Distressed Home Inventory May Clear Faster Than Expected

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NEW YORK – It will take less time than previously expected for the housing market to clear the supply of distressed homes for sale, but that so-called shadow inventory still will be around for nearly four years, Standard & Poor’s Rating Services is reporting.

It was the first time in two years that S&P had lowered its estimate for the life expectancy of the shadow inventory. The agency this week estimated there was a 47-month supply of homes at the end of the second quarter, which was five months shorter than its estimate at the end of the first quarter.

American Banker, an affiliate of Credit Union Journal, reported that even over a slightly shorter period, the lingering glut of homes in foreclosure threatens to further depress home prices and postpone a recovery. “Though fewer additional loans are currently defaulting, the overall volume of distressed loans remains huge,” Diane Westerback, S&P’s managing director of global surveillance analytics, wrote in an 11-page report that was reviewed by American Banker.

The total volume of distressed loans dropped 6% in the second quarter to $405 billion, the lowest level since December 2008, S&P said. But the worst is not over.

“We believe prices are likely to fall further as servicers clear the shadow inventory backlog and the properties under the distressed loans crowd the already weak housing market,” Westerback wrote.

The New York metropolitan area alone will need another 12 years for its entire inventory of distressed homes to be sold. S&P’s 144-month estimate reflects the fact that liquidation rates have ground to a halt in judicial states where foreclosures are processed through the courts. Finalizing foreclosures has become more difficult because servicers have been caught skirting legal rules and procedures.


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