7 Million Homes in Shadow Inventory Will Take 40 Months to Clear

Global rating company Fitch Ratings has released its figures about the amount of shadow inventory in existence. It estimates 7 million homes make up the shadow inventory. Based on the current liquidation trends, an inventory of this size will take 40+ months to clear. That’s nearly three and a half years! And the U.S. housing market has already been absorbing these distressed properties for the last two years.

For the 23 judicial foreclosure states, it will take more than the 40 months estimated due to the lengthier foreclosure process. For nonjudicial foreclosure states, the inventory will clear slightly faster than the projected 40 months.

Fitch defines its shadow property supply as any loans which are delinquent, in foreclosure or are already bank-owned (REOs). The firm acknowledges that the volume of newly delinquent mortgages has started showing signs of improvement. However, the rate of liquidation for already existing distressed properties has not improved due to limited demand and expanded initiatives by mortgage servicers to attempt loan modifications for homeowners in trouble.

“While the reduced volume of distressed sales since 2009 has temporarily helped home prices, Fitch believes that the extension in foreclosure and liquidation timelines is simply prolonging the housing correction underway,” the agency said in its report issued at the start of November. “Recent concerns about the title-transfer process for foreclosed homes could further weigh on demand.”

Real estate investors will also be happy to note that Fitch is estimating an additional 10% home price decline nationally before this market correction can completely work itself out.