Tuesday, August 12, 2008

Insight into Shadow Inventory

Edit: In my haste to publish, I failed to include the following footnote that belongs with each table:

Source: Realtytrac, Housingtracker, Deutsche Bank
Note: Foreclosure inventory includes pre-foreclosures, auctions and REO. 2/3 of pre-foreclosures are assumed to become foreclosures.
I'm not sure if they reduced the pre-foreclosure number by 1/3 before the calculation was made. that'll teach me not to read the fine print. :) Thanks CR!

Nishu Sood, a Research Analyst with Deutsche Bank focusing on home builders, regularly publishes research on wide-ranging issues affecting the industry, including how the resale market impacts builder prospects. Now that REO is dominating housing sales in many markets, including Sacramento, his team at Deutsche is focusing on ways to measure the backlog. Nishu kindly gave me permission to excerpt some of their recently published (subscription-only) findings, which I hope you will find illuminating:

Distressed inventory not captured in resale inventories

The foreclosure wave is arguably the most important phenomenon currently affecting the resale market, dominating transactions in many markets, depressing pricing and creating substantial inventory that competes with builders and individual existing home sellers. The pricing effect of foreclosures is evident in the various home prices indexes, which are showing historic declines. The transaction effect is evident as well, with bubble markets showing a dramatic spike in volumes in recent months. The inventory effect, however, is not as evident. In this section we analyze the extent of the foreclosure wave's impact on resale inventories.

A hidden source of resale inventory, or "shadow inventory"

Foreclosures add a substantial and toxic form of inventory to the market, one that is not fully apparent from traditional inventory metrics used to evaluate the resale market. When bank-owned homes are sold, they do predominantly show up in resale transaction volumes. Thus, 40%+ of transactions in bubble markets have been reported to be distressed homes and more than 1 in 4 nationwide. In terms of inventory however, bank-owned homes frequently do not show up in resale inventory, or MLS listings. The extent to which bank-owned homes do not appear in MLS listings is difficult to quantify because it depends on each bank or servicer's timeline and approach in handling foreclosed properties. In order to provide some sense of the extent to which MLS listings ignore distressed inventories we do a simple comparison analysis below.

MLS listings are missing large amounts of distressed inventory

The foreclosure wave has added another way in which MLS listings are not accurately reflecting true resale inventory conditions. Based on our analysis, MLS based listing inventory is significantly understating the extent of foreclosure inventory in many markets. In Figure 19 below, we compare distressed inventory vs. MLS listings in major metro areas across the US. A certain portion of distressed inventory is included in MLS listings – if it were all included we would expect MLS listings to be higher than distressed inventory…


MLS Listings

Foreclosure Inventory

% of Listings





San Francisco




Inland Empire




San Diego




Los Angeles




Figure 19: Local MLS listings vs. distressed inventory (Edited to show only the top 5 markets in the U.S. – Max)

In terms of the scale of distressed inventory vs. MLS listings, the bubble markets top the list, with all five of the top markets in California

Analyzing distressed inventory at a local level

Foreclosure inventory includes 1.8% of households. Since MLS listings are a poor proxy for true resale inventories (see above section), in this section we compare distressed inventory to other more reliable housing metrics in order to gauge how substantial it is. In Figure 20 below, we compare foreclosure inventories to the number of housing units in each metro. Overall, foreclosure inventory represents 1.8% of homes in the 33 markets we analyze. This list is headed more by the metro areas that experienced the fastest growth in terms of new construction during the recent housing boom, including Inland Empire, Ft. Myers, Las Vegas, Sacramento and Phoenix. In the top three markets, more than 5% of housing stock is distressed inventory. In the bottom 10 markets, less than 1% of housing stock is distressed inventory.

As a reference point, we also include the rate of growth in housing stock in the far right column. This column shows what percent of current (2006) housing stock was added from 2000 through 2006. The top five markets where distressed inventory is the highest as a percentage of housing stock added the most housing units during the boom, with 20% current housing stock added from 2000-2006. This compares with 8% for the bottom five and 10% overall.


Foreclosure Inventory

Housing Units (2006)

% Housing Units

Housing Units Added (2000-06)

Inland Empire





Ft Myers





Las Vegas















Figure 20: Distressed Inventory as a % of Housing Units (Edited to show only the top 5 markets in the U.S. – Max)


Sold in '05- Bought in '09 said...


Fantastic find. Thanks for posting this. If that is the true shadow inventory number, we still have a significant distance to fall on prices.

Anonymous said...

Wow, what a great post.

