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 following statistic gives a good idea as to why: every month so far in 2009, more existing San Diego homes have gone into foreclosure than have been sold. Much has been made of the rebound in sales activity, and rightly so. But foreclosures are piling up faster still.

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.


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