It's a ray of sunshine in an otherwise gloomy housing forecast, but still a chilling reminder of how deep a hole housing is in. According to a new report from Standard and Poor's, the United States won't burn through its supply of distressed homes for nearly four years. While that's a slight improvement from previous estimates, it still underscores the massive "shadow inventory" weighing down the housing market.
That means housing prices are likely to remain depressed and could see more declines in coming months.
S&P includes properties for which borrowers are 90 days or more delinquent on mortgages, foreclosures, and bank-owned properties, in its shadow inventory estimates.
Overall drops in inventory in 12 of the top 20 metro areas S&P tracks prompted the firm to pare back its forecast, but ongoing concerns about distressed loans continue to loom, especially as foreclosure processes in many states have stalled in the wake of sloppy foreclosure practices by several mortgage servicers.
"Low liquidation rates over the past two years allowed the shadow inventory to grow as distressed homes have remained tied up in foreclosure proceedings," the report said. "The shadow inventory will continue to jeopardize the housing market's recovery until services are able to improve liquidation times."
Here's a look at the top ten metro areas by months of inventory in the third quarter:
Metro AreaMonths of Inventory (3Q 2011)New York
However, if and when an influx of foreclosures hits the market, it will further bloat the supply of homes and worsen the downward spiral in home prices. "As long as these delays continue to affect the housing market, the inventory remains a market-wide threat," the report said.
But experts are cautiously optimistic. Though total volume is still staggering at around $384 billion, the amount of distressed loans has been falling since the beginning of 2010 and continued to decline in the third quarter of 2011 to the lowest level since November 2008.
"The floodwaters are starting to recede," says Diane Westerback, managing director of S&P's Global Surveillance Analytics and author of the report. "Things are getting better, but there's still a long ways to go."
So while the wind down of the foreclosure crisis might still be years away, the outlook is improving. The sooner we can rebalance supply and demand by clearing the huge overhang of foreclosures and distressed properties in the housing market, the sooner home prices will begin to recover, experts say. Only then can the housing market find its footing again.