8/14 M Hanson…”Shadow” & “Ghost” Inventory Quantified

by Mark on August 14, 2012

Those estimating “shadow” inventory at levels inconsistent with a multi-year drag on housing are “definitionally” challenged.  Moreover, they have bad data.

Bottom Line:  based on the data and simple math we have at least 10 -years of distressed supply to work through based on the past two years average monthly distressed sales demand quoted by the National Association of Realtors.

Most “Shadow” inventory estimates use incorrect demand numerator assumptions and do not account for borrowers who are technically “stuck”.

Note, that the analysis below looks at two measure;  1)  real “shadow” inventory and time to clear and the more important   2)  “ghost” supply that traps 25 million borrowers in their houses — the prime repeat buyer cohort who must be active in order for housing to be able to reach “escape velocity one day — making them useless in the macro housing market equation.



1)  Annualized Existing Home Sales 4.4mm units

a)  3.1mm units are non-distresssed

b) 1.3mm units are from the foreclosure stock or short sales

Bottom line: Demand for distressed supply is 110k per month on average.



Supply (Visible, Shadow, Ghost)


Visible Supply

1)  Listed Supply – 2.4 million Nation Assoc of Realtor listings

2)  REO – 300k to 400k Foreclosures

**this is where most “analysts” stop looking for supply.


“Shadow Supply”

1)  60-days late or in Foreclosure – 5 to 6 million units

2)  short sales – 600k annually

3)  modified legacy loans – 6 million (I call mods “new-vintage, higher-leverage, worse-than-Subprime loans).  Mods redefault at a faster pace than legacy Subprime loans defaulted in 2006 to 2008.  Once loans are modified everybody forgets that these borrowers remain more risky than legacy subprime borrowers…they simply forget about them.  But with respect to default and short sale volume, this is an extremely important cohort track closely month to month.

Bottom line, there are 11.6mm high risk loans/borrowers.  If only half liquidate over the next 3 years it means ~2mm per year in distressed supply in a market only proven to absorb 1.3mm units per year.

**Some better analysts go as far as here but they don’t grasp the “denominator effect” and try to divide total national sales of 4.4 million into the “distressed” supply. That’s not accurate because only 25% of the demand is for distressed supply.


“Ghost” Supply 20 million to 30 million borrowers/houses (not mutually exclusive meaning one borrower can belong to multiple cohorts)

1)  “Effective” Negative Equity – 25 million borrowers / houses.  These borrowers are dead to the housing market, as they don’t have the equity to pay a Realtor 6% to sell and put 20% down on a new house.  They were once the most active participants, the repeat buyers. Now they are “zombie homeowners”.

2)  Impaired Credit – 28 million borrowers.  These are borrowers with “c” grade or lower credit that can’t easily qualify for a purchase money loan outside of FHA

3)  Legacy Second Liens – 18 million borrowers.  Legacy seconds that banks refuse to extinguish also trap millions of homeowners making them useless in the macro housing market equation.

**No analysis I have ever seen makes the case that…until these 20 to 30 million — mostly bubble years buyers/borrowers — are de-levered macro housing can never reach “escape velocity” or achieve a “durable” recovery.  In a healthy housing market this is the primary demand cohort…current owners with mortgages who move every 6 to 8 years.


Bottom Line:

First timers and investors are volatile and thin cohorts that cannot sustain a “durable” recovery or push macro housing to “escape velocity”.   In fact, “distressed resales” have only averaged 110k per month over the past two years.  That is nowhere near enough demand to absorb all the likely supply detailed in the chart below.

The investor and first timer by and large bowed out of the market in June, as the distressed supply was all but chocked off for the election cycle. Now, the Realtors are screaming for more Foreclosures…how ironic.

This housing market will never achieve a “durable recovery” or “escape velocity” with 20 to 30 million homeowners — the prime repeat buyer cohort — trapped in their houses due to effective negative equity, poor credit, or legacy second liens.  All that will continue to happen is stimulus-induced short squeezes like we saw this year and in 2010 followed by hangovers like in 2011 and will again in the back half of 2012 and 2013.


Best Regards,

{ 12 comments… read them below or add one }

Jim,MtnView,Ca,USA August 14, 2012 at 7:23 pm

It’s interesting to compare your outlook with a similar article from the CalculatedRisk blog.
He is more optimistic, but he doesn’t seem to consider that all the people who are negative-equity normally can’t buy or trade up till they resolve their current situation.
Thanks for your blog posts, they always contain interesting information.


Jeff D. August 15, 2012 at 9:16 am

The biggest misconception about this whole unwind is that people won’t default. Just because it hasn’t happened en masse to this point doesn’t mean it won’t. It’s just a matter of time before people realize what they are doing is pointless and throw in the towel……


Nate August 15, 2012 at 7:43 am

Thanks Mark, Your overview seems far more accurate than some of the others as it includes the group that is stuck, the seconds that are not charged off, and loan mods. It echos what I have been saying for several years ” The U.S. housing sector will recover when the last sub-prime loan is foreclosed. Including mine”.

What is even more interesting is that I am starting to see loans originated 2009 and later foreclosing. Until we have a solid free market job recovery all of this inventory will loom weather it be in the shadows, ghost, or zombie.


