The Wall Street Journal

24 August 2012

The salvo of distressed home sales that was supposed to sink the housing recovery hasn’t shown up yet. Perhaps it never will.

The National Association of Realtors said Wednesday that sales of existing (translation: previously owned) homes rose 2.3% in July from May. And, as it has for several months now, the NAR said sales might have been higher if it wasn’t for a shortage of inventory.

It counted 2.1 million single-family homes on the market in July, down from a peak of 3.4 million in July 2007 and near the levels of a decade ago. Foreclosure sales accounted for 12% of total sales versus 17% a year earlier.

The NAR’s statistical acumen has a less-than-sterling reputation; in December, it said that it had overestimated home sales by 14.3% from 2007 to 2010, but what it is saying about inventory and foreclosure sales jibes with what regional real-estate associations and other sources have been saying. With household formation picking up, and new single-home construction running at half its level of 50 years ago (when the U.S. population was half the size it is now), inventory constraints could get tighter.

The major caveat is that there’s an unknown amount of “shadow inventory”—homes that are owned by banks, destined for foreclosure, and so forth—out there. As more of those homes hit the market, they could depress prices, restrain construction and put the nascent housing recovery that lately has been one of the brightest spots in the U.S. economy at risk.

It is worth remembering that worries that shadow inventory would buckle housing are no longer new. The delay merely may be that issues like banks’ unwillingness to accept losses and hamstrung courts have led to unanticipated holdups in distressed homes coming on the market. Or there may be other things going on.

One possible factor is that rather than getting put on the block, many distressed homes are getting converted by banks and investor groups into rentals. Indeed, the number of homes that were rented out in the second quarter was 685,000 higher than a year ago, according to the Census Bureau.

Another possibility: Many distressed homes may not have turned up on the market because they aren’t really sellable, either because of the condition they have fallen into or the neighborhoods they are in.

For whatever reason, the results of large public home builders don’t square with a looming threat of distressed sales flooding the market. Without exception, they have seen orders rising sharply. The latest: Toll Brothers said Wednesday that net orders for new homes in the quarter ended in July were 57% higher than a year earlier.

The shadow inventory problem is starting to look like a shadow of its former self.