‘Shadow Inventory’ Shrinks in U.S. as More Foreclosed Homes Sell

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A man looks at homes to be auctioned in Elizabeth, New Jersey. Close

A man looks at homes to be auctioned in Elizabeth, New Jersey.

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Photographer: Spencer Platt/Getty Images

A man looks at homes to be auctioned in Elizabeth, New Jersey.

About 1.7 million U.S. homes were in the foreclosure process and expected to be put on the market as of April, down 18 percent from the peak, as fewer loans entered delinquency and more distressed homes sold, CoreLogic Inc. said.

The so-called shadow inventory represented a five-month supply at the current sales pace, the Santa Ana, California-based real estate information company, said today. The inventory’s size is a barometer of housing-market health because foreclosed homes sell for lower prices and falling values discourage buying, said Sam Khater, CoreLogic’s chief economist.

“It’s showing there are improvements in some segments of the market,” he said in a telephone interview from McLean, Virginia. “It doesn’t mean housing distress is over, but it does show that the pipeline of distress is beginning to ease.”

Mortgage delinquencies fell to 8.32 percent in the first quarter of this year, down from a record 10.1 percent in 2010’s first quarter, the Mortgage Bankers Association reported May 19. The number of homes with mortgages at least 90 days late dropped to 1.96 million in April from a January 2010 peak of 3.06 million, Lender Processing Services Inc. reported June 1.

Foreclosures and short sales, in which the lender agrees to a sale for less than the balance of the mortgage, accounted for 31 percent of existing-home sales in May and 37 percent in April, the National Association of Realtors said yesterday. The share is about 5 percent in a healthy market, Khater said.

There was a 9.3-month supply of homes listed for sale at the annual sales pace of 4.81 million in May, down from a peak of 12.5 months in July of last year, the group reported.

Foreclosures Fall

U.S. foreclosure filings fell to their lowest pace in almost four years in May as banks delayed processing defaults while they rework documentation procedures following claims they improperly seized homes, according to Irvine, California-based RealtyTrac Inc., a real estate information service.

While the delays have slowed the foreclosure of properties with distressed loans, fewer defaults and more sales of troubled properties have had a bigger impact on reducing the shadow inventory, Khater said. The peak was 2 million homes, or about 8.5 months of supply, in January 2010.

CoreLogic includes in its shadow inventory homes ranging from those with 90-day payment delinquencies to bank-owned properties. It subtracts homes where borrowers are expected to receive a loan modification and those already listed for sale, Khater said.

Other shadow inventory estimates are higher. About 3.8 million U.S. homes are “vacant and held off the market, part of the large, so-called shadow inventory,” Assistant Treasury Secretary Mary Miller said in a June 9 address in Washington. Rick Sharga, senior vice president of RealtyTrac, said in an interview with Bloomberg Television yesterday that the number may be as high as 5.7 million.

‘Almost 12 Years’

“At current sell-through rates, it would actually take us almost 12 years to work through that inventory,” Sharga said on Bloomberg Television. “It won’t be that bad, but that just kind of gives you an idea of the scale of the problem.”

As of May, as many as 11.1 million of the 55.1 million homes with mortgages were in jeopardy of default over the next five years and potential contributors to the shadow inventory, according to Laurie Goodman, an analyst at Amherst Securities Group LP in New York.

To contact the reporter on this story: John Gittelsohn in New York at johngitt@bloomberg.net.

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net.

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