‘The Accidental Economist’ with Jack Kern: Shadow Inventory Disappearing?

“Life is tough, but it’s tougher when you’re stupid.”
—John Wayne 1907-1979, Actor, Director, Philosopher

The most recent report by Corelogic suggested that the shadow inventory as of July dropped to 2.3 million houses. I found myself thinking about this a lot lately because conceptually shadow inventory really does compete with professionally managed apartments. The real issue is where is it located and how it impacts apartment rentals. For the most part, research shows (I love to use that phrase) that residents living in single family or row-house units tend to rent from individuals who have one or at most a few properties. These owners are also fairly conservative and don’t raise rents much. I’m sure you’ve seen how some major funds are buying houses in bulk with the intent to rent them out for a reported yield of 10 percent. While I can’t comment on the likely result of that strategy, it does bring to mind the concept of “stupid pills.” Many of us, having grown up with depression era grandparents and greatest generation parents often heard this phrase when we did something that warranted that observation. Now, these days, when I read about levels of inventory and absorption in apartments compared to single family rentals, it makes me wonder what the bankers were thinking when they let all that capital loose to build mayhem and distress during the last 5 years. Of the 2.3 million units a little less than half of them are seriously delinquent. The rest of heading into foreclosure proceedings someplace. I don’t think this report on shadow inventory means that housing has come roaring back, but it is encouraging, at least for renters in professionally managed properties, because it signifies that some parts of the economy are functioning well enough to grow jobs. Between judicial proceedings and delays in clearing out inventory, mostly pursued by the brain trust at some realtor-based groups, there are still roughly five years of inventory left languishing. As long as this slow pace of absorption continues, renting will remain a great option and pricing power will grow at the hands of owners across the country.

Jack Kern is the research editor of Multi-Housing News and Commercial Property Executive magazines. We caught him recently in a donut shop doing “research” on the correlation between the sale of chocolate dipped donuts and housing prices. We’re still waiting for the results of that study. If you’re into donuts, sprinkles or have any insight into pastries, you can reach him at jkern@multi-housingnews.com.