The following is an excerpt from The Mortgage Pages research series on 11-13-2009.

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- Los Angeles County – YEARS of Mid-to-High End Shadow Supply

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Our mission is to provide our clients a significant edge. This is done by turning the daily, market-moving real estate and mortgage news flow and events into old news by the time it makes headlines. – Mark Hanson

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Yesterday, LPS put out its national monthly default and foreclosure report confirming what we already knew — that actual foreclosures are being held artificially low while banks and servicers shoe-horn anyone with a heartbeat into a trial mod putting off the years of reckoning ahead. (LPS report link)

This report is a great flip-through overall, but pay special attention to pages 31-33. The cut out below is of page 32, LA County. What this says is that based upon the current foreclosure-related inventory, potential inventory and sales rate for houses valued at $500k and above there is:

• 115 months potential supply based upon the number of props at the 90+ delinquency stage
• 71 months potential supply based upon the number of props at the foreclosure stage
• 62 months potential supply based upon the number of prop at the REO stage

(supply estimates do not include houses already listed on the MLS and counted in the Realtor Association’s supply estimates other than a portion of the REO bucket – this is ADDITIONAL supply)

However, when you move down price bands to $250k and below, there is hardly any supply – only a few months. This sums up the CA Real Estate market(s) perfectly. The “buyer frenzies” you hear about are in the price bands in which there is no supply while the mid-to-upper end price bands are in turmoil.

BUT, I do not completely agree with the methodology here. Counting potential inventory using supply in the foreclosure pipeline is solid – we have been doing that since this all began. However, I think LPS is far too aggressive because they are comparing supply (REO) and potential supply (90+ & FC) with specific distressed purchase counts for that supply stream.

What they should have done is take the supply and potential supply and divide by Total Residential Sales. This decreases the Months Supply significantly but is likely closer to reality based upon current sales rates and what sales rates would be if the supply was on the market at distressed prices. (see page 2 for my revised charts using this methodology)

The chart below is of the same supply and potential supply data, but divides the data by Total Residential Sales to come up with more realistic Shadow Inventory estimate for LA County.

At the 90-days late (NOD) stage there is 31 months of potential supply for houses valued at $500k and above. Obviously, not all 90-day lates will end up as short sales or foreclosures, just most of them. At the Foreclosure (Notice-of-Trustee Sale) stage there is 19-months of supply. Once again, most of this will end up as for-sale housing supply.At the REO stage inventory drops considerably to just over 5-months for reasons we all know.

Bottom Line - Based upon housing supply in the foreclosure pipeline, which is greater than ever before, the CA housing market has a long way to go until it finds its true bottom, especially at the mid-to-high end. By not including potential supply from the foreclosure pipeline in analysis, traditional economists looking at historical primary indicators such as Housing Starts and Building Permits, which are dwarfed by foreclosure starts, will continue to miss.

I often run similar analysis on various MSA and most regions in the all-important bubble states look similar to Los Angeles County.

Best Regards,

Mark Hanson

This document is for your private information only. In publishing research, Mark Hanson and M Hanson Advisors are not soliciting any action based upon it. Mark Hanson and M Hanson Advisors publications contain material based upon publicly available information, obtained from sources that we consider reliable. However, Mark Hanson and M Hanson Advisors does not represent that it is accurate and it should not be relied on as such. Opinions expressed are current opinions as of the date appearing on Mark Hanson and M Hanson Advisors publications only. Mark Hanson and M Hanson Advisors are not liable for any loss or damage resulting from the use of its product. Mark Hanson and M Hanson Advisors are Limited Liability Corp registered in CA.

Filed on: December, 3 2009 by markmti