‘The Accidental Economist’ with Jack Kern: The Shadow Inventory is Neither

In what I can only characterize as an interesting turn of events, the well-respected firm Corelogic released a report that indicated a reduction in “shadow” inventory by 1.5 million units, which translates to roughly four months’ supply. This represents, according to Corelogic, about one half of the number of housing units currently in serious foreclosure or REO status. Since this presents some good news, I found it to be odd that the oft-used term “shadow” keeps coming up. The unstated presumption in the release was that this is an inventory bound for rental and probably not re-sale, otherwise it wouldn’t be called “shadow.” The apartment industry has been under attack lately for raising rents too aggressively and the common presumption is that people who lose houses generally rent apartments and occasionally rent vacant houses. The opposite is actually true, and this constant twisting of the facts to suit some trend or other in the housing business doesn’t help anyone in the logical argument about having a balanced housing policy that should favor rental. Yes, despite the end result of an average 64 percent (my estimate) home ownership rate, rental should be favored because of a few facts. There is a critical affordable housing shortage in this country, something that has been an issue since just after WWII ended. Those newly forming houses, practicing for the future need a safe, adequate place to live, attain financial and social stability and eventually grow into working, voting citizens. These affordable needs cover recently graduating college students, just every day people, and not the underclass, as they have been called by media pundits. Another reality about rental communities is that it is essentially where everyone starts out in the quest for self determination and beginning careers and sustainable employment. If housing policy, and this “shadow” inventory isn’t handled correctly, it will just make the issue of excess housing units and lack of affordable rental units worse.

Arizona, California, Nevada, Michigan and Minnesota all saw double digit declines in the number of housing units, a good sign as these are all poster children for excess development and failed industrial policies. The rest of the country presumably follows a similar pattern, and while there is an inevitability in continuing foreclosure actions, the levels of equilibrium will undoubted continue to gradually balance. The 2.8 million housing units in trouble are down significantly from estimates as high as 8.5 million units that might fall into foreclosure and the resulting dissipation of excess inventory will likely absorb those who lost homes, and provide an investment opportunity for those seeking rental units in select places. The upshot of the message is that professionally managed apartments will likely see little real impact from foreclosed single-family “shadow” homes.

Jack Kern is the “shadow” research editor of Multihousing News and Commercial Property Executive. He writes and performs music for the Shadow Units, a band formed with Jay Lybik from Equity Residential. Their current hit single, “Don’t Shadow Me Bro'” is an anthem to the lost art of renting cheap apartments. Jack is always up for new song lyrics and can be reached when he isn’t touring at jkern@multi-housingnews.com.