Eller College of ManagementArizona's Economy
Economic and Business Research Center
JUNE 2011: SUMMER ISSUE      Issue in PDF Issue in PDFRSS RSSPrint Print     

Arizona’s Housing Market Haunted by Shadow Inventory

By Lora Mwaniki-Lyman and Ruth Christopherson


Economic data released in the month of May confirmed that the housing market in Arizona has not hit bottom yet. Building starts and permits remain at record lows and average home prices attempt to stabilize amidst a fragile economic recovery and foreclosure market. Home prices in the Phoenix metro area as measured by the S&P/Case-Shiller Home Price Indices1, dropped for the 10th consecutive month in March 2011 reporting an 8.45 percent decline since a year ago. At the national level, residential home prices dropped to their lowest level since mid 2002 after experiencing a short-lived rise in home prices in 2009 and 2010 attributed to the housing market targeted stimulus.

In the last two years, the federal government has injected over $1 trillion into the economy through spending, tax-cuts, incentives and entitlements among other programs. The overall goal of the bills was to stimulate a job-based recovery by inducing consumer spending and promoting investment. The only stimulus directly aimed at the housing market was Federal Home Buyer Tax Credit.

Federal Home Buyer Tax Credit

In an effort to stimulate the housing market, Congress passed the Federal Home Buyer Tax Credit included in the Housing and Economic Recovery Act of 2008. The 2009 American Recovery and Reinvestment Act expanded the first-time homebuyer credit by increasing the credit amount from $7,500 to $8,000 for purchases made in 2009 before December 1 while the Worker, Homeownership, and Business Assistance Act of 2009 expanded the deadline from December 1, 2009 to May 1, 2010. The Home Buyer Tax Credit provided eligible individuals with a financial incentive to buy a home now instead of later. First time home buyers were eligible for a tax credit equal to 10 percent of the purchase price of a house, with a maximum credit of $8,000. Repeat home buyers were eligible for a similar 10 percent of the purchase price of a house, with a maximum credit of $6,500. Buyers qualified for the tax credits if a binding contract was signed between November 7, 2009 and April 30, 2010 with a closing date no later than September 30, 2010. One positive effect on the housing market that ended with the Federal Home Buyer Tax Credit on April 30, 2010 was the temporary increase in the demand for houses, both new and resale.

Coupled with the historically low home prices and mortgage rates, the Home Buyer Tax Credit gave sidelined home buyers the extra push they needed to purchase one of the biggest assets in their portfolio in an uncertain economic environment. The increased demand for homes was expected to reduce the inventory of distressed homes in the market and encourage a flattening of, if not an upward movement in, home prices. During the time the Tax Credit was in effect, average single family home prices in the Phoenix metro area bumped up 10.1 percent, from $179,000 in November 2009 to a new peak of $197,000 in January and later in May 2010 to coincide with the Home Buyer Tax Credit deadline extension. Average home prices (both single and multi-family) in the Tucson metro area remained flat (Exhibit 1).


Source: Arizona Regional Multiple Listing Service

The Arizona Regional Multiple Listing Service reported a 2.2 percent increase in home sales in the second quarter of 2010 compared to the same period in 2009 for the Arizona Region2 it covers. 

The foreclosure market in Arizona showed some anomalies during this period as well. While it was expected that home inventories would decline, the exact opposite happened. In the three months between October 2009 and January 2010, over 7,000 houses were entered into the foreclosure process and this was not a typical Holiday effect. According to RealtyTrac Inc. which maintains one of the largest and most comprehensive databases of foreclosure and bank-owned properties with nation-wide coverage, foreclosure activities in Arizona spiked from 13,345 foreclosure filings in October 2009, the lowest since June 2008, to a new peak of 21,048 foreclosure filings in January 2010 (Exhibit 2). Total foreclosure filings include default notices, auction sale notices and bank repossessions.

Data Source: EBRC and RealtyTrac Inc.


It seemed as though houses had appeared from the shadows – a real possibility since a shadow inventory of bank-owned houses that have been pulled out of the market has been building up.

The short-term stimulus to the housing market had succeeded in raising home prices as well as bringing houses in the foreclosure process back into the formal market for clearing. There is fear however that the market may lose its momentum now that the homebuyer tax credit is expired, mortgage rates are rising and other economic stimulus programs are coming to an end.

