What is Shadow Inventory

The “shadow inventory” of unlisted bank-owned homes and potential foreclosures increased to 2.1 million units in August, up 10% from one year earlier, according to new estimates from CoreLogic, a real-estate research firm.

That’s around eight months of supply, compared to a five-months’ supply one year ago.

By contrast, the inventory of all unsold homes listed for sale totaled 4.2 million units in August, unchanged from one year ago. Together, that means the visible and shadow supply of homes stood at around 6.3 million in August, or around 23 months of supply at the current sales pace.

Mark Fleming, chief economist at CoreLogic, says that weak housing demand “is significantly increasing the risk of further price declines in the housing market.” Delays in the foreclosure process, including those brought on by banks’ inability to file the proper legal paperwork, threaten to exacerbate that trend.

CoreLogic estimates that the shadow inventory is highest in the Miami metro area, at 33.5 months, followed by Long Island’s Nassau and Suffolk counties and the Chicago and Atlanta metro areas, with around 30 months. Florida, New York and Illinois require banks to process foreclosures through courts.

Some analysts have said the CoreLogic estimates look rather low. Laurie Goodman, senior managing director at Amherst Securities Group, has warned that as many as seven million homes could end up in banks hands unless more aggressive modification regimes are put in place.

Analysts at Barclays Capital, meanwhile, estimate that bank owned inventory stood at around 600,000 at the end of September (the figures don’t specify what share of that inventory is unlisted versus listed).

Barclays estimates that another 3.76 million homes are either in the foreclosure process or are at least 90 days delinquent but not yet in foreclosure. That’s up from 3.66 million one year ago, though it’s down from a peak of 4.22 million at the end of February. Some of those homes could still sell before going through foreclosure, including through a short sale, where banks approve a sale for less than the amount owed, while other loans could be modified, avoiding (or delaying) foreclosure.

Nearly 356,000 homes have sold through short sales during the first nine months of 2010, according to Barclays analysts, double the amount two years ago. By contrast, banks have sold around 700,000 foreclosures during that period, down 25% from last year and up 10% from two years ago.