Should We Fear the Shadow? House Prices, Shadow Inventory, and the Nascent Housing Recovery
39 Pages Posted: 30 Jul 2014
Date Written: July 23, 2014
Although a broad-based increase in house prices has been observed over the past year, not everyone is convinced the rise of house prices will persist and lead to a steady recovery of the economy. The main reason for this skepticism is uncertainty about the "shadow inventory:" foreclosed homes held by investors or as REOs, which have not yet hit the market but likely will as market prices rise. The volume of shadow inventory itself in local markets is largely unknown, as is its impact on the housing market. This study quantifies the size of the shadow inventory and investigates the spatial impact of the of the outflow of shadow inventory. The scope of our study is a set of housing markets that vary in both their historic housing price volatility as well as institutional factors -- such as foreclosure law statutes -- that may influence the relationship between the shadow inventory and house price dynamics. To address the endogeneity that characterizes the spatial interaction of house prices and the outflow of the shadow inventory, we utilize a simultaneous equation system of spatial autoregressions (SESSAR). The model is estimated using measures of the shadow inventory derived from DataQuick's national transaction history database and county-level house price indices provided by Lender Processing Services. Lastly, because our estimate -- as well as all other existing estimates -- of the shadow inventory relies upon string matching algorithms to identify entry into and exit out of REO status, we validate the accuracy of our measures of REOs using loss mitigation data from the OCC Mortgage Metrics database.
Keywords: Foreclosures, Housing Prices, Spatial Econometrics
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