31,000 foreclosure inventory!?! Max, are you planning on updating your charts somehow to reflect this? Now we see the true state of the market: inventory is HUGE and bottom calls are premature, bordering on ridiculous. We've been looking at this the entirely wrong way in terms of the inventory picture. The market is hugely imbalanced and it will take many years to work this off and prices will be under pressure for a long, long time. Even I'm impressed at how bad this is and I'm a huge RE bear.

Maybe it's my tinfoil hat operating here, but in light of these numbers I can certainly see a large motivation for the banks to pull out all the stops to obscure and obfuscate with regards to foreclosure inventory.

I guess the bottom line is you REALLY have to see a house you like that you can easily afford and you don't care about getting any upside appreciation whatsoever for many years. Is this an accurate summary?

patient renter said...

This is pretty incredible.

Any idea what date that data is as of? I'm assuming that the Sacramento data is for the Sacramento metro area, not just Sac County. Also, any idea how Deutsche came about those numbers?

mndean said...

I can't say I knew this was the case, but I'd suspected for a long time that there was a lot more inventory than was being listed, just from my travels around town. Some areas are just ghostsuburbs. And yet, there are still knife-catchers in my own neighborhood buying houses. It's just crazy that anyone wants to buy in this market, and I don't understand those that are.

Max said...

Any idea what date that data is as of? I'm assuming that the Sacramento data is for the Sacramento metro area, not just Sac County. Also, any idea how Deutsche came about those numbers?

I'm not certain of Deutsche's sources on the REO side, but the have a huge investment in data collection, plus internal models and their own REO info (DB is well-represented in the Sacramento region. Remember, they were the ones that pulled the plug on Saca. :) For inventory, the ~14,000 number looks like the four-county number I generate.

patient renter said...

So I guess this is it then - the unofficial smoking gun showing that inventory has shot past the moon?

Deflationary Jane said...

Wow Max, great article

We knew something was up but even I'm shocked at just how large it really is.

Adam Bradley said...

Where can one find a complete list of all >31,000 properties? And are the homes not listed in MLS for sale, owned by the lender but not yet for sale, currently in some state of foreclosure, or ???

Anonymous said...

patient renter,

I think with this new info from DB, we can safely say that inventory is horrendous, probably much worse than its EVER been.

Max, is there any way to get DB's numbers for the last couple of years and overlay this data with the "standard" inventory charts that you have for 2006/2007? My assumption is that the "missing" inventory from 2008 vs. 2007 is largely the hidden foreclosures, but it would be interesting to see how many hidden foreclosures existed in 2006/2007. If there wasn't that much shadow inventory in 06/07 then this is an even bigger story than it appears to be.

Anonymous said...

This clears up some confusion, related to a comment by a blogger on CalculatedRisk, last week. The comment was made that WellsFargo is about to place 12,000 FCs on the Sac MSA market. I thought that was excessive, given that there were only ~14,000 current listings.

Now it makes more sense. Still, the WF number thus far is rumor only, unverified.

Max said...

Max, is there any way to get DB's numbers for the last couple of years and overlay this data with the "standard" inventory charts that you have for 2006/2007?

I'll check into it, but I'm not sure they even did the calculation before now. The phenomenon of the REO backlog is relatively new in any case. FWIW, it looks like the pipes are backing up even further. Aside from the usual anecdotes of defaulters staying in their houses mortgage-free for 12-18 months before foreclosure, we've got new laws coming in that are apparently slowing the process.

From Nishu's data, 3.7% of all housing in Sacramento is REO. With alt-a coming on strong in the next year, that number could easily double.

We're nearing a point where the market will become completely broken. (Supply/Demand = infinity. Both the numerator and the denominator are moving in the wrong direction.) At that point, more supply won't change things.

Max said...

Now it makes more sense. Still, the WF number thus far is rumor only, unverified.

I've heard that rumor for a couple of months now, but nothing's happened so far.

You figure there will have to be a liquidation at some point. A big bank might have to fail before the floodgates open.

CPAone said...

Wow Max...great info. You had mentioned your suspicion before, but the numbers are incredible.

By the way, did you get my e-mail on Sunday?

Max said...

For those that haven't refreshed the main page, here's a footnote for tables 19 and 20 I missed that might give the report more context:

"Source: Realtytrac, Housingtracker, Deutsche Bank
Note: Foreclosure inventory includes pre-foreclosures, auctions and REO. 2/3 of pre-foreclosures are assumed to become foreclosures."

So it looks like the foreclosure data is a aggregate from several sources. Not sure if the 67% factor is being applied to the data, or if it's too high or too low.

