“Shadow” and “ghost” inventory with respect to supply is only a part of the problem…a red herring really.  One has to look deeper than most “analysts”, reporters, or bloggers care to in order to see the true extent of the woes facing US housing going forward.

On “shadow” inventory we know most paid forecasters are “definitionally” challenged.  But everybody should agree that based on 110k average distressed resales per month — 1,3mm per year — for the last 2 years (based on NAR public figures) that this overhang will be with us for a long time.  That’s whether you look at the figures conservatively (1.6 to 3.2 million) or “realistically” like I did in yesterday’s post (11.6mm shadow units — 5 million 60-day late + in foreclosure;  6 million mods that will re-default at a 75% pace over 3 years;  and 50k short sales per month — of which I conservatively estimate half will become “supply over the next 3 years).  Based on proven absorption of 1.3mm distressed unit per year, this still leaves an overhang of over 500k units per year unabsorbed;  a figure that few will agree with me on…but math is math. Whatever.

I actually think it’s quite funny and ironic that bulls continue to cite the lack or foreclosure and short sales — and downplay shadow supply — as a “positive” catalyst for housing.  That’s because it’s the very metering of foreclosures and short sales — that housing bulls think is great — that will force Existing Home Sales “volume” into a “triple-dip” that began last month…within 3 months NAR will be screaming for foreclosures and short sales.

I think what should be most closely analyzed is the demand…the “selective” demand that has driven the market the past 3 years…and where incremental demand will come from.   That’s because the new-era housing market closely resembles the macro economy;  it responds pretty much only when stimulus is aimed directly at it.  This is why in the first half 2010 the market went vertical in the last 6 months of the homebuyer tax credit and is again right now on the 1.5% plunge in rates last Sept  — that caused a serious pulled-forward effect — and foreclosures that were systematically abated for the election cycle.  The dead-cat-bounce in 2010 was followed by a hangover in 2011 (making this year look great even though fundamentally speaking it’s very weak).  And this year’s dead-cat-bounce will be followed by a hangover in 2013 (hangover is actually starting right now because of the pulled forward effect in the winter due to when rates plummeted and the lack of rain and snowfall).

For years I have proclaimed that “no housing recovery will ever occur — or no dead-cat-bounce will reach “escape velocity” or become “durable” — unless the repeat buyer is leading the way.  This is because investors and first-timers are thin, volatile cohorts who have been known over history to leave the market literally, overnight.

Case in point, July Phoenix area home sales were down a whopper 22% MoM and 15% YoY to multi-year lows for July…demand “recoveries” are not supposed to come with that type of volatility. However, stimulus-driven short squeezes and dead-cat-bounces are.

The problem is that the mortgaged homeowner has always been the primary demand cohort. It’s not investors, first-timers or those who own their homes free and clear.  Rather, the mortgage-levered homeowner who tends to move every 6 to 8 years who provides most of the historic underlying support for macro housing.

This is a problem. Put simply, there are more houses today then there were five years ago but a full HALF of the primary demand cohort — repeat buyers — died due to negative equity, “effective” negative equity, poor credit or legacy HELOCs, all of which prevent sellers (repeat buyers) from paying a Realtor 6%, putting 10% to 20% down on a new purchase, and getting a mortgage for the remainder.  Put even more simply, housing “supply” has grown in the past 5 years and ready and able buyers have been cut in half.

Bottom line,  WHERE IS THE “DURABLE”, INCREMENTAL DEMAND GOING TO COME FROM short of issuing instant citizenship to 15 million foreigners for a $500k+ capital investment in US resi real estate?

With nearly 50% of all mortgaged homeowners in the nation zombified (not including HELOCs), the housing market will continue to go through period of stimulus-driven demand spurts (when investors and first-timers are “activated”) followed by stimulus-hangovers (when investors and first-timers go away) until meaningful de-leveraging occurs, which will take another decade based on my math.

1)  HALF of the primary housing demand cohort is “Zombified” – unable to sell and rebuy a house.

No “escape velocity” or “durable” recovery will ever occur until the repeat buyer cohort is mobilized, which will take a combination of massive debt cram downs, credit easing, and housing inflation.

Note Arizona at 66%…this is why Arizona resales are crumbling right now.  July Phoenix region home sales were down 22% month-to-month and 15% year-to-year.  Demand “recoveries” are not supposed to come with that type of crash volatility…short squeezes and dead-cat-bounces are, however.

