Depending on how you look at it, you would probably be justified in reacting to this chart from SocGen with either optimism or pessimism:
Optimism because the decline in overall inventory has recently fallen fast, pessimism because it is still higher than at any time since the late 1980s and there remains a big gap between visible and total inventory.
The most recent data for both existing home inventory and shadow inventory shows them declining. Today Calculated Risk writes that months of supply for existing home sales could soon fall below six months for the first time in six years, and yesterday’s decent delinquency and foreclosures report from MBA suggests that shadow inventory will continue to fall, even if there is some ways to go before it is cleared.
As to the impact on prices, here’s RBC Capital focussing on shadow inventory exclusively:
Despite the recent improvement in mortgage delinquency rates, we have to keep in mind that the shadow inventory component remains a major source of downside pressure for home prices in the medium term. And while the 4Q delinquency data did show a decline in this inventory glut, it remains north of 17 months’ worth of supply at current sales rates. It certainly is moving in the right direction, but “normal” is still a long ways away and the path there looks likely to be drawn-out. The housing market remains extremely oversupplied and, until this changes, the bottom in home prices will continue to elude us.
And some notes from a new Credit Suisse report:
Has housing turned the corner? The U.S. housing sector has been cheap by most measures for some time, but excess supply, driven by a steady stream of distressed homes, will continue to put downward pressure on home prices for the time being. A vigorous housing recovery is probably a year or two away (at least), but home construction and home sales have bottomed out, and we expect modest growth inresidential investment this year (3%). Homebuilder optimism has also visibly improved in the survey data (NAHB), as well as in the homebuilder stocks. Among all the housing policy considerations, a well structured buy-to-rent program to purchase and subsequently rent out GSE-owned distressed properties by institutional investors has the best likelihood of alleviating the looming supply glut and stabilizing prices.
Such a program, by the way, has already begun — from a Goldman note last week:
Other programs, such as the recently announced bulk sales of REO properties to investors for rental, are still in the startup phase. The effects of these programs are likely to become evident in Q2 and Q3…
In prior work on a potential REO-to-Rental program, we noted that the GSEs and the FHA have been selling nearly 500,000 distressed properties off their balance sheets at an annualised rate over the last few quarters. However, we estimate the location or condition of the properties likely reduces the number that could feasibly be sold in bulk to investors for rental to less than half the total.
Also, it seems likely that in some areas investors would have already converted a significant number of properties to rentals. We therefore estimate that the REO-to-rental program is likely to increase rental supply by between 20% and 40% of the distressed inventory, or 200,000 to 400,000 over 2012 and 2013.
CR had further, cautiously optimistic thoughts last week just after the foreclosure settlement had been reached, noting that we could well get a surge refinancing, mortgage modifications, and REO bulk sales soon. There’s a chance, of course, that visible inventory will increase as more foreclosed homes hit the market following the settlement, but at least then the gap between the two measures above will shrink and maybe we’ll have a better sense of how connected the housing market is to the rest of the economy.
Caveats, as always, include the methodological problem that the level of shadow inventory is tricky to measure. CoreLogic’s data seems to get cited the most, but there are other estimates that can vary (we recommend this excelellent Miami Herald piece from last year to read more on this).
And for a counterargument on the issue of how shadow inventory affect prices, Karl Smith notes today that maybe it doesn’t matter so much — that there didn’t seem to be much of a relationship between prices and inventory from 2001-2006.
Whatever the case, the pace of the decline in shadow inventory is certainly a hopeful trend; let’s hope it continues.
UPDATE: Calculated Risk just posted a new report on existing home inventory from Realtor.