Ahhh, Spring is here. Each year around this time, the flowers push up through the soil, the trees begin to bud — and the Real Estate recovery stories start to appear.

It is a perennial rite of Spring, not remotely slowed down by such niggling factors as consistently being wrong year after year, unsupported by data, and ignoring key factors that strongly suggest “Not this year.”

All this week, we are going to review the many factors that are overhanging residential housing. Each of the following 5 factors will be discussed. By the time Friday rolls around, I expect you will be looking at those calling for a Housing recovery a bit more skeptically.

The factors we will be discussing include:

-Shadow Inventory (REO + Investors)
-Pricing Mean Reversion/Foreclosure Overhang
-Home Affordability/Employment & Wages
-Psychology of Renting
-Mortgage Rates

This morning, let’s discuss Shadow Inventory. This is important, as we have heard from Housing Bulls as part of their recovery thesis that the decrease in inventory of homes for sale is a net positive.

I would argue that the massive supply of homes in the Shadow Inventory make this judgment premature. There are numerous definitions floating around, but I prefer to start with the following: Ordinary Inventory are homes that are listed for sale with either MLS or privately (FSBO) or are in some public way known to potential buyers as for sale. These are what are counted in the official inventory.

Shadow Inventory includes: Bank owned Real Estate (REOs), distressed homes not yet for sale, including short sales and delinquencies not yet defaulted. Various properties in different stages of Foreclosure are also in the shadow inventory.

This definition still yields a broad range of potential shadow homes that will eventually become part of the total supply. Michael Olenick (at naked capitalism) puts the range of potential shadow inventory from 1.6 million homes(CoreLogic) 8.2-10.3 million (Laurie Goodman, Amherst Securities).

But even those numbers do not represent the complete picture. I include in my definition of shadow inventory the enormous overhang of underwater homes — these are the houses that don’t qualify for a mortgage mod, but whose owners are still making most of their payments. They have minor delinquencies, but are not in default. The owners are frozen — economically immobile — since they cannot move to a different area to take a job.

The problem is the homes are worth anywhere from 5-25% less than their mortgage. A sale will not be possible without lender permission or a large check to make up the shortfall.

About a third of homes (30-40%) in the US have no mortgage — cash purchases or paid off mortgages mean they are owned outright. Of the remaining homes, estimates range from 21% to 29% are worth less than their mortgages. That’s between 12 – 18 million houses as potential supply at higher prices.

The key question for the Housing Recovery case: What happens if and when prices begin to rise? Do these underwater owners relax, feeling better about their positions? Or, do they finally hit the bid when the opportunity presents itself?

The truth is that we simply do not know. But is is reasonable to assume that many of these homes would be put up for sale and become inventory. If only a third do, that is another 4 million homes for sale.


Tomorrow: Pricing Mean Reversion/Foreclosure Overhang

Category: Credit, Real Estate, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

45 Responses to “Debunking the Housing Recovery Story (Part 1 of 5)”

  1. NoKidding says:

    “Of the remaining homes, estimates range from 21% to 29% are worth less than their mortgages. ”
    “What happens if and when prices begin to rise?”

    I think the first thing that happens is the same people who took out 100percent mortgages realize that if they had gone with the smaller house they might have had something left for:
    - Stain for the deck
    -An aluminum ladder to clean out gutters
    -Fertilizer and weed killer
    - Replacement appliances
    - Driveway sealer
    - Pest control service
    - Some nice shrubbery

    Surprise! the house you didn’t take care of did not appreciate the way your neighbor’s did.

  2. Through the Looking Glass says:

    The key question for the Housing Recovery case: What happens if and when prices begin to rise? Do these underwater owners relax, feeling better about their positions? Or, do they finally hot the nid when the opportunity presents itself?

    “hot the nid?” Whats that ?


    BR: LOL — HowTF did I do THAT?

    It should read “hit the bid”

  3. Nuggz says:

    “The truth is that we simply do not know.”

    Exactly. Based on the spread from CoreLogic to Amherst Securities that is abundantly clear.

    “But is is reasonable to assume that many of these homes would be put up for sale and become inventory.”

    If prices are rising, would they still be underwater? Furthermore, what is the forcing function for people to put them up for sale if the economy is improving?


    BR: No, once they are no longer underwater, their owners can sell, move to take another job, downsize to a smalller place, etc.

    They have OPTIONS which they didnt when underwater!

