‘Shadow inventory’ of 1.8 million homes could prolong housing slump

A glut of troubled homes not yet on the market threatens to prolong a housing slump already burdened by weak job growth and a lack of enthusiasm among buyers.

This so-called shadow inventory amounted to 1.8 million properties at the end of January, Santa Ana mortgage research firm CoreLogic reported Wednesday. While that was a decrease from 2 million properties in January 2010, it remained about a nine-month supply because the sales pace has weakened this year in the absence of federal tax credits for buyers.

“We are still talking about a very large supply by any measure,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “It is going in the right direction, but we are continuing to look at a situation where there is going to be downward pressure on house prices.”


The nation’s housing market increasingly appears headed for a double dip, and a large supply of distressed homes could hold back a long-term recovery. Home prices in January remained barely above lows hit during the worst of the recession, according to a closely watched index of 20 major American cities.

The Standard & Poor’s/Case-Shiller index, released Tuesday, dropped 3.1% from January 2010. Recently reported national statistics for new-home sales, previously owned home sales and housing starts for February also were worse than economists had expected.

“The adjustment in the housing market is going to take a long time,” said Patrick Newport, U.S. economist for research firm IHS Global Insight. “The numbers have been absolutely horrible, and I think a lot of this is related to the fact that we haven’t done much of a job getting rid of the glut.”

In California, an estimated 16.8 months’ worth of shadow inventory hung over the market, up from 15.3 months in January 2010, according to CoreLogic.

Celia Chen, a housing economist with Moody’s, said the big supply of homes and weak housing prices will hold back the broader economic recovery.

“Obviously, this will have a negative impact on consumer spending, because falling home prices weigh on household wealth,” she said. Also, “the inability to sell a house does reduce the mobility of a workforce, so it will be hard to move out of some areas where there are not many job opportunities.”

Shadow inventory, as defined by CoreLogic, is property that is in foreclosure, has a loan 90 days past due or has been taken back by a lender and is not yet listed for sale.

The CoreLogic statistics don’t include nearly 2 million homes that are more than 50% “underwater,” those worth less than half of the mortgage balance. These homes will probably fall into foreclosure in the near future, CoreLogic and other experts say.

“The reality is we just built too many homes and sold too many homes to borrowers who didn’t have any business buying them,” said Michael D. Larson, an interest rate and housing market analyst with Weiss Research. “Those homes have to be dealt with in one way or another.”

While policymakers and regulators are hoping to whittle down some of that inventory by pushing lenders to modify troubled loans, many properties will end up in foreclosure, Larson said. Some of those homes will be sold. But others may have to be razed because they are “in such lousy shape,” he said.

Shadow inventory typically isn’t included in the unsold inventory numbers reported by the National Assn. of Realtors. Economists and real estate agents keep a careful eye on this statistic to gauge the health of housing. The Realtors group recently reported that the inventory of previously owned homes — the bulk of the U.S. real estate market — listed for sale was 3.49 million homes at the end of February.