Don't Fear Housing Shadow Inventory: Barclays

By Roland Li | August 15 2012 5:48 PM

The perpetual message during the aftermath of the subprime housing collapse was that the numbers were worse than they appeared, because shadow inventory -- distressed properties that were unlisted on the market -- was not being accounted for. When those troubled properties finally came to market, the reasoning was, the housing picture would turn out to be even worse.

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But now, with the national housing market showing signs of a rebound, analysts are saying shadow inventory might not be such a threat, according to the Wall Street Journal. Barclays Capital (NYSE: BARC) estimated that at the end of May, there were 3.25 million distressed mortgages in the U.S. That included 1.8 million mortgages going through foreclosure and 1.45 million homeowners in danger of defaulting after missing three monthly payments. Although that still represents a significant amount, it's less than the 4.25 million units estimated in February 2010.

Furthermore, shadow inventory isn't present in all markets. Hard-hit areas like Atlanta and Las Vegas will have more troubled properties than the surging residential markets of San Francisco and New York. A sharp slowdown in new home construction will also offset excess supply from the boom, and conversions into rentals have also mitigated the supply imbalance.

While the housing picture may be brightening, there are still many concerns. The sales pace of new and existing homes remains far below historic norms. Interest rates are low, but mortgage approvals are very difficult for typical home buyers. And thousands of owners deal with underwater mortgages, where the balance of the mortgage is less than the worth of their property.

Still, if shadow inventory is better than feared, that is one less thing to worry about.