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Foreclosure Shadow Receded Further in May

Stocks in this article: XHB IYR SPY DIA

NEW YORK ( TheStreet) -- Fewer homes were lost to foreclosure in May and the total number of homes in the foreclosure process continued to decline, according to the latest report from real estate analytics provider CoreLogic.

The number of completed foreclosures dropped 27% year-over-year in May to 52,000. Month-over-month, completed foreclosures rose 3.5%.

Completed foreclosures represent the number of homes actually lost to foreclosure. Since the crisis began in September 2008, there have been 4.4 million completed foreclosures. Prior to the crisis, completed foreclosures averaged 21,000 a month, less than half the current pace.

Still, the latest reports continue to support the view that the foreclosure crisis is slowly moving behind us.

The number of homes in some stage of foreclosure was about 1 million in May, down 29% year-over-year. Month-over-month, the foreclosure inventory was down 3.3%. About 2.6% of all homes with a mortgage were in some stage of foreclosure, compared to 3.5% a year earlier.

Seriously delinquent loans -- loans that 90 days or more past due -- are now at their lowest level since December 2008, at 2.3 million mortgages.

The decline in seriously delinquent loans is significant because a good proportion of these loans could ultimately end up in foreclosure if they are not resolved. And mounting foreclosures add to the supply of distressed homes in the market, dragging down home prices.

Homes that could potentially wind up in foreclosure represent "shadow inventory" or pending supply that could hit the market.

As of April, the shadow inventory was under 2 million, or 5.3 months' supply.

For a long time time shadow inventory was seen as a threat to the housing market. However, that view changed as banks began to opt for short sales and loan modifications over a costly foreclosure process. An extremely lengthy foreclosure process, particularly in judicial foreclosure states, also slowed the pace of foreclosed homes hitting the market.

Ironically, the housing market now faces a housing shortage. The decline in foreclosures and shadow inventory has drained the excess supply of existing homes. Meanwhile, existing homeowners trapped with an underwater mortgage are unable to sell, while homebuilders are struggling to ramp up new construction.

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