The shadow inventory has declined by more than a third, according to a new Morgan Stanley report.

By Peter Ricci

The shadow knows – that his inventory is severely down! According to researchers at Morgan Stanley, the shadow inventory has fallen 35 percent from its 2010 peak, yet more evidence of stabilizing inventories in housing.

The researchers estimate there are around 5.65 million properties still in the shadow backlog, down from 8.79 million two years ago.

Though that number may seem big, it’s all a matter of definitions. In its computations, Morgan Stanley counted foreclosed homes and delinquent mortgages, but CoreLogic, in its most recent study, estimated the backlog at 1.5 million, because it only tracks severely delinquent mortgages.

“This is clearly good news, not only for distressed houses but also for the housing market as a whole,” the Morgan Stanley report stated, according to a HousingWire article.

Other details in the report included:

• As expected, there are strong regional differences in shadow inventory; it was down by more than half in the West, by 33 percent in the Midwest and South, and by 17 percent in the Northeast.
• The West’s high performance is probably because of its preponderance of non-judicial foreclosure states; indeed, one of the more prominent stories in 2012 real estate has been the divergence between judicial and non-judicial states (see here for a great graph demonstrating this).

The past few months, the shadow inventory had acquired bogeyman status, creeping along the edges of newsprint and threatening what has been some of the strongest months for housing in years. The latest reports, though, seem to suggest that’s not the case, and that’s definitely been the experience of Joe Zimmerman, the team leader for My Kind of Town Realty.

In general, Zimmerman said he really doesn’t hear about the shadow inventory, and he said a big part of that is his buyers do not want to go through the hassle of acquiring a short sale or REO, given the many horror stories out there for those transaction types.

Basically, Zimmerman concluded, if a home is priced properly, located in a desirable section of Chicagoland and something buyers will be excited about, it will sell, and sell quickly. Though he does consent that shadow properties could negatively impact prices as they hit the market (“that’s real estate 101,” he joked), he does not fear any massive city-wide impacts, given the size and nuance of Chicago’s marketplace.