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I am the first to admit that I don’t know exactly how this whole shadow inventory thing is going to play out. But I am certain that it is a legitimate area of concern.
The accompanying chart provides a long-term view on how existing home sales have stacked up against default notices (the first stage of foreclosure) over the past couple decades. The chart clearly shows that a low sales-per-default ratio has traditionally accompanied falling prices, and vice versa. The chart also shows that we aren’t very far off the all-time lows for the ratio.
For all the relief that the spring-summer rally has brought to the real estate bulls, it seems a bit premature to uncork the champagne before that orange line climbs out of the abyss. That’s all I’m saying.
I’ll be back with a couple more charts on this topic soon.