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A Tale of Two Shadows

May 26, 2012

I ran across a couple of articles on shadow inventory that were telling two very different stories. I thought the S&P article was a little too pessimistic, but the NAR article was entirely too optimistic. I found the way they measure the shadow inventory and the time it will take to clear it quite interesting.

The S&P article states it will take 46 months to clear the shadow inventory. This is a national number and as we know this varies by location. The NAR article goes a bit deeper and shows a state by state breakdown.  I have highlighted below how each calculates the inventory and the months to clear.

According to S&P

The data from S&P define shadow inventory and the months to clear as follows:

“S&P includes in the shadow inventory all outstanding properties on which the mortgage payments are 90 or more days delinquent, properties in foreclosure, and properties that are REO. The agency also includes 70 percent of the loans that became current, or “cured,” from 90-day delinquency within the past 12 months because S&P says these loans are more likely to re-default.”

S&P’s calculation of the months to clear the shadow inventory is the ratio of the total volume of distressed loans to the six-month moving average of liquidations. Although S&P’s analysis of the shadow inventory uses only non-agency loan data, the agency’s analysts believe the months-to-clear is similarly high for the market as a whole.

According to NAR

Another article from the NAR shows the following breakdown of months supply of shadow inventory by state. The NAR is showing a much rosier picture.

“The map shows the number of months it would take to clear the shadow inventory by state. The months’ supply is estimated by dividing the shadow inventory and the monthly number of distressed sales. The numbers range broadly from 51 months in New Jersey to 7 months in Nevada. When looking at months’ supply it is important to keep in mind that this estimate highly depends on saturation of distressed sales. Given that New Jersey over the past year on average reported about 20 percent of existing home sales to be distressed sales, it will take a longer period for the shadow inventory to clear. In contrast, Nevada’s distressed sales averaged a considerable 70 percent share of the existing sales and at that rate the current shadow inventory would clear in 7 months.”


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