The national shadow inventory, which are vacant real estate-owned properties not on the market and seriously delinquent mortgages, thinned significantly this year.
The total amount of homes in this supply declined 35 percent since peaking nearly two years ago, according to a report from Morgan Stanley. As a result, there are now an estimated 5.56 million properties in the shadow inventory, down from 8.79 million at the beginning of 2010.
"This is clearly good news, not only for distressed houses but also for the housing market as a whole," analysts from Morgan Stanley wrote in the report.
A majority of these homes have already been through the foreclosure process and are now vacant, while others with loans in delinquency have also contributed to the backlog. A number of real estate experts believe there are currently 1.5 million borrowers who are at least 30 days late on payments adding to the supply.
Regionally, the shadow inventory in the West shrank 52 percent during the past two years, representing the most significant decline, the report said. Meanwhile, the inventory thinned 33 percent in both the South and Midwest, while the Northeast reported the smallest drop of just 17 percent.
Judicial versus non-judicial states
Property data indicates that states with a judicial foreclosure process, which settle home repossession with the assistance of the court system, had the least significant shadow inventory declines, as servicers struggled to deal with inconsistencies in the process and a crushing backlog.
In contrast, shadow inventories in non-judicial states have now experience month-over-month improvements since the beginning of last year, the report said.
Fewer foreclosures across the country could go a long way in stabilizing home prices. In the wake of the housing market collapse, a significant increase of home repossession caused property values to plummet more than 30 percent in some areas.
Meanwhile, others argue that a slight upswing in foreclosure activity could help to stimulate dwindling property supplies in certain markets. At the current sales rate, the nation has just a 6.6-month supply of homes, leaving many prospective buyers with limited options. A surge of short sales and real estate-owned transactions could help to turn this trend around.