 2)  Percentage of first liens with legacy HELOC debt

When analyzing it this way new states enter the “zombie” mix not commonly thought of as being filled with trapped homeowners.

3)  Impaired Credit

Lastly, 40% of all US homeowners are either unqualified, or boderline, creditworthy meaning even if they could sell it is questionable whether they can rebuy.

Have a wonderful day!


Millions More At-Risk of Default Than Most Think (December 8th, 2009)

Most Common Things I Hear on Housing (April 5th, 2012)


originally published at Mhanson.com

Mark Hanson is a mortgage banking veteran specializing in wholesale and correspondent sales, operations management. His primary focus was upon residential mortgages working closely with most mortgage and Wall Street investors. Since 2006 his primary focus has been upon his work as an independent real estate and finance sector analyst, consultant, and risk enlightener to the financial services sector. His years of on-the-ground experience, extensive research, and access to proprietary data few have available has led him to make an extraordinarily large number of early and accurate predictions about the great mortgage and housing meltdown and company-specific events.

Category: 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.

16 Responses to ““Shadow” & “Ghost” Inventory / Negative & “Effective” Negative Equity…The Real Challenges for US Housing”

  1. george lomost says:

    According to construction people I’ve spoken with over the years, houses built in the past 20 years are not built to last – reminds me of the “planned obsolescence” for American cars built in the 1960′s. I predict that in 10 years or less we will be asking where all this shadow inventory disappeared to.

  2. NoKidding says:

    “Not built to last” is a red herring. I’ve lived in a house built in 1907, and it was not well build, and it was in an economically depressed area, and it did not make financial sense to tear it down or do more than replace the windows. That was almost 20 years ago – and Google Street view shows me the same house in the same location today, with no changes but vinyll siding.

    Bad houses do not disappear, they convert from McMansions to McTenaments.

  3. BennyProfane says:

    Thanks for this. Did not know Phoenix, the one great example bulls have been carting out for a year for their argument, tanked so badly. Now, we’ll watch and see if these “investors” who were essentially the market down there recently can actually make a go of it renting these homes out, or we are witnessing the next bubble sour, the rental bubble so many are buying into to make an imaginary 6% on their money.

  4. Orange14 says:

    Quite a difference between this analysis and Bill McBride (aka, Calculated Risk), one of them is wrong.

  5. stonedwino says:

    Best analysis I have seen to date of the housing crisis, by addressing the vast amount of people with negative equity that cannot refi or sell or move and the fact that a HUGE swath of the population can no longer even dream about qualifying for a loan. Indeed: How many people who even want to consider buying a home can actually even qualify for a loan? 49% percent of households are underwater, 44% with HELOCs in place and 40% can’t even qualify for a loan. Who is going to buy all those houses? Not Gen-X or Gen-Y, as they are broke and jobless….wow.

  6. NoKidding says:


    I think CR and BR might not be perpendicular.
    “For the economy and jobs, the bottom for housing starts and new home sales is more important than the bottom for prices. However individual homeowners and potential home buyers are naturally more interested in prices. So when we discuss a “bottom” for housing, we need to be clear on what we mean.” -CR

    I think McBride says sales volume will be flat-to-up without pointing out a price trend, and Ritholz is implying that high supply and low demand will hold prices down. If volume and price both stay rangebound, then you can read both as right. CR is wrong if volume drops, and BR is wrong if volume rises or if real prices rise notably.

    Bottom is different than recovery.

  7. S Brennan says:

    Two and a half years of little or no business income…all major banks went for my throat, none would wait and then set up a reasonable payment plan. My credit union did not use major bank tactics and was paid in full, in the end banks offered settlements, which I took after stressing I would have preferred a reasonable payment plan. Now that I back with the living [making money] I can’t think of buying or selling, I am out of debt and have a healthy reserve, but my credit is shot fo 3-5 years.

    America’s elite can’t think past their nose…so the citizens of this once great country are burdened to breaking and are propagandized into shame for the evils of others.

  8. adsanalytics says:

    Existing, distressed and shadow inventories have all stabilized and are no longer creating an obvious drag on the housing market and hence the broader economy. If you believe Rogoff etc, however, we shouldn’t expect significant price appreciation in the sector post a financial-bubble recession – especially in light of still high unemployment and continuing deleveraging in the household sector.



