The graph below includes what the Real Estate industry calls the "shadow inventory". In simple terms this is the homes currently on the market that are either in Foreclosure, Serious Deliquent Status, or REO (Bank Owned). While the media speaks of the economy in general, and the problems with banks and credit, in reality any product and the value of that produce is driven by supply and demand. As the plot below indicates during the height of the housing boom the shadow inventory was extremely low down near 0.4 million homes. As the economy and housing market began to deepen the inventory levels began to rise. During this past year the number reached a peak of 2 million homes in January. This indicator of the housing market is a lagging indicator. In other words while the inventory levels reached their lowest level in 2006 the housing market had already began to slow. The same will be true as the inventory declines. The market is always slightly better than the numbers indicate.
The positive side is that the worst is over. The inventory is now showing a constant continued reduction. At the current rate of decline the shadow inventory will be near or below 1 million homes in 12 months and 0.5 million in 1.5 years. Let's hope this trend continues and home owners are smiling once again as they celebrate the coming of 2013 on new years eve.
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