Mark August 15, 2012 at 8:07 am

Great comment Nate…I am going to steal that if you don’t mind but change it to Alt-A as I still have a Pay Option ARM on my primary res…one at 2% fully indexed thanks to the Fed! And who said Fed monetary policy wasn’t making it to Main St…all those of us who used high risk, high levered loans back in the bubble years are getting bailed out just fine…doh!

Anyway, I don’t think the “last” legacy loan has to be liquidated to get mortgage and housing on the right foot but it certainly can’t happen at 25% where we stand now. Perhaps 66%…it took 5 years to get to 25% so all being equal it will take another 7.5 years to get to 66%. In Japan they bottomed at 17 years. Due to aggressive Fed monetary policy I can see a bottom in 7.5 years from now…not unrealistic.


Joe S. August 15, 2012 at 11:00 am


While I understand and appreciate your analysis I found something inconsistent.

Using your numbers there are 20 to 30 mm homeowners stuck, unable to move. While this removes potential [move-up] buyers from the market it also removes potential inventory from the market as well. Unless these homeowners walk away or short-sale this is a zero-sum game.

For the last 5 years the banks have been able to pick and choose when and where they absorb this ghost inventory onto their books, which doesn’t have to be recorded as a loss until the actual resale is made. They have essentially learned how to manage non-performing loans, shadow inventory and the decline of prices, while simultaneously creating their own cheerleading headlines and public perceptions.

Thank you very much for providing this valuable information.


Tom Lipinski August 15, 2012 at 5:53 pm

I am a real estate agent. 20 years in the business. In a typical year (have not seen one of those for awhile) I would work about 20% first-time buyers and next to no investors. Currently, first-time buyers are about 70% of my business. Investors are, maybe, 5% to 10% (it could be higher, but many are time wasters so I push a lot of them away). What I am not seeing is the multiple-time buyer (trade up/trade down) in any great quantity. These are your zombie-homeowners. My from-the-trenches impression is that you are spot on. One could probably debate some of the numbers, as others have written, but in the final analysis we are a long way from any meaningful recovery. I now love first-time buyers.


fresno dan August 16, 2012 at 8:52 am

I found the blog post and the comments most enlightening.
I would make the minor point that I will soon be selling (my house is paid off – I bought it in ’93 so I will get back the purchase price – I won’t mention the cost if one included interest because I don’t believe in kicking an industry when it is down). But I WILL NOT be moving up – IF I buy another house, not only will it be less than what I sell my current house for, it will be consideraly less.


Mark August 16, 2012 at 9:03 am

You are the most common story I hear…twenty five million stuck, of which a large percentage are baby boomers and empty nesters looking to move down. The US does have a shortage of low-end housing. What that means??? The entire house price curve has to come down.

I still think that over the next 5 years a “million dollar home” will be the home of a “millionaire”.

The real pain in housing going forward is from house price compression. Too many big, expensive houses in the US nobody can buy.


Giovanni August 16, 2012 at 1:48 pm

Interesting point about all those looking to move down. While the studies I’ve seen point to most preferring to be in a single family home whether it’s rented or owned, apartments are going to fill a large part of that demand (one the zombies short sale). But on the supply side, just as single family in the main is oversized/priced, in multifamily all the new construction appears to be in class A luxury type properties. With boomers wanting to downsize while they work their retirement jobs and Gen Y wanting small single bed apartments how will that demand be met? Our answer is to acquire older class B apartments in markets with steady rental demand.


Mark August 17, 2012 at 4:42 am

I am glad you mentioned multi-family as yesterday’s housing starts data showed they are building multi-family buildings of 5 units or more at a pace of 229k per year…say the average is 6 units…that’s 1.3mm new units per year and plenty enough to absorb all of the meager 400k to 800k household formation per year.

But I do think that the rental market is in a bubble…rents have no risen commensurate to any demand or income metrics I follow. What we have going on I believe are landlords renting to people with weak credit and building the risk into price thus raising rental comps for everybody. Interesting dynamic that I have never seen before on a national scale throughout real estate history.

This means rents have one place to go…lower. Especially if they don’t really start to liquidate the millions of later stage distressed loans or the millions of loan mods that will redefault over the next few years.


Goldman August 17, 2012 at 6:06 am

Regarding rents is it possible that ‘stuck and empty shadow inventory’ is contributing to the perception of lack of rental housing inventory. In my area rents are moving upward and meanwhile there are a number of empty-preforeclosure homes where the Bank is regularly mowing the grass.

Until these empty homes are reoccupied or demolished you don’t have a true sense for the local inventory of housing. Meanwhile lots of first time home owners are buying based on the belief that low interest rates and rising rents = time to buy. Add zero down mortgages that are available to veterans, also zero down available through USDA loan programs, add in 3% down programs now offered through many CDFIs through out the country (https://www.masshousing.com/portal/server.pt/gateway/PTARGS_0_2_4676_0_0_18/MH_Mortgage_FAB.pdf). We seem to have the perfect environment to create another leg down in Real Estate. Just like 2004 it is impossible to convince a first time buyer that today is not the perfect time to buy a home! Any attempts I’ve made to suggest that a rising interest rate environment may be a better time to buy is met with ridicule or am I out to lunch?

Tom Lawler August 28, 2012 at 3:01 pm

The Case shiller “national” hpi in the second quarter showed the largest quarterly gain in the history of the index. Some inane posters said that it was “disappointing”. Relative to what?


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