CoreLogic’s April shadow inventory report revealed positive signs for a possible recovery in the housing industry.

Shadow inventory for residential properties declined to 1.7 million units in April, according to the Santa Ana, Calif.-based analytic provider. This five-month supply is down from 1.9 million units compared to April 2010.

The firm said that shadow inventory, real estate properties that are either in foreclosure and have not yet been sold or homes waiting for price improvements before being listed on the market, has gone down because there are fewer delinquencies and more distressed sales.

“The shadow inventory has declined in large part due to a reduced flow of newly delinquent loans in recent months,” said Mark Fleming, chief economist for CoreLogic. “However, it will probably take several years for the shadow inventory to be absorbed given the long timelines in processing and completing foreclosures.”

Out of all the shadow inventory supply, 790,000 units are seriously delinquent, 440,000 are in some stage of foreclosure and 440,000 are REO properties.

Shadow inventory, also known as pending supply, is calculated by determining the number of distressed properties not listed on multiple listing services where the mortgage is 90 days or more late, in foreclosure already, or REO on the books of a financial institution.

Fleming added that since peaking in January 2010 at two million units, which is an eight-and-a-half month supply, shadow inventory has declined nearly one-fifth and is currently 18% lower than the record high.

In addition to the current shadow inventory, there are two million negative equity loans that are more than 50% or $150,000 “upside down.” CoreLogic said these current underwater loans have increased the risk of becoming shadow inventory if the owners’ ability to pay is hindered, which could make selling the home difficult.

“This is another layer that is sitting behind the shadow,” said Sam Khater, senior economist at CoreLogic. “It is hard to quantify how many of those will default, but if you are upside down by 50% or more, the prospect of that homeowner being right-side up anytime soon is very low.”

CoreLogic said the total shadow and visible inventory was 5.7 million units in April, down from 6.2 million units last year. The shadow inventory accounted for 29% of the combined properties.

Khater expressed optimism for the future of the housing market. “Two years ago what was driving price declines was a combination of a heavy flow of distressed sales and economic distress,” Khater said. "But the economy is not in freefall the way it was in 2008 or 2009, so it is good news.”

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