fannie and Freddie to suspend foreclosures over the holiday season.

The bulk of foreclosure inventory, according to Dr. Wheaton of Torto Wheaton, was and is concentrated in four states; California, Arizona, Nevada and Florida.  In the last several quarters all of these states have seen a reversal in home prices.  Was there a concurrent "dump" of new inventory?  No.  As they say; "it is still working it's way through the system"

Inventory is slim in major cities including Boston and San Francisco, but to less so in many other cities.  For Realtors looking at the ninety day moving average of housing inventory in their market, I doubt there are any with significant increases based on a flood of foreclosures.  Investors from Blackstone to your neighbor are looking to get in before prices rise higher.

This is not to say I believe price increases alone will remove slack housing inventory.  Job creation will.  Population increases will.  And in markets experiencing job growth and population growth builders will come there first.  Yet, there is a lag between when a builder first conceives to build and when the property is made available for habitation.  This lag can be as short as a year and as long as two years.  Is the shadow inventory going to fill this gap in housing need?  No.

Like politics, all real estate is local.  Certainly, there will be some markets negatively affected by the foreclosure housing inventory.  Investors large and small buying up single-family homes for rental now will eventually want to sell.   The ratio of home owners  to renters may tick up yet again with an increase in home ownership rates.  Mortgages may be a little easier to come by as we settle into the new under-writing paradigm and people adjust to the higher standards.

But until home building returns to a rate that match’s population growth inventory will be below norm no matter the shadow.   To make certain you are not distracted by the noise, keep focused on just those markets where  you are an active buyer.  This is not to say ignore national trends or regional occurrences.

If you want to know what is coming into your market look at housing starts, the direction and average age of the population and movement in household size.  Shadow inventory may affect the four states mentioned earlier, some rural areas and small suburban cities with high concentrations of bad loans.  For most of the country this inventory will fold into and out of sales in the normal course of business or be a welcome increase to historically low housing inventory.

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Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily property management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel. www.MultifamilyInsight.com

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