'Shadow inventory' skews data

NEW YORK - As if the housing market were not scary enough, the record-setting surge in foreclosures could be distorting some of the closely watched housing data used to gauge the market's health.

The foreclosure glut is making listings of homes for sale a less reliable indicator because much of the distressed inventory might be left out. In addition, fire-sale prices for such properties may also be skewing volume figures. Some real estate analysts say this may indicate that housing conditions are worse than they now look.

Nationwide, more than 272,000 homes received at least one foreclosure-related notice in July, up 55 percent from about 175,000 in the same month last year and up 8 percent from June, RealtyTrac Inc. said. Irvine, Calif.-based RealtyTrac monitors default notices, auction sale notices and bank repossessions.

"The wave of foreclosures is unprecedented, making it difficult to analyze, difficult to gauge how large it will get or how bad it will make things," Deutsche Bank analyst Nishu Sood said in an interview.

Sood, in a recent report, lays out a case for why the surge in foreclosures is not being fully reflected in the resale inventory levels, as measured by the real-estate databases known as multiple listing services, or MLS. In 9 of the 33 markets Sood examined, distressed inventory is significantly higher than what is found in the MLS listings.

This is most pronounced in what have been deemed "bubble" real estate markets, which saw the biggest gains during the home buying boom and are experiencing the largest declines since the pullback began more than two years ago. For instance, in Sacramento, Calif., the foreclosed inventory was 31,219 units, or more than twice the 14,913 units on the MLS listings.

Sood attributes that gap largely to bank-owned foreclosed homes that are not always in the MLS listings. He calls that the "shadow inventory," and says the behind-the-scenes glut of properties wreaks havoc on housing statistics.

Foreclosures also are influencing sales and price data. Transaction volumes are being boosted by the sale of the distressed inventory, which in bubble markets represents 40 percent of sales. But such sales then tend to push market prices down, with banks offering steep discounts to move inventory, according to Sood's research.

"Since foreclosed properties are reduced in price until they sell, an increase in foreclosure transactions simply means there are more foreclosures rather than more buyers," Sood said.

What seems key to stabilizing the housing market is finding a way to slow the pace of foreclosures. Industry executives are looking for the Housing and Economic Recovery Act of 2008 to provide some help.

Starting Oct. 1, as many as 400,000 borrowers on the brink of losing their homes may be eligible for a more affordable loan backed by the Federal Housing Administration. The government program will allow those who qualify to cancel their old home loans and replace them with 30-year fixed-rate loans for up to 90 percent of the home's current value. The FHA will insure a total of $300 billion of the loans over three years.

But refinancing into the new program requires the lender to agree to the loan change. That means the banks would have to be willing to take a loss on the existing loans. This new program also is only for primary residences, not investor-owned properties, which have been hard hit by foreclosures.

Until there is clear evidence that the surge in foreclosures has slowed, it will be harder to call the housing collapse a thing of the past.

Rachel Beck is the national business columnist for The Associated Press.