"Shadow" inventory lurks over U.S. housing recovery

NEW YORK (Reuters) - The storm may have subsided, but clouds continue to hover over the U.S. housing market as homeowners waiting for prices to rise get ready to flood the market with fresh inventory.

Many home owners held off selling during the housing market’s downturn, but with the market showing signs of stabilization, they may now be ready to sell.

Many analysts agree the market may have turned an important corner after Case-Shiller home price index for May rose for the first time in nearly three years, but a massive supply of unsold homes is waiting in the wings and could easily swamp the recovery before it can gather speed.

“The number of homes listed officially on the market, while still at historically high levels, might be only the tip of the iceberg,” said Stan Humphries, chief economist at real estate website in Seattle, Washington.

According to Zillow’s latest Homeowner Confidence Survey, 12 percent of homeowners said they would be “very likely” to put their home on the market in the next 12 months if they saw signs of a real estate market turnaround, 8 percent said “likely,” while 12 percent said “somewhat likely.”

The survey of 2,123 adults aged 18 and older, of whom 1,357 are homeowners, was conducted online.

Survey results could translate into around 20 million homeowners trying to sell their homes, a startling number given that the Census bureau indicates there are 93 million U.S. houses, condos and co-ops, Humphries said.

According to the National Association of Realtors, the market is currently on track to sell 4.89 million homes annually.

“At this pace, it would take about four years to run through this amount of backlogged inventory,” he said.

A bent over sign advertising a home for sale is shown in Daly City, California December 31, 2008. REUTERS/Robert Galbraith

Adam York, economist at Wells Fargo Securities in Charlotte, North Carolina, said 20 million may be too lofty a number, but contends that the amount of homes that have not yet been listed for sale could be around 4-5 million.

“That is still an extremely high number,” he said. “Supply is and will continue to be one of the main obstacles to a housing market recovery in the year ahead.”

Low mortgage rates, high measures of affordability, and a $8,000 first-time home buyer tax credit, part of the Obama administration’s economic stimulus package, have helped pave the way for stabilization in house prices.

Standard & Poor’s widely watched gauge, the S&P/Case-Shiller 20-City Home Price Index, rose 0.5 percent in May, the first increase since July 2006.

In more recent data, U.S. existing home sales notched their third monthly rise in June, while the inventory represented 9.4 months’ supply at the current pace of sales, down from 9.8 months’ in May, according to the National Association of Realtors.

The historic average is about six months’ supply, so a huge imbalance between supply and demand remains.

“Shadow inventory has the potential to give us another leg down on home prices during the second half of the year,” said Steven Wood, chief economist at Insight Economics in Danville, California.

“It appears that there is a significant amount of shadow inventory in the form of bank owned properties, which will continue to grow with the rising in delinquencies,” he said. It can take about 4-6 months for a house for be out of foreclosure and ready for sale.

Torsten Slok, senior economist at Deutsche Bank in New York, said about 1.8 million homes are currently in foreclosure and they will continue to weigh on home prices at least for the rest of this year.

“Foreclosures are creating a shadow inventory and this is the main problem in the housing outlook,” he said. “Had it not been for foreclosures then the housing market would probably already have recovered.”

Stabilization of the hard-hit U.S. housing market is key to a turnaround for the United States, so a delayed recovery could prolong a rebound for the world’s largest economy.

John Canally, economist at LPL Financial in Boston, said the areas most vulnerable to shadow inventory are California, Florida, Arizona, and Nevada.

“The areas where shadow inventories are likely to have the biggest impact are in the regions where we saw the most speculation and price gains during the boom times,” he said.