Shadow Inventory: Holding Down Home Values in Multiple Ways

Eric Rosenblatt, Vincent Yao, Fannie Mae

As with the articles in this issue, this introduction reflects the views of the authors and does not necessarily reflect the views of the U.S. Department of Housing and Urban Development.

National real home prices have dropped back to levels last seen in 1999. Nominally, they have fallen 31 percent from their peak in April 2006 if we include distressed sales and 22 percent if we exclude them (CoreLogic® , 2011). At the same time, mortgage interest rates are at generational lows. The combination of cheap houses and cheap money makes homes more affordable now than they have been in decades. So why do home sales prices continue to fall? One could suggest reasons such as unemployment and tight credit, but the shadow supply of available properties is one key factor. American consumers know the basic law of supply and demand and can see that, although the number of months of listed inventory is near historic averages right now, vast numbers of homes wait on the sidelines. These coming sales include unlisted repossessed homes, homes associated with the 8.1 percent of mortgages delinquent as of March 31, 2011, according to Mortgage Banks Association survey, and some growing fraction of the 10.9 million homes with underwater owners (CoreLogic® , 2011) who would have sold by now if they could have paid off their mortgages. In her testimony to the U.S. Senate Subcommittee on Housing, Transportation, and Community Development on September 20, 2011, Laurie Goodman of Amherst® Securities Group, LP, predicted that upwards of 1.4 million units of distressed housing will hit the market annually for the next 6 years (Goodman, 2011). These “sales on the way” are additive to the normal economic rates of offerings and are therefore likely to exceed even normal demand rates. Actual demand, however, will probably fall short of normal in response to the tightest underwriting practices since at least 1995.