John Burns Real Estate Consulting released a much-cited study this week arguing that the country has a "shadow inventory" of 5 million houses that will hit the market over the next few years.

Another startling assumption here: 80% of homeowners who are currently delinquent on their mortgages will end up losing their houses. Mortgage mods, meanwhile, will just delay the inevitable.

(From the perspective of the homeowners, it's probably best to get the inevitable out of the way sooner rather than later, before throwing more money down the negative-equity rat hole.)

Below, John Collins of the O.C. Register interviews an author of the study, Wayne Yamano of John Burns Consulting:

Us: Your study says that five million of the 7.7 million delinquent homes will go through foreclosure or a “foreclosure-related procedure.” How is this likely to occur?

Wayne: Most shadow inventory will get out onto the market as an REO or short sale. In any event, it results in the homeowner losing their home, and that home being added to the supply of homes available for sale.

Us: Do the remaining 2.7 million borrowers get their loan payments caught up?

Wayne: Of the 7.7 million delinquent homeowners, we actually think that only about 1.6 million will be able avoid losing their homes, and that the remaining 6.1 million will lose their homes. We say that there is 5 million units of shadow inventory because we estimate that about 1.1 million delinquent homeowners already have their homes listed for sale, and we would not classify those homes as “shadow.”

Us: When will this wave of foreclosures hit, and how will this shadow inventory affect home prices?



Wayne: We don’t believe that the shadow inventory will be dumped onto the market all at once. Although we don’t believe modification efforts will truly save a lot of homeowners from losing their homes, we do believe that these programs are effective in delaying foreclosures and pushing out the additional supply to later years.

In terms of pricing, as long as the economic recovery continues and mortgage rates remain low, we do NOT expect another leg down in pricing, despite the looming shadow inventory problem. However, if the economy takes another dip and mortgage rates spike, we’re certain to see another decline in prices.

Keep reading at the O.C. Register >

(Via Calculated Risk)