Shadow Inventory

Shadow inventory is the inventory of homes that could enter the market in the near future and includes distressed properties of unlisted foreclosed homes, unlisted bank-repossessed homes, or any home whose principle borrowers are 90 days late on a mortgage payment.
According to a study3 by Selma Lewis, a Research Economist at the National Association of Realtors (NAR), the amount of shadow inventory in the United States through January 2010 was estimated at over 2.4 million homes. The estimates of shadow inventory uses the share of seriously delinquent homes (60+ days delinquent) that are already in the foreclosure process by the fourth quarter of 2009. These estimates are based on Lender Processing Services (LPS) roll rates4. It excludes from the inventory of delinquent homes; 24 percent of distressed homes in the foreclosure process that are already in the market, and 75 percent of delinquent loans under modification, and adds 75 percent of lender-owned properties (REOs) not on the market. Hence shadow inventory estimates by NAR differ significantly from shadow inventory estimates by other agencies that do not adjust for delinquent loan under modification, distress-home sales, ROEs among others. According to the study, Florida is reported to have the highest shadow inventory numbers at 441,461 homes, followed by California (227,961) and Illinois (121,226). These top three states account for 35.4 percent of total estimated shadow inventories in the U.S. while the top ten states accounted for a total of 62.2 percent.

Arizona fell right behind the top ten estimated states for shadow inventory, ranking in at 11th with a total of 60,286 shadow inventories estimated by the National Association of Realtors for 2010. Arizona accounted for 2.7 percent of total shadow inventories estimated for the U.S. Arizona reported a large amount of foreclosures in 2010, with 55 percent of all existing home sales in the state being distressed sales. Assuming only shadow inventory properties would be sold NAR estimates it would take Arizona nine months to completely clear the total amount of shadow inventories at today’s sales prices. While Arizona is ranked among the top five states for foreclosure processes by RealtyTrac Inc., and the top fifteen for shadow inventory by NAR, the state is doing relatively better in terms of getting rid of distressed properties. According to the NAR Study, Arizona’s shadow inventory seems to be moving relatively faster through the pipe lines and makes up a large share of existing sales (Exhibit 3).

Data Source: National Association of Realtors

The rate at which the shadow inventory clears is dependent on the number of borrowers who are becoming 90 days or more delinquent on their mortgage payments. Even though the economy appears to be in recovery, the delinquency rate remains high. The Federal Reserve5 reported a 10.23 percent delinquency rate for all real estate residential bank loans in the 1st quarter 2011. This was a decline from an all-time high of 11.34 percent reported in the 2nd quarter 2010. According to a study by Standard and Poor’s Ratings Services6 estimates, the principle balance of the National shadow inventory - residential properties that are 90 days delinquent, are in the foreclosure process or are real estate owned but not yet on the market - stood at 433 billion in 1st quarter 2011, a drop from 450 billion dollars in the 4th quarter 2010. The amount of homes they estimate as shadow inventory, which does not account for delinquent loans that may not end up in the market, would take 52 months to sell at current home sales prices. The effects of the shadow inventory will be to depress home prices. When the large build-up of shadow inventory hits the market, the number of sellers will once again outweigh the number of buyers. Another concern is large amount of mortgages established during the peak of the home-sale bubble in 2006, which are scheduled to be reset in 2011. The fear is that the bottom has not been reached and there could possibly be worse times for the housing market ahead as the influx of shadow inventory floods an already saturated housing market.

Robo-signing Controversy

It is debatable how effective the tax credits were in the long-run since by September 2010 banks had succeeded in muddling up the housing market again. Word that banks, overwhelmed with paperwork, had been signing off on foreclosures without verifying the information on the documents led to bank-led and congressional investigations. As a result, several banks, including GMAC, Bank of America, Ally Financial and JP Morgan Chase, imposed a moratorium on foreclosure sales in October 2010. This led to a sharp decline in the number of foreclosure filings reported by RealtyTrac Inc. nationwide as well as in Arizona. As described by RealtyTrac inc., foreclosure activities in Arizona dropped from 16,538 in October 2010 to 10,384 foreclosure filings in November 2010 after the moratorium on foreclosures was imposed. This resulted in a drop in Arizona’s ranking by foreclosure rates from 3rd in October to 4th in November 2010; it’s lowest since November 2009. It is not exactly understood how the effects of the controversy continues to affect the non-judicial and judicial foreclosure process in Arizona, however as a whole, foreclosure activities are back on the rise as banks resume processing foreclosure sales. By December 2010 Arizona had returned to ranking the 2nd highest in foreclosure rates. 

