Housing Market Recovery?

“Shadow inventory” is considered the number of homes that are either in foreclosure or likely to end up in foreclosure held on banks’ balance sheets.  This inventory creates substantial pressure on housing prices and potential losses to banks.   If the number is manageable, it usually means waiting for the market to digest the overhang. But if shadow inventory is large, housing prices could experience further declines before they hit bottom, which of course has dire consequences for communities, homeowners, and the economy.

Estimates of shadow inventory, and even the definition of what constitutes shadow inventory property, vary widely.  Current estimates vary from 1.6 million to 8.2 million homes, depending on which database of loans and criteria are used to determine possible foreclosure rates.  Mostly likely, the shadow inventory is probably in the range of the numbers above. Regardless of the actual number, the sooner this inventory gets worked through the system, the sooner we will see an improvement in the housing market and the broader economy.

While the actual shadow inventory numbers are a wild card in the housing recovery, we may be starting to see the first signs of the housing market stabilizing.  While sales of homes are still historically very low, regular housing inventory is on the decline and fell to its lowest level since March 2005 in December 2011, according to NAR.  The NAR reported inventory fell to 2.31 million in January. This is down 21% from January 2011. This decline in inventory was a significant story in 2011 and may continue to accelerate in 2012.  In addition, total existing home sales increased 4.3% in January from December and are slightly about the January 2011 figures.

It may be that we are finally starting to see stabilization in home prices and a meaningful decline in inventory; which is the first phase to a lasting housing market recovery.