2cents said...

Wow, so there are more homes for sale than we thought in Elk Grove, Natomas and Del Paso (. . yawn . .).

I'm hoping that the coming Alt-A wave brings some of that action to the $400/ft2 zip codes.

patient renter said...

I'm hoping that the coming Alt-A wave brings some of that action to the $400/ft2 zip codes.

That's exactly who it will bring the action to.

Anonymous said...

Rhetorical question: When the Alt-A wave hits the better neighborhoods, what kind of an impact will that have on the worse neighborhoods?

Bakersfield Bubble said...


I have been saying this and thank you for showing us the facts. You are DA MAN Max!!

For example in Bakersfield we have over 4,900 foreclosures this year and we started the year with 3,700 homes. We have sold 2,500 homes. yes we only have 3,600 homes listed.

The math is off!

3,700 (beg) + 4,900 (f/c) - 2,500 (sales) = 6,100 SHOULD BE THE INVENTORY!!!

patient renter said...
This comment has been removed by the author.
patient renter said...

So, if I can solicit some further explanation of this data - what exactly does this mean? That we are far and beyond the highest inventory on record for the region, but that previous inventory numbers probably don't matter much since they were based solely on data from the MLS and it's hard to place them into context?

Max said...

it's hard to place them into context?

Well, I think it's safe to say "distressed" inventory was barely above zero the last few years.

2cents said...

MLS #80079987
2 BR/2 BA, 2042 ft2
*Easy* freeway access

Anonymous said...

Excuse me, Max.... you said the number included "preforeclosures".

If they discounted those by 33% that would be more accurate. Last year Realty Trac was claiming about 20% of their NODs went to foreclosure in CA (due to multiple counting per home, etc.)

But, really a whole lot of homes.

If their including "preforeclusures" it will likely take a year before you see those, unless the behind in payment homeowner would rather not live rent free while the processing goes on. But those homes aren't empty, like an REO. A renter or new homeowner will take their place or be displaced.

Will this impact prices? yes

Will it lower prices? - not likely as they are pretty low and these homes are selling as fast as the banks finally get them to market - a situation the banks will like to continue.

Keep in mind that builder inventory is measured kinda funny also..... all those empty lots with streets, etc. out there in Elk Grove, West Sac, Yuba City, etc. are included in "inventory" and "# months inventory" and last I checked, no bathrooms.

When I sip, I need those...


Perfect Storm said...

It is my understanding that 75% of NODS are going foreclosure.

Anonymous said...

Excellent post.

While there has been much talk of the "shadow inventory", this is the first quantitative data I've seen.


2cents said...

Sippn has been gone so long that other posters are trying to take over his POV. Pretty sad.

Anonymous said...

"It is my understanding that 75% of NODS are going foreclosure."

This seems reasonable. 66% is too low. "Economists" have been proven wrong again and again and the most bearish case ends up being correct because they don't understand that when people have no equity, there is no reason to continue making payments. People just get this basic concept - no equity, no nest-egg building, no continue making payments.

Sippn, 20% of NOD's winding up in foreclosure is laughable. You realize this, yes? When you make such statements it detracts from your arguments.

Anonymous said...

Another game they're playing out here in Los Angeles is with the condo conversions. I've driven by a lot of completed projects at night, NOBODY home, lights out.

It doesn't even appear they're trying to lease these units. Funny thing? They'll put one or two up for sale in the MLS when they have 30, 40, 50+ to move.

Lander said...


What, no more Google handle? Did someone cut that elevator cable?

Anonymous said...

Like the whole housing situation, these figures raise interesting questions:

In a sane system, the people would be rejoicing that all these new houses were built. That actually constitutes real wealth; but our financial system has so crippled our economy that it routinely turns assets into liabilities and vice versa.

Since most of the new inventory was lived in at one point, even though many are now vacant; and since the population has not grown nearly as much as the housing stock; where did all these people live before moving into the new housing.

In a sane system, this should have driven down the price of housing and rents. Supply and demand.


My apologies if this turns out to be a double post.

Anonymous said...

"Sippn, 20% of NOD's winding up in foreclosure is laughable. You realize this, yes? When you make such statements it detracts from your arguments."

Darth - The NOD papparazzi counters would count every filing, in CA that might be a monthly filing for both the first mortgage and the second mortage, then again next month so they were reporting multiple filings per home. Made great news, but a little high then.

Maybe they corrected it this year.


Deflationary Jane said...

