Monday, July 26, 2010

CNBC/Reuters want's you to think everything is peachy:

Headline: New Home Sales Surge in June, Inventory at 42-Year Low

But a different view over at Calculated Risk: New Home Sales: Worst June on Record
Ignore all the month to previous month comparisons. May was revised down sharply and that makes the increase look significant.
Both are technically true, so who do you trust in terms of where this economy is headed?


The key phrase here is "number of houses on the market".

There are many houses that are what has come to be known as the "Shadow Inventory":

What is Shadow Inventory?

Before we talk about shadow inventory, we have to first figure out what inventory is. Inventory in this case in the number of homes currently for sale in the US. Inventory can be measured in a couple of ways. The National Association of Realtors likes to express it in months of inventory, so there is an 8.4 month supply of inventory of existing home (it excludes new ones). Generally speaking, an ideal supply is closer to 6 months; this means that if no new homes went on sale, the existing supply would run out in 6 months.

The shadow inventory is the inventory of homes that are probably going to be for sale real soon. For example, foreclosed homes that haven’t been listed are a part of shadow inventory. Calculated Risk mentions unlisted condos by builders that have decided not to sell yet are also a part of the shadow inventory. The exact definition of shadow inventory depends on who you ask. Someone might say it only includes homes that have been taken over by the bank. Another might say it could include any home that is more than 6 months late on a mortgage.

What Impact Does Shadow Inventory have On Real Estate?

Regardless of what you say shadow inventory is, there’s a lot of it. Estimates vary between 2 million and 8 million homes in the US. With sales expected to be 5.5 million this year, that’s a lot of inventory. The effects of such inventory will be to depress home prices. As soon as sales pick up people and banks will list homes to try to sell them. This will depress prices as there will again be more sellers than buyers. It could take years before all the shadow inventory is sold off, which means prices will be lower than what they could be.

Look up what Irving Housing Blog, Dr. Housing Bubble, etc., have to say about the subject.

By Anonymous The Dark Avenger, at 7/27/2010 7:02 AM  

Post a Comment