Massive "Shadow Inventory" Overhang Will Keep Pressure On House Prices

Houses prices, like everything else, are a function of supply and demand. 

The inventory (supply) of houses on the market has dropped significantly in recent months, fueling hope that the housing bust is over and done with. 

Unfortunately, the inventory of houses listed for sale may severely understate the actual inventory of houses owners want to sell.  This, in turn, may be creating a far too rosy picture of supply and demand.

Amherst Securities has produced a scary analysis of this “shadow inventory” overhang, which Amherst estimates is a shocking 7 million houses.  (The consensus is only 2-3 million).

7 million houses represents 1.4-times the number of houses currently sold in the country each year.  So this represents a massive overhang.  As these houses hit the market in future years, they will keep pressure on house prices.  This will likely either lead to further declines in prices or delay the recovery.

The build-up of shadow inventory, according to Amherst, is the result of three factors:

  • High “transition” rates.  More mortgages that fall behind by 30 and 60 days are progressing through to default.
  • Low “cure” rates.  Fewer delinquent mortgages than usual are returning to performing loans.
  • “Liquidations” of deliquent loans are taking much longer than usual.  The banks are taking longer to foreclose and holding foreclosed properties to avoid putting pressure on prices (and thus triggering writedowns).  Mortgage mods are delaying foreclosures.  Many houses are early in the foreclosure process.

We have wrapped many of Amherst’s charts into the presentation below.  Here is the firm’s bottom line:

We are concerned that, in light of this housing overhang, the stabilisation we have seen in home prices the last few months is temporary. 

See The Charts >

As this chart from Calculated Risk shows, existing house inventory peaked in 2007 and has drifted lower since.

Importantly, however, this chart shows houses listed for sale. It doesn't show:

  • Houses that owners want to sell but have decided to 'rent for a year until the market comes back'
  • Houses in the foreclosure process
  • Houses owned by banks after foreclosure (REO) but not for sale
  • Deliquent loans that are likely to become foreclosures

Source: Calculated Risk

Current home sales are now a normal 5 million a year

During the boom, sales of existing homes soared to 7 million a year. Now they're back to a more normal 5 million.

At the current rate of sales, it would take 8.5 months to clear all the inventory on the market. This is still high. Normally 'inventory-months' averages about 6.

If Amherst Securities is right, meanwhile, there are another 7 million houses of 'shadow inventory' that will hit the market in the next couple of years. It would take 16 months to sell this inventory.

Source: Calculated Risk

Amherst Securities arrives at its estimate of 7 million units of 'shadow inventory' by assigning a probability of eventual 'liquidation' to different classes of delinquent mortgage loans.

Loans that are in the foreclosure process, for example (4.3% of mortgages), are almost certain to be liquidated. Loans that are 90+ days delinquent (3.9% of mortgages) are 99% likely to be liquidated. And so on.

Add it all up, and Amherst estimates that nearly 7 million housing units will eventually be liquidated.

Source: Amherst Securities

This chart provides context for the 7 million estimate.

'Shadow inventory', as measured by delinquent loans, has exploded in recent years.

Source: Amherst Securities

Shadow inventory: An extreme case study

To illustrate the impact of this shadow inventory, Amherst takes a close look at Riverside, California.

In Riverside, according to, there are 1,372 housing units for sale. There are also, however:

  • Banked Owned (but not yet listed) = 1,362 Units
  • Auction Date Announced = 1,916 Units
  • Notice of Default Issued = 2,360 Units

Put all that together, and you get total probable inventory of 7,010, more than 4-times as much:

Source: Amherst Securities

Here's the same analysis in many different cities...

Las Vegas and San Diego are the worst, with massive shadow inventories.

New York and Boston, meanwhile, are fine.

Source: Amherst Securities

So why are house prices rising now?

The Case Shiller housing numbers in recent months have sent bulls into pandemonium: The housing bust is over!

Amherst and other analysts, however, think the rise in the Case Shiller numbers in the past few months is largely a function of seasonality.


  • The rate of foreclosure sales has held steady through the year
  • The rate of real open-market (non-distressed) sales has boomed because of normal seasonality
  • Non-distressed sales tend to have more favourable pricing than foreclosure sales. So as normal sales become a higher percentage of the total, average pricing moves up.

Housing bears like Amherst think that the Case Shiller numbers will begin to decline again in the fall.

Source: Amherst Securities

Here's a look at the payouts on a single mortgage-backed security.

The blue line shows the total balance of delinquent loans. The red line shows the total amount of this balance that has been liquidated (written off).

Source: Amherst Securities

The same thing is happening with prime loans

The blue line shows the balance of non-performing loans.

The green line shows the number of new defaults.

The red line shows liquidation.

Source: Amherst Securities

The less equity the owner has, the more likely the loan will default

The later the loan was made in the bubble, the lower the cure rate

This chart shows the cure rates for loans of various delinquencies.

Source: Amherst Securities

Loans are taking a long time to liquidate

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