Currently, there is an eight-month supply of “shadow” real estate inventory in the US according to CoreLogic; resulting in an artificially high supply. This form of housing inventory includes all delinquent real estate (those in foreclosure as well as those repossessed) that has yet to be made available to the residential real estate market. Therefore real estate data is distorted, and in many cases shows less inventory than what is actually available.
Current shadow inventory has increased from less than 1.9 to over 2.1 million homes from late 2009 to late 2010, as more potential buyers opt for rental leases instead of mortgages.
Looking forward, a bleak picture is being painted for near-term real estate prices as supplies continue to increase. On top of that, the lag time between when a borrower stops paying their mortgage to when a property is finally sold can be easily a year, thus limiting the pace at which shadow inventory may be unloaded.
Fannie Mae conducted a recent poll which found that many investors believe that rental leases will significantly increase over the next year, while home prices decrease in parallel. With shadow inventory rising and the homeowner population dropping, more of the populace opting for rental leases, particularly those who have been delinquent on past mortgages.
The result of such a shift means a higher percentage of homes will be owned by real estate investors. This will be primarily damaging in low-income neighborhoods that have begun to turn themselves around due to homeownership. An influx of more tenants statistically tends to increase the crime rate, as they are more prone to conduct illegal activities. Also, an increase in rental leases may mean more American homes could be owned by a higher percentage of foreign investors.
On the flip side to all these bad news, lending practices have been honed-in and made stricter in hopes to maintain better control of the market.
Current inventory levels are approximately 4.2 million homes (roughly the same as a year ago). However, when you include the shadow inventory currently on the books, a more realistic number is 6.3 million. Almost a 2-year supply of homes! A huge number when compared to historical averages. A typical market has anywhere from a 6 to 8 month supply of housing.
As estimated by Standard & Poor, shadow inventory makes up roughly one-third of all mortgage-backed securities, creating a major drag on the global securities market. They go on to estimate that it will take about 3 years to unload the entire shadow inventory, or possibly longer if homeowner defaults continue at these high levels.
What this means for investors is that prices most likely will not be going up any time soon, however, rental leasing rates may very well increase as more people shy away from mortgages. This may spur some investment in the rental market as more part-time investors look to accumulate some passive income.
Brian is a real estate analyst for EZ Landlord Forms, an online resource for landlords and property managers that provides free rental lease forms, landlord articles, and many other tools for landlords.
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