Frequent readers know I’ve spilled a lot of virtual ink on the concept of “shadow inventory” — the fairly vast category of homes that are in foreclosure but not for sale. This overhang of potential but not-yet-actual inventory contrasts with the very low levels of inventory currently for sale.

The title of this post refers to a recent entry describing how current inventory is even lower than it seems. That prior article contained a graph showing that the amount of current inventory is unusually low compared to the number of sales, even before taking account of the reverse-shadow inventory effect.

But while sales are numerous in comparison to available inventory, homes in foreclosure are quite numerous in comparison to sales. The following chart, which measures the number of single family home sales divided by the number of monthly default notices (the first official stage of foreclosure), makes this clear:

Here’s another version of the same data, this time comparing the sales-per-default ratio starting at the peak of the recent housing bubble (in orange) and the late-1980s bubble (in green):

Even at its lowest, the sales-per-default ratio never fell below 1 in the 1990s bust. Except for the moratorium-induced spike down in defaults late last year, we’ve spent a good portion of this housing crash bumping around closer to the .5 levels (the latest score was .63).

It’s certainly not a sure thing that all these homes will end up on the market as distressed inventory. Many will surely not. But a lot of homes have entered foreclosure and the new foreclosures continue to pile up, and I haven’t seen any evidence to indicate that the troubled loans are being worked out nearly fast enough to clear the foreclosure overhang away. I think the extremely rapid pace of default notices in comparison to sales provides a rough indication that the shadow inventory concept is for real.

— RICH TOSCANO

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