Economists' Outlook

Housing stats and analysis from NAR's research experts.

State by State Estimate of Shadow Inventory

Although the foreclosure crisis at times appears like an all-encompassing national problem, there are states and metropolitan areas that are harder impacted than others. From the onset of the foreclosure crisis, four states have continually had relatively worse foreclosure problems: Arizona, California, Florida and Nevada. These four states still account for 42 percent of the foreclosure inventory today. Adding Illinois, New York and New Jersey – other states with high incidence of foreclosures, brings the share up to almost 60 percent. As suggested by the national numbers, the situation is mostly improving, at least in terms of delinquencies. In the last quarter of 2010, serious delinquencies, those 90+ days late, fell over the past year in all but four states, Washington, New Jersey, New York, and Vermont. The change in the total non-current loans is in fact down 38 percent nationally, with states such as Hawaii, California, Nevada, New Hampshire, Illinois and Massachusetts all seeing decreases over 40 percent over the last 12 months. Even the states which decreased the least saw drops in the 23 to 25 percent range.

Also, as suggested by the national numbers, some progression of the serious delinquencies into foreclosure inventory led to an increase in foreclosure inventory in all states between the third and fourth quarters in 2010. More detailed state by state delinquency and foreclosure numbers are presented in the Mortgage Delinquencies by State presentation (PDF). Based on the Mortgage Bankers Association (MBA) National Delinquency Survey quarterly state level data, this commentary provides estimates of state level shadow inventory and months’ supply of that inventory.

Differences in the levels of foreclosure and seriously delinquent inventory, as well as the saturation of distressed sales in total existing sales are naturally causing varying levels of shadow inventory across states. State by state estimate of shadow inventory presented here is based on the same method as described in the March 2010 shadow inventory article(PDF). The estimate of shadow inventory includes all 1st lien loans in the foreclosure inventory and a share of delinquent loans anticipated to enter foreclosure based on Lender Processing Services (LPS) roll rates. Additionally, delinquent loans already on the market and modifications are excluded from the estimate.


The share of delinquent loans already on the market is estimated based on NAR’s REALTORS® Confidence Index (RCI) survey in which Realtors report, among other things, what share of their sales were short sales or foreclosures. State level monthly data is averaged over the past year to get the state level estimates of short sales and foreclosures. As shown in Figure 1, this figure varies widely and thus differently impacts states’ shadow inventory estimate. For the estimate of modifications by state, the OCC OTS Mortgage Metric Q3 2010 report published the number of mortgage modification actions by state in the 3rd quarter 2010. The quarterly number of modifications was extrapolated to get an annual number. Since about 30 percent of the more recent modifications are expected to redefault, 70 percent of state level modifications are excluded from the shadow inventory. Finally, the REO that is not currently on the market is added back to get the final shadow inventory estimate. Again, the REO not currently on the market is estimated based on state level share of existing sales that are foreclosures and this data comes from the NAR’s RCI.


Figures 2 and 3 rank the states based on their levels of shadow inventory. Figure 2 shows top 26 states with highest levels of shadow inventory, while Figure 3 shows the 25 states with lowest levels of shadow inventory. Note that scales are different in two charts with the first one going up to 450,000 and the second one up to 30,000.


As one might expect, Florida tops the list with the largest shadow inventory of over 441,000 properties. The issue in Florida largely stems from inflated foreclosure inventory which takes a very long time to clear. New York and Florida have the highest average number of days loans are in delinquency status, at 644 and 638 days respectively. California, Illinois and New York follow Florida in the levels of shadow inventory. This is also not out of the ordinary, given that these states have also had high delinquency and foreclosure rates, but also relatively longer foreclosure processes. For example, California and Illinois average 511 and 489 days respectively loans are in delinquent status. Since 2008, the length of the foreclosure process has in fact jumped up 156 and 157 percent in Florida and California, correspondingly. On the other hand, Arizona and Nevada, while still ranking among top 25 states, are faring relatively better in terms of the shadow inventory. This is largely due to their shadow inventory moving somewhat faster through the pipe lines and comprising larger share of existing sales. While distressed sales comprise 55 percent of existing sales in Arizona, they are up to almost 70 percent in Nevada.


The last map (Figure 4) shows the number of months it would take to clear the shadow inventory by state. The months’ supply is estimated by dividing the shadow inventory and the monthly number of distressed sales . The numbers range broadly from 51 months in New Jersey to 7 months in Nevada. When looking at months’ supply it is important to keep in mind that this estimate highly depends on saturation of distressed sales. Given that New Jersey over the past year on average reported about 20 percent of existing home sales to be distressed sales, it will take a longer period for the shadow inventory to clear. In contrast, Nevada’s distressed sales averaged a considerable 70 percent share of the existing sales and at that rate the current shadow inventory would clear in 7 months. It is very likely that saturation of distressed properties will continue to vary widely among states but also vary within states from month to month. Also, the months’ supply estimate is dependent on levels of monthly home sales by state. The estimate presented here is based on 2010 existing home sales, thus any change in existing home sales would impact clearance of shadow inventory. And finally, there continue to loom various issues which may also affect shadow inventory and how long it takes to clear it. One important issue currently taking place is the controversy over banks’ foreclosure processes and documentation which has a significant impact on what happens with shadow inventory.

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