In Morgan Stanley's new finance report, Housing Market Insights, the investment bank estimates that at the rate of current home sales, it would take 47 months for us to clear the "shadow inventory" of houses. What exactly is the shadow inventory? Morgan Stanley's method of calculating the shadow inventory includes all loans 90 days or more behind on their payments, most loans that are 30-60 days behind, and properties that are already foreclosure. In short, unless they go through a successful loan modification or short sale, there is a strong possibility of the house going into foreclosure and ending up on the market at auction. Morgan Stanley estimates there are approximately 8 million homes in the shadow inventory at this time.
Of course when these homes end up on the market, they inflate an already large supply of homes on the market which can drive down home prices further. Your basic economic sense should tell you that lower prices should lead to more homes being purchased, right? Unfortunately, this isn't necessary the case for us at this time. Banks have made it difficult to get credit for a home purchase unless the borrowers have stellar credit, which is hard to come by these days. Additionally, with unemployment still a giant albatross around our necks, people are less willing and less able to make big investments and instead are buckling down and playing it safe.