I’ve never made the giant attempt of gathering MLS data for every one of the 58 counties in California. Let us not even discuss gathering foreclosure data for each of the counties on an individualized basis. Yet this is necessary if we want an accurate count of shadow inventory. Over the weekend I went ahead and gathered MLS data and foreclosure data for each county to put together the full inventory for the entire state. What did I find? The data is startling because it shows that California, should it keep the current pace of things in the real estate market, won’t empty out the entire inventory for nearly 9 years! Let us first take a snapshot of total MLS data and also MLS + foreclosure data.

The MLS data is what is readily available for the public to view and the foreclosure data is housing that is already in the foreclosure pipeline but isn’t easily viewable by the pubic (i.e., NODs, REOs, etc):

Source: MLS, foreclosure filings

Now the above data is gathered from the following 58 counties:

This is stunning data. The MLS lists slightly over 176,000 homes yet if we throw in homes in the foreclosure pipeline the total inventory jumps up to a stunning 468,000! The shadow inventory in the state is off the charts and locks us in to years of distressed inventory. Now we can see how some in the housing industry can play with these numbers. Just take a look at the current inventory if we simply go by the MLS figures and the latest month of sales:

176,430 (MLS inventory) / 34,239 (CA home sales August 2010) = 5.15 months of inventory

A healthy market usually has 6 months of inventory. Yet this is assuming no shadow inventory which is actually a new real estate phenomenon. So let us run those numbers with the new inventory figures:

468,833 (MLS inventory + distressed inventory) / 34,239 (CA home sales August 2010) = 13.69 months

All of a sudden the inventory count jumps up to over 13 months. But you might ask, some of these homes will cure right? Some, but not many:

Keep in mind that all homes listed as distressed will be at least 3 months behind to have a notice of default (NOD) filed. A big portion is scheduled for auction and other homes are bank owned. In other words, most of the homes in the pipeline will end up as foreclosures and that is why we are now seeing banks more willing to move on higher priced inventory in the state. The dam is simply holding too much inventory and there has to be some method of putting this out in the market, even if it means lower prices as much as banks want to avoid this. So where do we get the 9 years of inventory data from? You have to remember that people are still defaulting as we speak. The figure above isn’t static. More people are entering the chamber as inventory is cleared out. Let us look at the latest figures:

Source: RealtyTrac

The auctions and REOs are already in the shadow inventory pipeline. Yet the NOD figure is the loading up of future inventory. Last month 29,753 new NODs were filed. As we all know, banks are lagging in this category so this figure could be higher if they actually adhered to simply filing a NOD after 3 missed payments. Given the above cure rates, it is safe to say many of these will end up as REOs or will sell at some stage of the process. In other words, this is future inventory in the pipeline. So current sales need to be measured against what is coming online through the foreclosure pipeline:

Keep in mind the above doesn’t account for potential organic inventory that will come online through the normal channels of selling a non-underwater home; moving up, downsizing, locking in a profit, divorce, new job, and any other reason why people would sell when they have equity. The market has been turned on its head. Distressed inventory always used to be a tiny sliver of the market. Today, it is the market. So to discount the shadow inventory is simply ignoring reality. Given the latest data with NODs still hitting the market plus actual sales, the actual inventory count is only being drawn down by 4,486 homes per month. So then we can run the numbers yet again:

468,833 (MLS inventory + distressed inventory) / 4,486 (CA home sales August 2010) = 104.5 months (8.7 years)

Do people really want things to be drawn down slowly? If that is the case, you can rest assured that real estate will be a bad bet for the next decade and will drag the fragile state economy with it.

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