California Housing Inventory Mystery: 206,000 Homes on MLS but is the Real Inventory 412,000 or closer to 618,000?

It is probably one of the least desirable tasks to undertake but if we are to understand the California housing market we need to look at the entire state current inventory level.  Now having access to the MLS gives us a general sense of the overall number of homes on the market but it does vary by source.  First, let us take a look at some of the largest metro areas in the state and come up with a rough estimate:

No need in counting and adding the above up.  I ran the numbers and it is approximately 206,000.  Now this covers the largest regions of the state.  This number would appear to be right if we go by the latest sales data and information from the California Association of Realtors:

September 2009 sales:                  40,216

Source:  C.A.R.

So we can do the quick math above:

206,000 / 40,216 = 5.1 months

That is relatively close to the CAR number and the data provided from their source is for August 2009 while the latest sales data and inventory data we are looking at are for September and October respectively.  Now as many are aware, a healthy market will have roughly 5 to 6 months of inventory on the market.  It would appear on the surface that we are there.  But the large X-factor is the shadow inventory.

Take for example the number of notice of defaults being sent out:

Source:  Dr. Housing Bubble

So even though notice of defaults for 2009 are reaching the 475,000 mark actual defaults for the year are going at a pace of 230,000.  In other words, there is a major gap in the data.  This isn’t because loans are curing either.  Recent cure rates are under 5% and for California, they are even lower.  So most of those 475,000 notice of defaults are going to become additional inventory at some point.  In fact, how many of those 475,000 homes are even listed in the 206,000 current inventory?  That is the major question and brings up the shadow inventory trends.

A recent report from Amherst Mortgage Insight tackled this question:

If we look at three or the largest metro areas in California, Los Angeles, San Francisco, and San Diego we see that shadow inventory makes up a large number of the actual unlisted housing data.  Let us breakdown each category:

Listings: This is the 206,000 category that is public and is listed on the MLS

REO Listings: Some of these are listed on the MLS but not all

Auction Listings: These are scheduled foreclosures but a large number of these do not show up on the MLS

Notice of Default: This is the enormous 475,000 number above.  The bulk of this is not even on the MLS

So using the above ratios of shadow inventory for these three areas and applying it to California, we get a figure of roughly:

206,000 x 2 =      412,000 homes

206×000 x 3 =     618,000 homes

Now this is an enormous difference from the listed 206,000 homes.  In fact, some areas like San Bernardino, Riverside, and the Central Valley will have larger shadow inventory because they are in higher amounts of distress.

With so many moratoriums, banks not moving on homes, and low end buyers the current market is no where close to an equilibrium.  We can make the mistake of only looking at the MLS data and assuming things are fine.  Given the NOD count, low cure rates, and temporary programs I would suspect that in 2010 more housing inventory is built into the schedule regardless of general improvements in the market.  In other words, don’t expect California housing to rebound in 2010.

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