Shadow Inventory Could Reach 5.5m by 2011: Report

There are 2.5m households going through the foreclosure process right now and the number of homes with at least one missed mortgage payment sits at 5.4m, according to Capital Economics. And even though the economic recovery is gaining momentum, more households are still falling behind on their mortgage. By the end of 2011, an additional 3m homes will be in the foreclosure process, making the shadow inventory of potential REO properties at 5.5m. Some of these homes will inevitably avoid a foreclosure. But for many, the foreclosure process may be the only option and, eventually, those homes will get sold in the REO process. Equity prices continue to fall, but there are some encouraging signs of recovery in the US housing market, notably increased housing starts and homebuilder confidence. On the other sign of the coin, mortgage applications are at a 13-year low. “In any case, it is hard to describe the housing market as healthy when one in ten mortgages are in default,” economists Paul Ashworth and Paul Dales wrote. Capital Economics maintains its projection that the housing market will experience a double-dip. Builders believe that the recent surge in demand — fueled by the now-expired homebuyer tax credit — will continue without the credit. However, the economists said, despite mortgage rates setting new record lows, application volume is dismal. “This supports our long-held view that high unemployment, high indebtedness and tight credit will mean that without the tax credit the housing market will not be able to stand on its own two feet,” Ashworth and Dales wrote. Adding to the problem is the increased number of homes in the foreclosures process. In Q409, the foreclosure inventory rate was 4.58%, but reached a new high at 4.63% — 2.5m foreclosures — in Q110. The Capital Economics chart below tracks both foreclosure and mortgage delinquency rates (click to expand): As more and more artificial interventions on the federal, state and municipal level slow down the foreclosure process, the pipeline is bulging. At the end of Q110, one in 10 mortgage holders — 5.4m households — missed at least one mortgage payment. Of that group, 2.7m are more than three months behind on payments. While the economists note that a slight improvement in unemployment and steady economic growth would help reduce the foreclosure rate, those changes won’t address households too far gone in the foreclosure process to save. If Capital Economics’ projections hold true, and by the end of 2011, the shadow inventory of foreclosures numbers 5.5m, an oversupply of inventory that would send home prices down again. “To put that in perspective, that’s more than the 4m homes currently up for sale,” the economists wrote. “Without a doubling in demand, a doubling of supply would deter homebuilders from constructing new homes and put more downward pressure on prices.” Write to Austin Kilgore.

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