Shadow Inventory to Take 3 Years to Clear: Standard & Poor's

by JON PRIOR

Tuesday, June 15th, 2010, 12:09 pm

The shadow inventory of distressed properties that back residential mortgage-backed securities will take nearly three years to clear at the current sales rate, according to the credit rating agency, Standard & Poor’s (S&P).

The shadow inventory is the amount of homes with delinquent mortgages yet to move through the foreclosure process. S&P narrows the definition down to the amount of outstanding properties 90 days or more delinquent, in foreclosure, or in REO status but not yet on the market.

S&P puts the total principal balance of the shadow inventory at $480bn or 30% of the entire non-agency market.

“Given this backlog, we believe that average home prices could fall again if demand doesn’t rise in step with the potential influx of supply,” said Diane Westerback, S&P credit analyst.

But the shadow inventory isn’t equally distributed across the US. Although the shadow inventory remains at historic levels, it varies from city to city. S&P reviewed the top-20 metropolitan statistical areas (MSAs) included in the S&P/Case-Shiller Home Price Indices.

S&P found the largest shadow inventory in New York City. There, it would take 103 months to clear the distressed properties, or more than 8 years. The national average is at 34 months. Phoenix had the smallest shadow inventory. That market would take 16 months to clear the amount distressed properties yet to hit the market.

Estimates on the shadow inventory, and the time it will take to clear, vary firm to firm. Morgan Stanley most recently said it could take four years to clear. Barclays Capital reported that it could peak at 4.7m in the summer of 2010. The research firm, Capital Economics, said the shadow inventory could reach 5.5m by the end of 2011.

Write to Jon Prior.