Inventory of distressed homes shrinks

A new Standard & Poor's report says the shadow inventory has seen its biggest quarter-to-quarter decline since 2008. That's good news for all homeowners.

By MSN Money Partner Aug 23, 2011 11:41AM

This post comes from Brian O'Connell at partner blog MainStreet.

On the list of neighborhood favorites, distressed properties rank right up there with raccoons and potholes. But as low an opinion as homeowners have of those troubled homes, banks certainly don't like them any better.

That's why it's good news for both that distressed properties -- foreclosures and other bank-owned residences -- are beginning to thin out, since they lower property values by selling well below the average market value for homes in a specific neighborhood.Data (.pdf file) from the Federal Reserve Bank of Atlanta show that foreclosures can trigger discounts in nearby home values by anywhere from 20% to 50% depending on the neighborhood.

But the picture is starting to clear on the foreclosure front -- and that's one big, fat silver lining in an otherwise dour economic landscape. Standard & Poor's just released a new report (.pdf file) showing that the volume of "shadow inventory" (foreclosed homes, real-estate-owned properties or nearly foreclosed homes that aren't for sale yet) is down by five months for the second quarter of 2011.

What S&P is saying is that it now will take 47 months for banks and other lenders to clear their inventory of distressed homes, down from 52 months in the first quarter of 2011. S&P says that's the largest quarter-to-quarter decline since 2008. Post continues after video.

According to Diane Westerback, an analyst at S&P, the U.S. housing market just might be stepping back from the abyss.

"While the volume of these distressed U.S. non-agency residential mortgages remained extremely high at $405 billion in the second quarter, it has declined every quarter since mid-2010, including the most recent," she writes in the report. "In conjunction with stable liquidation rates, we believe these are positive signs that the amount of time it will take to clear this 'shadow inventory' should continue to decline over the next year."

S&P shies away from pointing to a specific foreclosure peak, but data pieced together from the report points to early 2010, as the ratings agency notes that the total number of distressed homes in the U.S. has been in decline since that period.

The pricing volume of such distressed properties is falling, too, S&P reports. The second quarter pricing values for all U.S. distressed homes stood at $405 billion -- down from the $433 billion measured by S&P in the first quarter of 2011.

Data from the report also show that "in peril" properties were down in all 20 metropolitan areas that were measured in the S&P report. At 144 months to clear inventories, New York City was at the top of that list, but that number did improve by two months since Q1, 2011.

The takeaway? Economists and housing experts have long held that clearing shadow inventory was a huge deal for the housing market. Now it looks like it's finally starting to happen.

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