The residential shadow inventory of distressed homes continues to shrink according CoreLogic's monthly report for October.   The improvement is across all metrics; number of units, months supply, dollar volume and transition rates.

The inventory as of October was 2.29 million units or a 7.2 month supply at the current absorption rate.  The number of units in the inventory represented a 12.3 percent decrease from October 2011 when the inventory consisted of 2.62 million units, an 8.6 month supply.  The volume of the inventory in October was $376 billion, down from $3.99 billion a year earlier.  In September the inventory stood at 2.31 million units or a 7.7 month supply.  

The shadow inventory represents the number of properties that are seriously delinquent, in foreclosure, or in bank inventories (REO) but not listed on Multiple Listing Services. CoreLogic uses the rates of transition of properties from delinquency to foreclosure and foreclosure to REO to identify the currently distressed unlisted properties most likely to become REO properties. Properties that are not yet delinquent but may become delinquent in the future are not included in the estimate of the current shadow inventory.

Of the 2.3 million properties currently in the shadow inventory 1.04 million units are seriously delinquent (3.3 months' supply), 903,000 are in some stage of foreclosure (2.8 months' supply) and 354,000 are already in REO (1.1 months' supply).

Roll rates from current to 90 days delinquent have decreased from 0.50 percent in October 2011 to 0.46 percent in October 2012.  Rates from 90+ days to foreclosure are down from 6.74 percent to 6.17 percent but rates for transitions from foreclosure to current increased slightly from 0.81 percent to 0.83 percent.

"The size of the shadow inventory continues to shrink from peak levels in terms of numbers of units and the dollars they represent," said Anand Nallathambi, president and CEO of CoreLogic. "We expect a gradual and progressive contraction in the shadow inventory in 2013 as investors continue to snap up foreclosed and REO properties and the broader recovery in housing market fundamentals takes hold."

"Almost half of the properties in the shadow are delinquent and not yet foreclosed," said Mark Fleming, chief economist for CoreLogic. "Given the long foreclosure timelines in many states, the current shadow inventory stock represents little immediate threat to a significant swing in housing market supply. Investor demand will help to absorb the already foreclosed and REO properties in the shadow inventory in 2013."

Forty-five percent of the inventory in held in five states, Florida, California, Illinois, New York and New Jersey down from 51.3 percent one year earlier.  Over the three months ending in October 2012, serious delinquencies, which are the main driver of the shadow inventory, declined the most in Arizona (13.3 percent), California (9.7 percent), Michigan (6.8 percent), Colorado (6.8 percent) and Wyoming (5.9 percent).