Wednesday, April 22, 2009

Housing Market Recovery: Shadow Inventory?

We all want to know when the housing market will recover. A recent piece by David Leonhardt in the NY Times suggests that the housing market still has not reached bottom. Central to clearing the housing market is eliminating the oversupply of homes (see my earlier entry). There are several measures of oversupply: the National Association of Realtors provides a monthly measure of homes for sale; the Census Bureau provides a monthly measure of new homes for sale; and the Census Bureau also provides us with a quarterly measure of vacant homes for sale.

All of these measures rely upon the owner of the property putting the housing unit up for sale. As Calculated Risk has been saying (here, here, and here) there is most likely a large shadow inventory of sellers keeping their homes off the market. A recent piece in the San Franciso Chronicle (article here, Calc Risk Blog here) suggests that banks are also keeping foreclosed properties off the market.

There is no survey of banks and households that we can use to estimate the size of the possible shadow inventory. However, we can get a sense of it from the quarterly Housing Vacancies survey. This survey is the source for the data on owner-occupied and rental vacancy rates, and it provides a breakdown of vacant units beyond these headline vacancy rates. Table 1 provides the breakout of vacant housing units from Census. When census reports vacancy rates they exclude `Seasonal Vacant’ and `Held-off Market.’ The category Held-off market consists of three sub-categories: `Occasional Use’, `Usual Residence Elsewhere (URE)’ and `Other Reasons.’ These excluded categories are generally quite boring. They are generally increasing, following a trend, but display almost no cyclicality.


I say almost because the sub-category vacant held-off for other reasons has become quite interesting of late. Figure one plots the % of the housing stock that is vacant held-off the market for other reasons. My measure of the housing stock is the sum of total occupied, vacant for sale, vacant for rent, vacant sold or rented and vacant held-off market for other reasons. In the last two years this category of vacant units has surged from 2.3% to 2.9%. This suggests that there is a large shadow inventory equal to roughly 0.6% of the total housing stock, or 736,000 units.


Figure 2 plots the total residential vacancy rate with and without the shadow inventory (vacant units held off the market for other reasons). The total residential vacancy rate is the % of the housing stock that is vacant irrespective ownership status. The red line in figure 2 is the total vacancy rate solely from vacant for rent and vacant for sale, excluding the shadow inventory. The black line in figure 2 denotes the vacancy rate when the shadow inventory has been added to the vacant units for rent or sale. In the current crisis we see that the vacancy rate excluding the shadow inventory seems to be stabilizing while the vacancy rate including the shadow inventory seems to still be rising.


A rising vacancy rate is a potential bad omen for the recovery of the housing market. Ultimately, it is vacant units that are putting pressure on the cost of housing services, be it rents or house prices. Common sense suggests that stabilization of the vacancy rate is a necessary but not sufficient condition for stabilization of house prices. This suggests that inclusion of the shadow inventory implies that the housing market still has a long way to go before prices stop falling.

An interesting feature of the data is that the presence of a shadow inventory is not a new phenomenon. In figure 1 we see that during the crisis in 1974 there also was a surge in vacant held off market. In figure 2 we also see that the rise in the vacancy rate including the shadow inventory is more pronounced during the 1974 crisis. This suggests that movement in the shadow inventory is always part of the cyclical process of the housing market. The shadow inventory is just more visible during the severe downturns. Therefore, there may not be too large of an error in forecasts based upon historical estimates that ignore the shadow inventory.

The nature of the shadow inventory is not clear. The measure from the Census data is only vacant homes, so it does not consist of any owners who are waiting to put their house on the market. The vacant homes most likely consist of a large amount of foreclosed homes that are not listed as for sale. They could also be the former homes of the elderly who have moved to assisted living. When the housing market is in a downturn, the offspring of the elderly may take their time preparing a house before putting it on the market.

The vacant homes could also be abandoned homes. I was only just born during 1974 so I have no personal memory of that downturn, but it seems likely that it was during this period when there was an acceleration in the abandonment of vacant housing units in the cities that contributed to the inner city blight back then. Currently there is a same abandonment going on the midsize former industrial cities of the Midwest. For instance, the New York Times just had a recent piece about abandoned homes in Flint, see "An Effort to Save Flint, Mich, by Shriking It." Therefore, it is not clear whether the vacant units held off market for other reasons are a viable shadow inventory of future homes to be sold, or just an indication of a higher rate of depreciation via abandonment.

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