It's often feared a shadow inventory of homes will flood the housing market derailing the fragile recovery that some now believe is under way. But a new report from Freddie Mac says this view may be too pessimistic given today's rising home prices and falling REO levels.
While the real estate market has its share of distressed loans and assets looming on the sidelines, the nation's excess supply of vacant properties continues to fall, simultaneously making room for more REO absorption, Freddie said in its August "U.S. Economic & Housing Market Outlook" report.
"This continuing shrinkage in excess vacant stock is important because it means that in most markets the REO homes on the for-sale market are not competing with an oversized vacant housing inventory," the government-sponsored enterprise asserted in its report. "Thus, REO homes may be more attractive to investors and first-time buyers because fewer vacant homes are available, and REO sales will have less effect on other home sales or home values."
The rental vacancy rate alone fell to 8.6% in the latest Freddie report, its lowest point since 2002. The for-sale vacancy rate also declined to 2.1%, a six-year low. The market also is seeing fewer REOs with CoreLogic's sales database revealing that REO sales made up only 13.5% of all May sales, their lowest share in four years.
The good news is a smaller supply of REOs can buoy home prices. That trend is already occurring with Freddie's home price index rising 4.8% from March to June, the largest quarterly increase in 8 years. The national index also posted a year-over-year gain of 1%.
Thirty-four states and the District of Columbia saw home values rise during the 12-month period leading up to June 2012, the largest number of states with positive annual appreciation in five years.
Just a few years ago, the nation faced an "unprecedented oversupply of housing stock," Freddie said. But with homebuilding suppressed for years and more households finally forming, a great deal of that excess inventory has already been absorbed, the GSE said.