Embedded in the release of Existing Home Sales data yesterday was an update on the number of previously owned homes currently for sale on the market.

From the Release...

"Total housing inventory at the end of October fell 3.4 percent to 3.86 million existing homes available for sale, which represents a 10.5-month supply at the current sales pace, down from a 10.6-month supply in September."

Although we did see a month over month improvement, these inventory numbers still confirm the unsettling trend of housing stock piling with nearly 4 million properties on the market today. The 8.4% year-over-year increase in inventory is especially bad news because the reported inventory is already historically very high and the 10.5 months of supply in October is far above normal.

Unfortunately, as anyone in this industry knows, concerns over existing inventory stockpiles are only half the problem - literally - shadow inventory could very well be a heavier shoe that has yet to drop. CoreLogic announced on Monday that they saw shadow inventory at just over 2 million units in August and total inventory over 6 million units.

From the Release...

"CoreLogic (NYSE: CLGX), a leading provider of consumer, financial and property information and business services, reported today that shadow inventory of residential property as of August 2010, reached 2.1 million units, or eight months worth of supply, up from 1.9 million, or a five-months’ supply, from one year earlier. With visible inventory remaining flat at 4.2 million units, the change in shadow inventory increased the total supply of unsold inventory by 3 percent. The total visible and shadow inventory was 6.3 million units in August, up from 6.1 million a year ago. The total months’ supply of unsold homes was 23 months in August, up from 17 months a year ago. Although it can vary and it depends on the market and real estate cycle, typically a reading of six to seven months is considered normal so the current total months’ supply is roughly three times the normal rate."

This estimate is based largely on seriously delinquent and defaulted loans that likely will find their way onto the market as short sales or REO sales. Well over 6 million homes have received foreclosure notices since 2007. Our research indicates that as many as 3 million of those homes have already been foreclosed on, but have yet to be put on the market. Therefore, we believe this shadow inventory could be as high as 5 million units. If this is indeed the case,  it would extend months of supply to an all time high of over 12 months.

Based on the MBA mortgage purchase applications index, it appears there will be little increase in sales over the next few months (sales will probably remain in the low-to-mid 4 million SAAR range). That means we will see double digit months-of-supply for some time - and that suggests house prices will continue to fall in many markets.