Should We Fear the Shadow? House Prices, Shadow Inventory, and the Nascent Housing Recovery

Posted: 3 Mar 2016

See all articles by Hua Kiefer

Hua Kiefer

Office of the Comptroller of the Currency

Leonard C. Kiefer

Federal Home Loan Mortgage Corporation (FHLMC)

Tom Mayock

Florida State University

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2016

Abstract

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 out-flow of shadow inventory. The scope of our study is a set of housing markets (AZ, CA, and FL) that vary in both their historic housing price volatility as well as institutional factors - such as foreclosure law statues - 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 out-flow 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 Black Knight. 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: House prices; Spatial econometrics; Foreclosures

Suggested Citation

Kiefer, Hua and Kiefer, Leonard C. and Mayock, Tom, Should We Fear the Shadow? House Prices, Shadow Inventory, and the Nascent Housing Recovery (March 1, 2016). Journal of Real Estate Finance and Economics, Vol. 52, No. 3, 2016. Available at SSRN: https://ssrn.com/abstract=2740654

Hua Kiefer

Office of the Comptroller of the Currency ( email )

250 E Street, SW
Washington, DC 20219
United States

Leonard C. Kiefer

Federal Home Loan Mortgage Corporation (FHLMC) ( email )

8200 Jones Branch Road
McLean, VA 22101
United States

Tom Mayock (Contact Author)

Florida State University ( email )

Tallahasse, FL 32306
United States

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