Housing Recovery Moves out of Shadow

NEW YORK ( TheStreet) -- Shadow inventory, once considered a major threat to the housing recovery, is declining at a rapid pace, according to the latest report from real estate analytics firm CoreLogic.

Shadow inventory refers to distressed properties that are yet to be listed for sale. CoreLogic estimates shadow inventory by calculating the number of properties that are seriously delinquent and likely to result in foreclosure, properties already in some stage of foreclosure and homes held as real estate owned (REO) by mortgage servicers but not currently listed on multiple listing services(MLS).

Residential shadow inventory as of January 2013 was at 2.2 million units, down 18% from a year earlier. The number of shadow inventory properties in the United States peaked at 3 million in January 2010.

Of the 2.2 million properties currently in the shadow inventory, 1 million units are seriously delinquent, 798,000 are in some stage of foreclosure and 342,000 are already bank-owned. It would take 9 months to absorb the pending supply in the market at the current sales pace.

"The shadow inventory continued to drop at double the rate in January from prior-year levels. At this point in the recovery, we are seeing healthy reductions across much of the nation," according to CoreLogic CEO Anand Nallathambi.

Florida, New York, California, Illinois and New Jersey are still dealing with a huge pipeline of foreclosed homes and now account for 44% of the country's distressed inventory.

California enacted tough borrower protection laws last year that have stalled foreclosure activity, while the other four states follow a judicial foreclosure process, requiring banks to prove in court that borrowers are in default before initiating action.

Analysts expect these states to deal with a foreclosure backlog for several years, unless laws change.

Fear that millions of foreclosed homes would flood the market and force down home prices was a major weight on the housing market in the early years following the housing market bust in 2008. More recently, some of those concerns have eased as foreclosure activity has declined and as strong investor demand for distressed properties has helped clear the inventory more rapidly.

On the contrary, most parts of the nation are now dealing with a significant shortage of inventory, which has turned out to be a frustrating situation for home buyers just returning to the housing market.

Nationwide, inventory has declined so steeply that it would now take about 4.4 months to clear the market. In a balanced market, it would take 6 months.

The lack of inventory has created bidding wars in many parts of the nation and in traditionally hot markets such as Manhattan, brokers say the shortage of inventory is "absolutely insane."

For buyers in hot markets, the prospect of more homes hitting the market might actually be welcome, as TheStreet recently explained in When Foreclosures Are Good tor the Housing Market.

-- Written by Shanthi Bharatwaj New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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