“Shadow” Inventories: What They Can Tell Us

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Two new reports estimate bank “shadow inventories,” or foreclosed homes that haven’t been put on the market, will peak soon and disappear entirely from the market by 2013. Some might accuse those analysts of wearing rose-colored glasses, but the housing market won’t recover until those “shadows” go away.

The first report comes from Barclays Capital (Stock Quote: BARC), which predicts the peak for shadow inventories will come soon. After that, the rest of 2010 will see a gradual decline in lenders’ foreclosed properties.

In its forecast, Barclays includes not only homes already in foreclosure, but distressed homes where the mortgage loan is more than 90 days late in payment.

Altogether, Barclays estimates the total amount of each as follows:

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Total U.S. shadow home inventories

90-days late = 2.4 million loans

Foreclosed homes – 2.1 million

Total U.S. shadow inventory = 4.5 million homes

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Those inventories should disappear in the next three years, Barclays estimates, but it will be a slow process. With the residential real estate market absorbing about 130,000 shadow properties per month, the market has its work cut out.

Barclays estimates the following ranges for shadow inventory over the next three years:
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Rate of shadow home inventory property sales over next three years
2010 – 1.6 million
2011 – 1.6 million
2012 – 1.5 million
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The Barclays report is right in line with another major study from Standard & Poor’s.

That data, issued earlier in 2010, pegs the time expected to rid the market of all shadow inventories at 33 months.

The analysts at S&P caution that the numbers they reached hinged on a key assumption – that the number of shadow properties doesn’t rise again if the U.S. economy manages to fall back into recession, and trigger another heavy dose of foreclosure activity.

S&P analysts also say their data does not reflect a recovery in housing as much as it reflects a change in the number of residential properties actively on the market.

“Overall, it is our opinion that recent positive housing reports should not be construed as a sign that the distress in the residential housing market is abating, but rather should be attributed to the temporarily limited supply of homes on the market,” said the report.

While there may be consensus that those shadow properties will be off the banks and lenders’ books in three years, the housing market could drag as a result – for three years on its own. Only when the slate is cleared and normal home selling and buying can pick up, will the housing crisis finally get behind us – and thankfully out of the shadows.

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