  4. AGORACOM says:

    Barry, I’ve pounded the bearish drum on US housing for as long as anyone (http://blog.agoracom.com/category/real-estate) so there is very little I disagree with here.

    However, for the sake of avoiding a love in, I’ll make the following 2 comments:

    1. Underwater Homes As Shadow Inventory … I don’t see 1/3 of these being added to inventory. If people are living in them and STILL making the payments after all this time, they are most likely long-term homeowners that are dealing with the current price slump. I would assume that any increased selling stemming from lower water levels would be offset by a purchase somewhere else.

    2. The foreclosure-for-rent business seems to be picking up a lot of momentum and has to be factored into your analysis given the fact many large funds are now involved or on the verge of getting involved. This should remove a meaningful amount of inventory over the next 2-3 years …. it certainly wasn’t something I had factored in.

    George … The Greek … From Canada

  5. Chief Tomahawk says:

    I’d love to see a metric of what percentage of homes bought since the crash have been by ‘investors’ vs. ordinary folks? Would it be the latest example of the 1% bringing back feudalism, renting out ‘the American dream’ to the peasants?

    BR, second to last paragraph seemingly needs some editing: “Or, do they finally hot the nid when the opportunity presents itself?” Do you mean ‘hit the bid’?


    BR: About 35% are distressed sales — many all cash — draw your own conclusion as to how many of those are investors.

    (PS: Yes)

  6. Mike in Nola says:

    Plenty of cheerleading here in Houston where the real numbers are a secret known only to realtors. To be fair, Houston is being buoyed somewhat by the oil bubble and we probably won’t see the final legs down til that deflates.

    The Houston Chronicle real estate reporter is a little too honest. One day she published the realtors’ optimistic reports; the next day was a gallery of McMansion REO’s, many in good areas, and some of whose asking prices were lower than even my pessimistic mind assumed.

    Pleanty of open house signs yesterday.

    As to the hidden size of the inventory, it has been evident in our area in the last couple of months with a fair number coming on the market, maybe 5% of houses in our small, stable neigborhood: a couple of sales, a tear down, one abandoned for a couple of years that’s getting a cosmetic facelift (probably to hide foundation damage) prior to coming back on the market, another that had a for-sale sign for a couple of months late last year and is now back on the market, never having appeared in the MLS, and another house that is pretty nice but pretty overpriced for the neighborhood and just had a small price drop. There are a couple of others that were pulled off the market last year after languishing at the bubble prices the current owners had paid, and which probably what is required to pay off the mortgage. I expect, as BR says, that they will be relisted if houses start moving.

  7. [...] – Businessweek Expectations rising for housing market’s spring season – USA Today Debunking the Housing Recovery Story (Part 1 of 5) – The Big Picture California foreclosure rates dropping – O.C. Register Fed Policy and [...]

  8. streeteye says:

    That’s a good argument for a cap on any rebound, but not an argument for prices to fall significantly further.

    This has been going on for four years now. How long does it take for sellers to get realistic and take these factors into account? Seems reasonable to think we must be pretty close, and if the economic recovery continues, it would put a floor on any further price drop and the bottom is in.


    BR: Note this post is about a lack of recovery, not a lack of bottom — though I am skeptical about that as well.

  9. theexpertisin says:

    My observation is that the cost of home ownership, the changing size of the American family and the contraction of housing expectations has left us with many,many not so well built 20th century McMansions that have little practicality for 21st century family dwellers. We are loaded with home inventory that is akin to a used car lot filled with gas guzzlers and Edsels.

    This stale inventory, seen and unseen on the market, will depress home prices for quite some time to come.

  10. Herman Frank says:

    Reading this post you only have to refer to your earlier post about the “Extend & Pretend” posturing of the banks. (http://www.ritholtz.com/blog/2011/03/extend-pretend-bank-practices-attracting/) Their coming downgrade shouldn’t be “just 3 steps”, but all the way to “speculative – about to go under”. Any investor should be warned NOT to invest in them, not to believe this housing sales/inventory/historic perspective BS – but instead to buy one ticket in the Powerball. Just as much chance of upward potential! Once again the warning of my former manager stands out: “We don’t have to fear the lone bank robber, we have to be prepared for the colleagues who are in cahoots to empty the whole place under our eyes”. Will the SEC stand up?! Will ANYONE stand up?! (“Will fantasies come true??” Nah, it’s REALITY guys, NOT “reality-TV!” No shining knight on a white stallion here, only dust in the eyes of the investors …..

