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Jan. 3, 2013

Economy Watch: Shadow Residential Inventory Declining

By Dees Stribling, Contributing Editor

The Congressional agreement on avoiding the fiscal cliff unleashed a torrent of commentary on Wednesday, mostly involving moaning and gnashing of teeth about one provision or other of the deal. As usual with a haphazard, deadline-inspired compromise, there’s plenty to upset about regardless of one’s political leanings. Still, it was a deal, and the nation seems to have avoided being knocked of a growth course by too much austerity too suddenly.

The markets certainly seemed relieved, though whether that’s a rational reaction or merely Wall Street suggestibility is a matter of debate. Nevertheless the Dow Jones Industrial spiked upward on its first trading day of 2013, gaining 308.41 points, or 2.35 percent. The S&P 500 and the Nasdaq likewise took to the sky, advancing 2.54 percent and 3.07 percent, respectively. Other markets elsewhere in the world that weren’t closed for New Year’s, such as Hong Kong’s Hang Seng, also jumped.

The matter of federal spending cuts remains unresolved, with the potential to kick up another political storm in two months, as does the debt ceiling, which will soon need raising again. With or without further austerity, however, at least the federal deficit is going in the right direction: down from 10.1 percent of U.S. GDP for fiscal year 2009 (ended Sept. 30, 2009) to a projected 6 percent of GDP or even lower for fiscal 2013.

Shadow residential inventory declining

CoreLogic said on Wednesday that the residential shadow inventory as of October 2012 fell to 2.3 million units, which it calculates represents a supply of seven months. That inventory level is a 12.3 percent drop from October 2011, when shadow inventory stood at 2.6 million units.

CoreLogic estimates shadow inventory by calculating the number of properties that are seriously delinquent or already in REO but not currently listed on multiple listing services. Transition rates of “delinquency to foreclosure” and “foreclosure to REO” are used to identify the currently distressed unlisted properties most likely to become REO properties. Properties that aren’t yet delinquent aren’t included in the estimate of the current shadow inventory, even though they might be at serious risk of ending up there sometime.

“Almost half of the properties in the shadow are delinquent and not yet foreclosed,” Mark Fleming, chief economist for CoreLogic, noted in a press statement. “Given the long foreclosure timelines in many states, the current shadow inventory stock represents little immediate threat to a significant swing in housing market supply. Investor demand will help to absorb the already foreclosed and REO properties in the shadow inventory in 2013.”

Construction spending edged down in November

The Census Bureau reported on Wednesday that total U.S. construction spending during November 2012 was at an annualized rate of $866 billion, 0.3 percent below the revised October rate of $868.2 billion. Still, the November 2012 figure is 7.7 percent above the November 2011, with residential spending accounting for much of the gain.

Private residential spending—mostly single-family houses but also multifamily—experienced an uptick of 0.4 percent month-over-month in November, while private non-residential spending dropped 0.7 percent (mostly CRE but also infrastructure). For the first time since the housing bubble burst (2007), residential was the largest category of construction spending. That had been the case for many years before 2007.

Moreover, private residential construction spending was up 19 percent year-over-year in November 2012, while non-residential spending was up 8 percent, with the bulk of the latter due to energy spending (power stations, electric lines, etc.). Since November 2011, public construction spending (highways, other kinds of infrastructure) has dropped 3 percent.


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