Nation's Shadow Inventory Falls to More Than 3-Year Low

The supply of distressed and foreclosed properties fell more than 10 percent over the past year.

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Homeowners get help from a counselor at the Cow Palace in Daly City, Calif. About 1.7 million homeowners were on the verge of foreclosure in fall 2009, a looming "shadow inventory" of homes that were put up for sale in the coming years.

Long blamed for nagging weakness in the housing market, the nation's shadow inventory—distressed residential properties or those somewhere in the foreclosure process—is shrinking at a decent clip according to a new report, falling to a more than three-year low in July 2012.

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About 2.3 million homes were delinquent, in foreclosure, or held by mortgage servicers in July 2012, a more than 10 percent drop from numbers reported a year ago, according to CoreLogic, a financial information firm. The July data are the most recent figures available.

While this year's figures still represent $382 billion and a 6-month supply of homes sitting on the sidelines, the general trend is encouraging and another sign that the housing market is healing, albeit slowly, experts say.

But of the 2.3 million homes currently considered a part of the shadow inventory, about 1 million are "seriously delinquent," meaning that the specter of more foreclosures flowing onto the market is still very real, as is their potential to depress home prices again.

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That's especially the case in states with very long foreclosure timelines, such as Florida, Illinois, and New York.

"While a lower outflow of distressed sales helps alleviate downward home price pressure, long foreclosure timelines in some parts of the country causes these pools of shadow inventory to remain in limbo for an extended period of time," said Mark Fleming, chief economist for CoreLogic, in a statement.

A tighter supply of distressed homes on the market has helped buoy home prices across the country in recent months, but as clogs in the system are flushed out, the nation could see another swell of distressed properties come onto the market.

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Meg Handley is a reporter for U.S. News & World Report. You can reach her at mhandley@usnews.com and follow her on Twitter at @mmhandley.