  11. NMR says:

    While one can buy Barry’s general thesis it’s more complicated than this because of the regionality of the market and all real estate bubbles were not equal. I’d argue we have considerably more than 50 real estate markets in the country (how many separate markets are there in CA?) and their return to normality is going to be an extended process that happens at a different rate. In fact I’d argue some are back to near normality already although obviously many will be in the tank for years.

  12. AGORACOM says:

    Barry, I posted a detailed comment earlier this morning but it hasn’t appeared. When I try to re-post, system tells me it is a duplicate.




    BR: Fixed

  13. Jim67545 says:

    One of the big mysteries to me is where those millions of foreclosed upon families went when they lost their homes. I’ve seen anecdotal stories but nothing systematic. Clearly it is a mix of delayed family formation, doubling up, and entry into the rental market. Apartment vacancy rates have tightened and in response multi-family construction has picked up.

    CalculatedRisk is running an article on the wholesale purchase of single family homes by investment/REIT types for rental. In some markets over half of the home sales are to investors. Some may try to flip (suicidal?) but most will put them up for rent until the market improves. Thusfar smaller investors, who can manage single family rentals in a tight proximity, have been more common. Now bigger guys seem to have solved the management issue.

    With tightening credit standards, higher down payments and legions of families with damaged credit (foreclosure, delinquencies, short sales, reduced income, depleted savings, etc.) many folks have no choice but to rent unless they want to continue to live in their mother-in-law’s basement.

    Any discussion of the “shadow inventory” which predicts continued weakness in sale prices should consider the pent-up demand and shift (voluntarily or unvoluntarily) of occupancy from owning to renting. In other words, as the inventory comes out of the shadows in the form of single family rentals, it becomes available and there may be ready “shadow demand” to absorbe it. Tight multifamily vacancy rates suggests that this is real.


    BR: Rentals

  14. rd says:

    The “underwater houses” are both a good and bad sign.

    Hope has not yet been crushed yet since there are still people making their mortgage payments in areas that have high unemployment and large real estate devaluations. The big question is how many of these people will still be able to make mortgage payments a year or two from now and if they have jobs or are unhappy in their jobs. Many of these people are probably just hanging on right now but have not made the decision to dump the house or change jobs because of all of the uncertainties, both good and bad. Bear markets don’t really end until hope has changed to hopelessness.

    Areas where the economy is seriously compromised, so that employment is both lagging and good jobs are scarce will likely see underwater homeowners make the decision to leave to take a job in another area. At that point, they will likely simply walk out of their underwater house knowing they will take a credit hit and they will need to rent in some other locale for several years before they can buy a new place. This will further depress the place they are leaving.

    Those same people will be creating some form of housing demand in the new place they go to which will boost its economy.

    All of this is going to take at least 5-10 years to fully play out. As a result, we will probably see foreclosures going on at the same time as new construction starts because they will be occuring in different places as mobility picks up.

    I think this is going to take one to two decades to play out. A few of my basic predictions for the next 20-30 years:

    1. The water shortages in places like the Southwest are going to begin to crimp their economy on top of the implosion of their house prices. These areas will probably suffer the most over the next 20 years. The primary inflow will probably be retirees looking for warmth and cheap housing while living off money earned elsewhere.

    2. The Northeast and Mid-West Rust Belt will take another decade to sort through their legacy issues of failing industries and cities. Many areas will get razed like Detroit has been doing. Municipal and state costs will get sorted out through negotiation or bankruptcy. Water and climate are why they were developed inthe first place and will lead their revivial 10-20 years from now. The razed areas will become new commercial, industrial, and residential development. I think the Rust Belt will be surprisingly strong after 2025.

    3. The Southeast is trickier. I think it will be more on a county by county basis depending on local conditions. Places like Atlanta are likely to suffer because of water shortages (follow the Lake Lanier story). Many areas in Florida will get razed because of the rapid deterioration of abandoned housing stock but then get re-developed fairly quickly over the follwing decade or so.

  15. ancientone says:

    Barry, while I agree with you that the overall market has a long way to go before it looks anything like normal again, I must report what I am seeing here in tallahassee. I drive through a pretty high end neighborhood ($400k and up) on my way to church on Sundays, and after no building activity of any kind since 2007, there are now three new homes under construction in that neighborhood. Just sayn’.

