Shadow Inventory of Foreclosed Homes

Real Estate Agent with Keller Williams Realty Signature Partners

By Inman News
Inman NewsTM

February 02, 2011

It may take more than four years to clear the "shadow inventory" of distressed homes lurking on the sidelines in the U.S., a factor that's likely to undermine real estate prices as the backlog clears, analysts at Standard & Poor's Ratings Services say.

At 49 months, the estimated time needed to clear shadow inventory at the end of the fourth quarter of 2010 was up 11 percent from the previous quarter and 40 percent from a year ago. With the lone exception of Miami, the months' supply of shadow inventory grew in almost all of the nation's 20 largest metro markets.

But much of the increase in the estimated months needed to clear shadow inventory is due to the fact that it's taking longer for lenders to liquidate distressed homes -- not because the number of distressed properties is growing, analysts said.

Standard & Poor's defines shadow inventory as properties with borrowers who are 90 days or more delinquent on their mortgage payments, properties currently or recently in foreclosure, or properties that are real estate owned (REOs).

Although shadow inventory peaked in the first quarter of 2008, loans that are 90-plus-days delinquent and foreclosed properties are taking longer to become REOs. That's once again lengthening the overall timeline for resolving troubled assets, Standard & Poor's analysts said.

Shadow Inventory: top 20 U.S. markets

MSA Months of inventory, Q4 2010 Change from Q3 2010 Change from Q4 2009
Atlanta 49 +13% +41%
Boston 71 +14% +30%
Charlotte 65 +26% +49%
Chicago 59 +14% +41%
Cleveland 57 +20% +60%
Dallas 56 +24% +39%
Denver 38 +10% +36%
Detroit 31 +3% +43%
Las Vegas 33 +9% +62%
Los Angeles 50 +11% +38%
Miami 60 -- --
Minneapolis 38 +10% +77%
New York 130 +9% +31%
Phoenix 25 +10% +49%
Portland 51 +12% +65%
San Diego 39 +12% +43%
San Francisco 42 +11% +53%
Seattle 59 +10% +42%
Tampa 57 +3% +12%
Washington, D.C. 50 +13% +52%
U.S. total 49 +11% +41%

Source: Standard & Poor's Ratings Services

At the current, slower rate of liquidation in the New York metro area, Standard & Poor's analysts estimate it will take 130 months to clear $116.7 billion in shadow inventory there -- 2.7 times longer than the average for the U.S. as a whole.

That's despite the fact that the Los Angeles metro area has a larger "overhang" of troubled mortgages -- $173.1 billion, or 31.5 percent of all outstanding mortgages.

The good news is that the overall level of distressed loans continues to decline, and loan-cure success rates -- often the result of loan modifications -- have been improving since the second half of 2008.

Although 45 to 50 percent of loans modified or cured in the fourth quarter of 2009 redefaulted within the first year of modification, that's an improvement from the nearly 80 percent redefault rate on loans modified or cured during the first quarter of 2008.

Comments (1)

Karen L. Pietsch
Cary Property Pros - 4 Sale Realty, Inc. - Crystal Lake, IL
Cary Property Pros. Cary Property Pros Premier Real Estate

Mary, thanks for the helpful stats.  Always welcome to me to use for my clientele out there.  Keep em coming.  I love what you write about.  :)

Feb 07, 2011 06:59 AM