by Calculated Risk on 10/08/2007 06:59:00 PM

The story this morning on distressed home sales in Orange County reminded me that all inventory isn't counted in either the Census Bureau's New Home, and the NAR's Existing Home, inventory reports.

Note: Distressed homes are usually homes that will sell for less than the amount owed (including tax liens). This includes properties in foreclosure and short sales. Some people also include 'must sell' properties (divorce) or seriously damaged properties. I prefer the first definition.

Let's start with New Homes. During periods of changing cancellation rates, the Census Bureau may overestimate or underestimate the actual changes to the inventory. Currently my estimate - based on an analysis of public builder's cancellations rates - is that the Census Bureau is underestimating New Home inventory by 77K units.

Another problem with the New Home data (both inventory and sales) is that some condos are not included. It appears town home style condos (with no neighbor above or below) are included in the New Home report, but high rise condos aren't included. Look at this marketing piece: First Condo Auction in D.C. Suburbs Offers Prices Not Seen in a Decade. The press release calls these "two story condos" and it appears from the picture that these are side by side type condos, so they are probably included in the New Home report as inventory. From the Press Release:

"There are currently about 19,000 unsold condominiums actively marketing in the Washington metropolitan area, with at least 16,000 new units coming on the market in the next 36 months," said William Rich, Vice President of Delta Associates.

Why a marketing piece would want to remind buyers of the excess inventory is a different issue, but some of these 35,000 units - if they are multiple story units - might not be included in the New Home report.

For existing homes, some distressed properties are not included in the Existing Home inventory report. Some bank REOs (Real Estate Owned) are not listed - and some REOs are. So it's difficult during periods of high foreclosure activity to accurately estimate the total inventory for existing homes.

The Census Bureau and NAR numbers are useful in comparing to prior periods, but this is just a reminder that the current reported inventory numbers are probably lower than actual.