Supply will continue to depress home values

LOS ANGELES – A supply of 1.8 million homes either owned by banks or poised for foreclosure potentially hangs over the nation’s real estate market, according to data released Wednesday.

This “shadow inventory” of residential real estate – property that is in foreclosure, has a loan 90 days past due or has been taken back by a lender and is not yet listed for sale – stood at a nine-month supply at the end of January, according to Santa Ana, Calif., research firm CoreLogic.

That was a decline from an estimated 2 million units in January 2010. However, because the sales pace remains so weak and prices are on the decline again, a large shadow supply could affect the market for the foreseeable future, holding back any recovery.

Additionally, CoreLogic estimates that there are nearly 2 million homes with loans that are more than 50 percent “underwater,” with the home worth less than half what is owed on the property. These homes are likely to fall into foreclosure in the near future, according to the firm.

“While the trend of the shadow inventory is improving somewhat, the current level and distressed months’ supply remain very high,” Mark Fleming, chief economist for CoreLogic, said in a statement. “The short-term weakness in prices and longer-term weakness in the drivers that affect the housing market imply that excess supply will remain high for an extended period of time.”

Shadow inventory is typically not included in the unsold inventory numbers reported by the National Association of Realtors, which economists and real estate agents keep an eye on to gauge the health of the housing market.

The Realtors group recently reported that the inventory of previously owned homes – the bulk of the U.S. real estate market – listed for sale was 3.49 million homes at the end of February. That represented a supply of about eight months and just over two weeks at February’s sales pace. Economists consider a supply of about six months to be healthy.