The S&P/Case-Shiller Home Price Index grew 1.2% month-over-month, and expanded for the third month in a row, according to data released this morning.  It would appear that the housing recovery is upon us.  To maintain this sunny outlook, we advise readers to please stop their analysis of the health of the housing market right there.  For braver souls, LPS (a provider of data and services to mortgage lenders and servicers) releases its Monthly Mortgage Monitor in the middle of every month.  The growing disparity between delinquencies and foreclosure starts is in focus in the chart below, from October’s release.

Source: LPS

As the graph illustrates, delinquencies are rising, but foreclosure starts are not.  As of September 2009, 90+deterioration more than doubled actual foreclosure starts.  LPS has dubbed this “shadow foreclosure inventory.”  Higher unemployment begets delinquencies and defaults, but foreclosures aren’t flowing through due to modification efforts and various moratoria.  Depending on the success of programs like HAMP, more than a few of these loans are still destined for foreclosure.

And once you get the foreclosure process started, it’s taking a while for the foreclosing lender to actually get the homes on the market.  The chart below is from the same LPS presentation.

Source: LPS

What this means is that a full 12 months after the foreclosure process is started, 30% of these homes are still caught up somewhere in that process and have not been put on the market.  LPS has labeled this “shadow REO inventory.”  The delay could be caused by any number of things, from overcrowded courts to trouble locating the actual loan documents.

The coming supply of foreclosed homes for sale is often referred to as a “wave” (ie. “the wave of foreclosures”), but it seems to be moving much slower than that.  From the looks of things, it’s more of a glacier.  This shadow inventory is hard to measure in any precise way, but it looms.  We expect it to keep a very heavy lid on prices.

This entry was posted on Tuesday, October 27th, 2009 at 4:52 pm and is filed under Current Events, Housing. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.