Shrinking ‘Shadow Inventory’ Eases Threat to U.S. Housing

The overhang of pending foreclosures that threatened to flood the U.S. housing market and depress prices is dissipating as banks sell off distressed properties and let borrowers sell homes for less than they owe.

The so-called shadow inventory of homes that are seriously delinquent, in the foreclosure process or owned by banks and not listed for sale tumbled in April to the lowest level in more than three years, CoreLogic Inc. (CLGX) said today. Home seizures plunged 18 percent from a year earlier even as initial notices of foreclosure increased, a sign that banks are turning to repossession alternatives, RealtyTrac Inc. said today.

A surge in foreclosed properties, which typically sell at a discount, may have driven down home prices, hurting a market that’s showing signs of bottoming. Transactions involving homes in the pre-foreclosure process rose 25 percent from a year earlier in the first quarter to a three-year high, Irvine, California-based RealtyTrac said on May 31.

“In some ways, the shadow inventory was aptly named because shadows can sometimes appear larger than the actual problem,” Daren Blomquist, a RealtyTrac vice president, said in an interview. “The uncertainty of how much distressed inventory would end up on the market was more of a problem than what the actual numbers are turning out to be.”

The shadow inventory fell 15 percent from a year earlier to about 1.5 million homes and is at the lowest since October 2008, the Santa Ana, California-based real estate information company CoreLogic said in a statement today. That represents a supply of about four months, down from six months in April 2011.

‘Positive Development’

“The decline in the shadow inventory is a positive development because it removes some of the downward pressure on house prices,” Mark Fleming, chief economist for CoreLogic, said in a statement today. “This is one of the reasons why some markets that were formerly identified as deeply distressed, like Arizona, California and Nevada, are now experiencing price increases.”

Serious mortgage delinquencies also are down, with the share of payments 90 days late dropping to a three-year low of 6.86 percent in April, according to data compiled by Bloomberg. Arizona had a 37 percent decline in serious delinquencies, more than any other state, followed by California, Nevada, Michigan and Minnesota, CoreLogic said today.

Foreclosure starts rose in May from a year earlier for the first time in more than two years after the largest U.S. loan servicers settled with states over faulty documentation. An increasing share of those distressed homes are being disposed of through short sales, in which owners sell their properties for less than they owe to avoid repossession, Blomquist said.

Distressed houses that come up for sale are likely to be quickly absorbed as demand rises in some cities where property inventory is low. Rising buyer interest is spurring banks to approve more short sales, said Doug Duncan, chief economist for Washington-based mortgage financier Fannie Mae. (FNMA)

“The sense is now is the time to move and clear inventory,” Duncan said today in a telephone interview. “If you see house prices continue to stabilize, you’re not selling into a falling price market.”

To contact the reporter on this story: Prashant Gopal in New York at pgopal2@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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