Shadow Foreclosure Inventory Creeps Up

Last week I noted that foreclosure data appeared to be trending in a generally positive direction. But that data only included visible foreclosures. What about homes in the foreclosure pipeline that haven't officially been included as part of the housing inventory? That so-called "shadow" foreclosure inventory is climbing, according to a recent report. This isn't good news.

Bloomberg reports:

The number of homes that may be in the pipeline for a sale because of foreclosure and delinquency climbed about 55 percent to 1.7 million at the end of September, according to estimates by First American CoreLogic.

I wrote about the shadow foreclosure inventory problem back in September. This news is troubling, because it supports the theory that the visible foreclosure data reported is leaving out a big part of the story. Banks have many more properties to get rid of than the mainstream statistics take into account. The question is whether this shadow inventory will eventually flood the market, or if banks intend to let it slowly drip out it little-by-little, month-by-month. Neither prospect is particularly good, as both options will delay the housing market hitting the real bottom.

According to that Bloomberg article, overall housing inventory, including the shadow supply, is lower year-over-year. But not much lower. It was 5.5 million in September. That's only 200,000, or 3.5%, fewer than a year ago.

This is sobering news, particularly in light of all of the government efforts to prop up the housing market, and recent ultra-low mortgage interest rates. Those factors should have brought forward housing demand. As a result, eventually real estate investors, first time buyers and most anyone else who might have been looking to buy will have already done so. Yet, the inventory hasn't much changed. Supply must be approximately keeping pace with demand.

As foreclosures continue and this shadow inventory gets released, that could be disastrous for the housing market. Next year at this time, overall inventory could actually be higher if a huge chunk of 2010 demand was pulled into 2009. And as long as the inventory remains so high, it's hard to see why home price declines would permanently subside.

(hat tip: calculated risk)