Arizona’s Foreclosure Market

According to RealtyTrac Inc. data, Arizona has steadily ranked 2nd in foreclosure rates over the last three months, after relinquishing the position in August last year. In February 2011, one in every 178 households was involved in the foreclosure process compared to the national average of one foreclosure for every 577 households. This meant that 15,485 households in Arizona received a foreclosure filing. However, this was a decrease of 1.7 percent since January and 7.4 percent compared to February of last year.

The foreclosure market is exceptionally large in Arizona with over half of homes sold in Arizona’s housing market being distressed homes. According to RealtyTrac Inc., Arizona recorded the second highest percentage of foreclosure sales in 2010. 55 percent of all residential sales in Arizona for 2010 were foreclosure sales, a decline from 54 percent in 2009. The share of foreclosure sales to residential sales for the fourth quarter 2010 were 55 percent, compared to 46 percent in the 4th quarter of 2009. According to James J. Saccacio7, the CEO of RealtyTrac Inc., fourth quarter and 2010 total foreclosures could have been higher if the foreclosure-documentation controversy and expiring home-tax credit had not slowed down the sale of foreclosed homes towards the end of the year.

While 2011 will continue to be plagued by the foreclosure crisis as the housing market tries to clear the shadow inventory of houses and employment hopefully kicks into gear, the general long-term trend indicates that foreclosures are on the decline. In 2010, the total number of foreclosure filings reported by RealtyTrac Inc. dropped by 4 percent compared to 2009. However, the level of foreclosure filings in Arizona still remained the third largest in the nation with Arizona registering 155,878 foreclosure filings in 2010 and ranked 2nd among all states in foreclosure rates for the second year in a row. The Phoenix-Mesa-Glendale Metro Area ranked 4th in foreclosure rates in 2010, with 124,720 foreclosure filings reported. The metro area also reported 55,372 bank repossessions in 2010, the largest number of bank repossessions (REOs) among all metro areas and 17 percent more than 2009. The Tucson metro area recorded a total of 14,480 foreclosure filings in 2010 and was ranked 38 in 2010 by foreclosure rates by RealtyTrac Inc., up from 41 in 2009.RealtyTrac Inc. tracks 206 metro areas in the nation.

Arizona’s high ranking in foreclosure rates implies that the state’s housing market is still in critical condition. Arizona continues to be second only to Nevada for foreclosure filings, which has topped the nation in foreclosures for 50 months. Arizona’s housing market was among the first in the nation to crash and continues to be deeply affected by its aftershock. Therefore, it will probably take Arizona’s housing market longer than the national average to recover.


1. S&P/Case-Shiller Home Price Indices are the leading measure of U.S. residential home prices. The indices capture about 75 percent of nation’s residential home stock by value. There are a total of 23 S&P/Case-Shiller Home Price Indices: the S&P/Case-Shiller U.S. National Home Price Index, a quarterly index that tracks the nations home prices; 20 Metro Area Indices that track single-family home prices in 20 select cities; and the 10-cities and 20-cities S&P/Case-Shiller composite indices calculated from the 20 metro areas tracked.

2. The Arizona Region includes: Phoenix, Scottsdale Area, SouthEast Valley, West Maricopa and Western Pinal Associations.

3. Selma Lewis “Foreclosing” on 2009, Part II: Shadow Inventory, Real Estate Insights, March 2010

4. Roll rates is the percentage of loans that will ‘roll’ into the next stage of the foreclosure process

5. Delinquency Rates: Charge Offs and Delinquency Rates on Loans and Leases at Commercial Banks

6. First Quarter Shadow Inventory Update: Relief is Further Away, But There is Light at the End of the Tunnel, May 2011, Standard and Poor’s Rating Services

7. 2010 Year End and Q4 Foreclosure Sales Report, Press Release, February 2011, RealtyTrac Staff

For additional information, please contact the Economic and Business Research Center.