A new report putting the so-called shadow inventory of houses at a three-year low, and showing a decrease in foreclosures spells good news for the construction industry, economists said.
According to a report by CoreLogic, a provider of business data and analytics, "The overall shadow inventory is down 34 percent from its peak in 2010, when it reached 3 million homes, and down 18 percent from a year ago, when it was at 2.4 million."
The shadow market is generally defined as the homes that are in foreclosure, but not on the market, or homes that the bank or mortgage provider has taken back but is holding until the market improves.
"There has been some suspicion that whoever is holding property is hanging onto them, waiting until prices improve or until they feel comfortable with the loss they will take," said David Crowe, chief economist of the National Association of Homebuilders.
"They were waiting to claim that loss on their balance sheet when their balance is stronger. The concern is that there are these houses are out there in never-never land. The uncertainty is the worst part. My take is that these are not huge threats to the housing market, particularly not now. Whatever concern there was about the shadow and how it could affect the market is dissipating."
Along with the decline in the shadow inventory is news that completed foreclosures in May 2013 numbered 51,000, down from 71,000 in May 2012 , "a year-over-year decrease of 27 percent, CoreLogic said.
"The stock of seriously delinquent homes, which is the main driver of shadow inventory, is at the lowest level since December 2008, said Mark Fleming, chief economist of CoreLogic.
"We continue to see a sharp drop in foreclosures around the country and with it a decrease in the size of the shadow inventory. Affordability, despite the rise in home prices over the past year, and consumer confidence are big contributors to these positive trends," said Anand Nallathambi, president and CEO of CoreLogic. "We are particularly encouraged by the broad-based nature of the housing market recovery so far in 2013."
For the construction industry that means less competition from existing houses, and more contracts, more jobs and more sales of equipment as more new homes are built, said Crowe.
"Reduced competition from shadow inventory means more construction in new homes and we estimate that 100 new single family homes generates 300 additional jobs," Crowe said.
Construction equipment manufacturers are seeing the positive effects, too, said Dennis Slater, president of the Association of Equipment Manufacturers.
"My central message is we feel good about it," Slater said. "If you look at the sales numbers by construction equipment manufacturers as a whole, they are reporting good numbers."
But while the news is good, it could be better, Slater said.
The U.S. Congress’s inability to pass critical legislation is creating market uncertainty.
"With the uncertain economic conditions, particularly with the lack of funding for the highway bill, contractors would be less likely to buy equipment at all," Slater said. "One option would be to rent because they don’t have the long term commitment. They aren’t comfortable that they have jobs beyond the current horizon.
"So I think what you have is the housing market is a good story, but I think the market uncertainty created by Congress does dampen that optimism. We are positive, but it could be a better story."