From 10-07
--Ominous trend: homeowners in default are much more likely to lose their homes than they were a year ago -- A year ago, only 19% of homeowners of homeowners in default were headed toward foreclosure; the rate is now estimated at 54%.

This is old news from 10 months prior and it's for all of CA but I think we can extrapolate from this.

Max said...

This is old news from 10 months prior and it's for all of CA but I think we can extrapolate from this.

Without knowing the degree with which preforeclosures are weighing the actual number, it's all conjecture at this point. Some of it is future inventory, some is listed on the MLS and counted in the REO stats, and some are distinct.

I think it's safe to say, however, that the sheer volume of REOs are in no way being reflected in the MLS data, and real inventory is much higher.

This is the point in the debate where other metrics become more useful. Vacancy rate, % distressed of total housing stock etc are much better predictors of market prices right now than inventory.

Like I said, the supply side factors continue to show increases, and demand side factors are pointing downward. The market is breaking down.

Anonymous said...


Check out MrMortgage's view of the situation. He says there is currently 4.25 years of inventory. Search for the term "shadow inventory" on the page:


Max said...

Here's some fresh info from Foreclosure Radar (via LA Times):

Notices of Trustee Sale, which are typically recorded 105 days after the Notice of Default, and which set the auction date and time, increased 9.8% to 39,010 filings in July. Looking at this number in comparison to Notices of Default, it is clear that far fewer homeowners are finding a way out of foreclosure. At 97 percent of defaults, July’s Notices of Trustee Sale filings are nearly double the 50 percent that were more typical as recently as February.

Anonymous said...

Mr. Mortgage is so overplayed. This jackass got famous when the naitonal media highlighted his implode-o-meter. Suddenly the guys hitcount goes thru the roof - advertisers notice and he reincarnates himself as Mr. Mortgage and the cash starts rolling in.

Problem is, its in his best interest to keep the ball rolling at all costs...

"guys I tell ya this ones gonna hit and its gonna be big next year"

Its always next year with this guy. (translation keep sippin my Koolaid guys - put my kids thru college).

Ever notice his tagline is "dont believe the hype" yet there is no one out there hyping anything (downplaying yes, but not hyping).

Bottom line, this guy plays us all for fools and we keep going back for more - we fall for his crap everytime hook line and sinker...We are all a bunch of suckers!!!


Anonymous said...

Ouch - I will be logging in to Google from now on. That was an impostor @ 2:26!

Most of the recent uptick is related to Countrywide resuming their actions, delayed during the takeover/merger with BofA.


Anonymous said...

Can you imagine what it is going to be like when the prime mortgages all start to default. I bet you yanks go back to 1980's prices.

Deflationary Jane said...

Congrats on the shout out from CR Max.

I still say that considering how high the percentage of homes in the Sac area is that go from NOD to actual foreclosure, there is a considerable shadow sitting out there.

I think I have the first corollary to the Heisenburg Uncertainity Principle of Real Estate:
You can know the percentage of defaults in an area, or you can know the number of REOs listed on the MLS but you can't know both.

Anonymous said...

Glad to see some CR press for you, although he watered it down and made the story seems a lot more tepid than it actually is. You've basically blown the doors off the shadow inventory riddle and this amounts to a smoking gun. I don't think people realize how huge this story is. And Sac (along with SD and IE) is the canary in the coal mine for what the future holds for RE generally and especially the bubble zones.

If 97% of NOD's are converting to REO's, the 31K number either represents a HUGE pile of inventory coming on in the next 3 months, OR it is some bank(s) holding back a pile of inventory. Something tells me in three months the MLS STILL won't show the 31K that we know is there. In fact, if foreclosure radar's 97% number is to be believed over the DB 67% number, the shadow inventory could be as high as 40K or 45K in 105 days!!!!

2cents said...

Max, LA Land cited your story:


Good job.

norcaljeff said...

Well even in hurriacanes people won't abondon ship and ride the storm all the way out until their body washes out to sea.

This is good stuff.

I highly doubt people are rushing out to buy REOs as soon as the banks put them on the market. I call BS! If they did, why do I see the same inventory on CL for 8 months now? Why do people complain that when they do put an offer on a REO, "the bank never gets back" to them?

And IF the REOs are selling like hot cakes, why did Merrill Lynch just sell off $30 Billion worth of inventory for 22 cents on the dollar?

I guess facts like these just don't matter, because all real estate is local.

norcaljeff said...
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norcaljeff said...
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Anonymous said...

Just in: "Inventory is at 5.6 months based on the last 12 months of sales and 6.5 months based on the last six months."