  16. Jim67545 says:

    Sorry I duplicated some comments but they were not visible when I posted.

    The real estate market here is pretty active in the under $500k and especially under $300k portions. Homes under $300k have almost disappeared. So, the comment on McMansions which are too large, etc. for 21st Century taste illustrates that the market is complex/stratified and so global statistics may not clearly show what is happening. The investors buying to rent, I suspect, are picking up the middle to cheaper properties.

  17. AGORACOM says:

    Have to admit it is almost surreal reading comments alluding to $400 – $500k homes as “high-end” areas.

    In Toronto, $500k barely gets you a livable house. Are we about to burst here as well? Paul Kedrosky thought so when we made a PYMWYMI bet 2 years ago … but it looks like he’s about to lose come August.

    George … The Greek … From Canada

  18. super_trooper says:

    Why not plot it by state. Prices have probably bottomed in many areas (first step in pre- recovery). In some prices are going up. And in some it’s still going down.
    I would imagine that the situation in Nevada and Arizon could still be described as SNAFU. But much of the country was not as overbuilt as that area. We know that there were some areas that experienced greater degree of the bubble. So why not look at Shadow Inventory by state? That way you know if you got outliers. So what percentage of the Shadow Inventory is in NV, AZ, FL and CA? If that’s 50% it would certainly influence how you look at the impact of the Shadow Inventory on the total market.

  19. rd says:


    Bubbles can last quite a while if the central bankers are determined to keep them going because they don’t believe that bubbles are possible.

    It sounds like your median house price is significantly higher than 5x median household income.

    Watch out for some combination of commodity prices drop, interest rates rise, Europe mushroom clouds, and China etc. have a hard landing. The combination of those would be dropping Cdn dollar, reduced affordability, reduced employment and personal income, and reduced foreign buying. These would not be good for housing.

  20. VennData says:

    But everybody knows that the future of home price apprecition estimates ALWAYS go up.

  21. Diogenes II says:

    I suspect one variable in this will be the Mortgage Forgiveness Debt Relief Act.

    It expires at the end of 2012, so any debt forgiven after that time will be taxable as income.

    I am guessing there will not be an extension.

  22. Mark Down says:

    “since they cannot move to a different area to find a job”……. If you need to find a gig to put food on your family you go and come back home on weekends……How many studs / studettes are doing this in NYC?

  23. DeDude says:

    Question is what exactly are we talking about when we say “recovery”. Are we talking about house prices getting back to their previous highs? – or just that they stop falling and begin to increase again?

  24. wally says:

    Do not assume that the backlog of inventory and shadow homes must all be worked through before housing ‘recovers’. There is an enormous amount of junk in those inventories… it will never sell or will only sell to market segments that do not compete with new housing.
    If you go simply on raw numbers, the ‘shadow inventory’ argument makes some sense… but housing isn’t comparable to a commodity like oil; it is more like a consumer product where new, improved, or ‘this year’s model’ can displace the old junk (like cars, clothes, electronic devices).

  25. obsvr-1 says:

    @AGORACOM Says: In Toronto, $500k barely gets you a livable house. Are we about to burst here as well?

    What are the credit terms on housing in Cnd ? 0,5,10,20% down ? If folks are leveraging up like they did in USA, and/or used the home as an ATM to extract equity to buy “toys” and live beyond income — then yes Canada will probably see a burst…. much like Austrailia (see Steve Keen work on the Austrailian housing bubble).

  26. Greg0658 says:

    “Or, do they finally hot the nid when the opportunity presents itself?”

    maybe its one of these insider tags that sets the mind up ..
    “Greg Smith on Goldman Sachs. Clients called Muppets. Infrequent fliers: Clampetts. Platinum trash. Foamers. Bobbleheads.
    Piker, Mark, Pawn. Deadbeats: pays bill every month. Term: inmate.”

    good thread – not gonna pick a fav – well RD at 9:32am follows my beaver dam theory

  27. Greg0658 says:

    ps – I spent a # of minutes (twice) looking for the original to no avail .. maybe it got some ‘blowback’ took some ‘heat’
    :-) @ those electronic prints

  28. louis says:

    “I include in my definition of shadow inventory the enormous overhang of underwater homes”

    Bingo! All it takes is some life event to trigger more of these onto the market. When will they show up for sale? Could be years. MLS listing is weeeeaaakkkkkk. I personally feel that the Shadow Inventory is huge and being intentionally held back.

