9/7/2010
By David Urani, Research Analyst

Barclays said on Friday that the "shadow" inventory of homes (defined as homes 90+ days delinquent or in foreclosure) fell in August by 1.2% to just under 4 million homes. That marks the fifth straight month of decline for shadow inventory according to Barclays, showing that the housing market is indeed making some modest progress on the supply side. Actually, lender Processing Services (LPS) (pictured below) reckons shadow inventory declined for six months straight through July, and if it agrees with Barclays, August would mark the seventh. The figures vary from firm to firm, but looking at the broad collection of evidence points to a true, sustained decrease in shadow inventory over the past several months.

The trend of falling shadow inventory can be attributed to a slowing of incoming new delinquencies as both the rates of decline in employment and home prices have generally stabilized, sending fewer people into unemployment and/or underwater. However, the later stages of delinquency continue to speed up, according to Barclays, with repossessed home inventory rising by 0.2% in August to well over half a million units. That runs generally in line with data from RealtyTrac, which has posted a varying, but generally increasing rate of foreclosure completions. In a nutshell, although new delinquencies are slowing, the huge pipeline of delinquent borrowers (more than 7 million according to LPS) is being cycled through at a quickening pace.

Additionally, Barclays notes that while all home sales have been down significantly, distressed homes have increased as a percentage of total sales. Given the rising rates of repossessions, that makes sense. Barclays says that the distressed proportion of total sales rose to 30% in July from 23% in August. Consequentially, it seems clear that the rising percentage of distressed home sales will pressure prices, as those homes generally sell for a discount. Not only that, but with repossession rates still going higher and sales falling to new depths, inventory will be very difficult to control. Even during some of the higher-demand tax credit months, inventory was still able to inch higher, and with demand having plunged, rising supply is only logical.

In conclusion, the falling shadow inventory is good for the long term, but the pipeline of delinquent borrowers is still huge, and as foreclosures cycle through at a fast pace it spells difficulty for the near-term. A dip in prices is still inevitable.

David Urani
Wall Street Strategies

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