Shadow Housing Inventory Stalls Economic Recovery

The housing sector that dragged the economy into recession three years ago, is still in bad shape. Home sales are eroding despite low mortgage rates. There are just too many homes on the market and not enough people to buy them. Plus, there's a huge shadow inventory: Millions of other homes are waiting to come on the market.

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RENEE MONTAGNE, host:

This is MORNING EDITION from NPR News. Im Renee Montagne.

STEVE INSKEEP, host:

And Im Steve Inskeep. Good morning.

Here's a major problem with fixing the housing market: In a tough economy, companies can downsize.

MONTAGNE: Consumers can pay down debt. People can adjust.

INSKEEP: But vacant houses dont go away.

MONTAGNE: So years after the collapse of the housing bubble, there is still an excess supply of houses. Economists say there are now 1.7 million more houses than there's a demand for, and that may only be part of the problem.

INSKEEP: Behind all those unsold homes, there may be a huge shadow inventory. Those are homes whose owners are just waiting for their moment to sell.

NPR's Yuki Noguchi explains.

YUKI NOGUCHI: If there's a larger housing problem lurking in the shadows, it lurks in places like this one: the new Fairwood neighborhood in this Maryland suburb of Washington, D.C. Here, a third of the homes for sale are short sales, and 17 percent are foreclosed properties.

The one Im standing in front of now sold for over $700,000 four years ago - and is listed today for about half that. But there's nothing to indicate that the property's for sale. There's no signs out front; there's no Realtor's box on the door. In fact, I see no for-sale signs on this street, but who knows how many people might be nearing foreclosure, or how many people would sell if they could recover some of what they paid for it.

This is what is known as shadow inventory. And its basically impossible to know how big it is.

Shadow inventory is made up of essentially all the homes that otherwise would be up for sale: people who want to sell but can't, and banks that don't want to undercut prices by flooding the market with foreclosed homes.

Glenn Kelman is chief executive of Redfin, an online realty firm. Kelman says the dynamics indicate this hidden inventory of homes is huge, and will keep the housing market depressed for some time.

Mr. GLENN KELMAN (CEO, Redfin): There's just a whole class of people that are totally disenfranchised from the home-buying process because of their credit. And then you have the fact that 10 percent of the United States, or something like that, is unemployed - and that disqualifies another group of people from buying a house.

So even as the supply stabilizes, there's going to be a problem in demand. And the supply isn't as stable as people think.

NOGUCHI: Kelman says he thinks millions of people are essentially trapped in their homes. Half of potential Redfin customers who want to sell, end up not listing because they can't afford to sell their homes in this market. Kelman says banks are much worse off, and overwhelmed by the number of homes they're trying to unload.

Mr. KELMAN: They just can't get all the properties out on the market. So people sometimes suspect there's this nefarious plot to titrate inventory to demand. But I think part of it is that these guys just can't hire real estate agents fast enough, can't process the paperwork quickly enough. I think all hell is breaking loose at the big banks - who are still trying to figure out how to sell houses. That wasn't their original business.

NOGUCHI: William Wheaton does not agree. He's a professor of economics at MIT, and doesn't think this is a problem. He considers himself one of the lone bulls of the housing market.

Professor WILLIAM WHEATON (Economics, MIT): My suspicion is that this shadow inventory really isn't that big.

NOGUCHI: Wheaton says he thinks banks aren't hanging onto properties. He guesses at most, a half million bank-owned homes are stuck in limbo between foreclosure and resale. And on the other side, he says buyers are snatching up low-priced homes even in the most distressed markets, like California.

Prof. WHEATON: There's a steady stream of buyers, so that even with all the foreclosures going on in California, the number of units for sale has actually been decreasing, quite consistently, for the last year.

NOGUCHI: Wheaton also says there are more than a million new households created every year, on average, and those people will soon mop up the excess supply.

Prof. WHEATON: The housing market, as a whole, is going to grow its way out of this problem.

NOGUCHI: Whether the housing market's due for prolonged turmoil depends which of these interpretations might prove true.

Even that Fairwood development outside of Washington, D.C., seems to tell two sides of the same tale. The manicured homes show no outward signs of distress. Nothing is in disrepair. Even the streets project optimism, with names like Odin's Hope(ph) and Seatons Promise.

But a main road through the subdivision dead ends at a blockaded intersection. And on either side, weeds thrive where a developer clearly hoped more homes might stand.

Yuki Noguchi, NPR News.

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