  9. rj chicago says:

    Excellent article and I think that Hanson is correct. Regardless of price – you could have a house go to a dollar but if you cannot qualify for an 80 cent loan then there is no ability to purchase. There is no transaction taking place.

    I have also read for a while CR – they look at a number of stats and though they seem accurate the one thing they keep missing that Hanson picks up on is the ability to qualify. When half the potential home repurchasers are wiped out the affect on the market has to follow suit.

    BR – keep up the good work – though at times I don’t agree with some of the articles you cite at least they cause me to think about my own views and what is truly accurate. Can’t wait to see what comes of your recast on the ‘look’ of this website.

  10. BennyProfane says:

    McBride (Calculated Risk) is now stuck trying to defend his “housing has bottomed” call a little while ago, an seems to spend a lot of tome hunting down data that would support his bet.

  11. louis says:

    WHAT the HELL! I thought you guy’s said the other day that everything was great.


    Blood on the Plow.

    Clear the shit out or watch it happen again and again and again.

    Setup a joint haircut court, arbitration (MLB) and get on with it.

  12. Hammer of Thor says:

    I think you’ve proved your point that there is a large number of home owners who are unable to move out of their house. In this case though, aren’t you reducing demand and supply by the same amount?

    Also, considering the investment climate I think you should consider that investors purchasing houses to rent out will continue to incrase. I will not dispute your historical evidence to the contrary, but recent data suggests this is already happening.

    You also need to consider the barriers to purchase a new home, good credit and money for a down payment will gradually ease. The housing boom pulled demand forward with the low down payment requirements, and now people need to save for this again. This is something that will be achieved gradually with time.

    Add this all up and you’re going to get a sideways market for the next 10 years. People predicting another 40% leg down should not hold their breath.

  13. DeDude says:

    Just because you are under water doesn’t mean you can’t sell and rebuy. It is called a short-sale and you have to make sure to arrange it such that you come out with some money in hand (cash in the cookie jar). That way you can pull together a big enough down-payment after a period in a rental. Even if you cannot purchase, you will be out in the rental market and be part of why that sector is growing rapidly. People who lose their home always end up moving into another home (we do not have big tent city Hovervilles anywhere). The current trend is that they move into a smaller home as renters and that is why we have an increase in operations purchasing and renting out homes. The purchase to rent market is not a short term fad. If you can lock in 6% return on 100K for 30 years by purchasing and renting out a property that is a heck of a lot better than treasuries (and you just have to think that the house will be worth more than 100K in 30 years to consider it a good deal)

    This guy is a classic start with the conclusion type of “analyst”. He lists all the things that support what he want to believe and ignores all that weigh against it. At least his claim that another dip started this month will soon either pan out or show that he is not that smack full of “early and accurate predictions”.

  14. capitalistic says:

    Awesome analysis.
    I tend not to listen to the weekly or monthly news regarding an uptick in housing activity. When you dig into the details, housing is still overpriced. A good deal of the housing activity pre-2008 was led by second home buyers and investors.
    Now that the requirements for obtaining financing has normalized, most people can not afford to buy a house. As you mentioned, 20% + 6% + a snazzy FICO = not a lot of qualified buyers.
    Actually, the easiest way to obtain financing is if one were interested in buying a distressed property…

  15. bear_in_mind says:

    I believe y’all missed one other really important factor that’s a “real challenge for U.S. housing”… namely, the decline in median income! With lenders kicking ‘no doc’ loans to the curb, not only does FICO and indebtedness matter, but your household income becomes a key consideration. And baby, if you’re not in the Top 5 percent, you’re likely to have gotten screwed royally from 2007 to 2010:

    For all families, the median income fell to $45,800 in 2010 from $49,600 three years earlier — a 7.7% decline… the biggest percentage drop occurred in families headed by people with some college education: Their incomes fell to $42,900 from $47,800, down 10.3%. Families headed by college graduates saw their median incomes fall just a hair less than 10%, to $73,800 from $81,900.

    LA Times
    June 11, 2012

  16. [...] While the supply of homes in the US has grown over the past 5 years, ready and able buyers have been cut in half (The Big Picture) [...]