Shadow Inventory Opens: Almost A Million Houses Headed to Market

Foreclosure activity in the U.S. real estate market increased by 7 percent in the first quarter of 2010, according to RealtyTrac's U.S. Foreclosure Market Report. Default notices, scheduled auctions and bank repossessions were reported on 932,234 properties in the first quarter. The pace of foreclosure activity seems to have increased through the three-month period ending March 31. The breakdown:

304,799 default notices

369,491 foreclosure auctions scheduled

257,944 bank repossessions (REOs)

"[B]anks are starting to wade through the backlog of troubled home loans at a faster pace," says AP's Alex Veiga.

Is this the kind of wading you can do with just hip boots?  The "shadow inventory" -- the number of houses that are highly likely to come onto the market soon -- is as hard to pin down as its name implies. First American CoreLogic [pdf] puts the figure at 1.7 million units. Amherst Securities senior analyst Laurie Goodman estimated in congressional testimony [pdf] that there are closer to 7 million mortgages so dire that they will inevitably fail -- though Goodman made the case in December that "there will be one modification plan after another until a plan is successful." The latest HAMP report [pdf] offers more evidence that the number of unsalvageable mortgages is growing. (The shadow inventory estimates do not include good borrowers who will be selling in the near future.) Here's an estimate of 7.2 million delinquent mortgages as of January.

Goodman has been an advocate for much more radical public spending to rescue bad mortgages. Fortunately the political winds have blown even more strongly against this position since December, and the Obama Administration is now experimenting with a potentially less destructive strategy of simply giving bad borrowers relocation assistance. This is still a misuse of the public's money, but at least it's pointing in the right direction. However many hopeless mortgages there are out there, they need to be processed as quickly as possible.