  29. Through the Looking Glass says:

    Where shall my dumb money go?

    In the final analysis with gas prices going up, inflation, new wars in the middle east on the horizon and Europe still teetering on collapse only dumb money would put their bets on the come line with housing. Whats the big deal with a house anyway ? The smart money is sitting on their hands as they should be unless they have too much money to spend and are bored not spending it. Most of us will never have that problem .

  30. rhodope says:

    Dear Barry,

    I don’t know if you already planned to cover the topics of DEMOGRAPHICS and the 30-20 somethings EMPLOYMENT PATTERNS in your 5 part discussion.

    I would assume that the wave of baby boomers retiring that started in 2011 and should intensify for the next decade or so would factor in to the recovery(More supply), as well as the fact that the next decile of people behind the boomers represent a 5% smaller decile than the boomers (Less demand), and the fact that the people who side stepped the housing crash/ Y2K Dot Crash by going back to school now have debts and no nugget to get the 20% down payment on a house given the strengthened lending standards that have been re-adopted by the banking institutions (Transaction Friction). Given how housing cycles typically have been on a 7 year +/- cycle (3.5 down and 3.5 up) and the last boom was 14 years of up, I am wondering if we are ever going to see any material capitulation with the housing market.

  31. DEMOGRAPHICS & Baby boomers are in my Top 10 — but not the top 5.

    There is no doubt, it is an issue — but I also wonder what the impact of destroyed 401ks/IRAs are going to do to all those boomers. Willt hey be able to stop working and retire?

  32. The Window Washer says:


    “hot the nid” brought this up in Bing. You been hangin with Spitzer lately? Dude smokin dubbies before Bloomberg now this.

    hot_nid : hot nid hot – escort in Bangkok,
    Escort hot_nid – hot nid hot ( review by andy andy, 07/17/08)

    did you really

  33. The Window Washer says:


    I just pasted from the BING search didn’t thing it would link

  34. Bob A says:


  35. Bob A says:

    I knew a Nid once in Bangkok but that’s a whole nother story and I’m not tellin’ it for free

    Anyhow.. in my neck of the woods things are improving.
    In select areas houses are selling quickly and prices are getting better as well.
    My neighbors house just sold with mulitple offers in two days.
    A friend just bought a house under similar circumstances.
    We’ve got two 40 story condo towers that were 15% occupied a year ago and are over 50% sold as of recently. Where? Well nearby there’s an office tower that says Microsoft on it.
    I know it’s not like everywhere. All I can say is it’s definitely improving here and
    I guess we can just hope it starts to spread.

  36. marianlibrarian says:

    Ditto Austin. A 20 veteran realtor/property manager says “the market has gotten hot overnight” in the good neighborhoods. He says the ratio ofpending listings to active listings was about 1 in 5 but is now 1 in 3 overall, and 1 to <1 in some areas. He says it may peter out or we could be at the beginning of the next up cycle in housing. (I read this guy because he has a business degree from Texas, is an investor himself, and he has been posting sales and rental stats online for a decade or more–last Spring he said he was telling his investors it was a bad time to sell so he doesn't seem to be a Pollyanna.)

  37. [...] meme, challenging the assumptions and data that make up that argument. Yesterday, we began with Debunking the Housing Recovery Story (Part 1 of 5). Today we look at exactly how affordable homes are today, as well as the home buying public’s [...]

  38. [...] Ritholtz: Debunking the Housing Recovery Story (Part 1 of 5). I do not buy that housing is recovering either. [...]

  39. [...] 5 part series in progress over at TBP – Home Affordability Reality Check. Part 1, Part [...]

  40. [...] meme, challenging the assumptions and data that make up that argument. Monday, we began with Debunking the Housing Recovery Story. Yesterday, we did a Reality Check on Home [...]

  41. [...] Here are the distinct parts: 1. Shadow Inventory. [...]

  42. Don’t renters need good credit too? At least in condos they do. Not because of the landlord but because of the association’s requirement. At least that’s how it is in Florida.

  43. [...] Debunking the Housing Recovery Story: Shadow Inventory. 2. Home Affordability Reality Check: Can Buyers Afford Homes?. 3. The Problem With Home Prices [...]

  44. [...] -PART 1: Debunking The Housing Recovery Story [...]