Analysts at Barclays Capital say the industry’s ominous shadow inventory is close to topping out.

New research published by the firm says the supply of homes nearing REO status, defined as 90 or more days delinquent or in the process of foreclosure, will peak this summer and then begin falling gradually as the market becomes stable enough to absorb 130,000 distressed properties a month.

“While we expect REO levels to remain elevated, the trickle of homes from foreclosure into REO implies moderate levels of inventory reaching market,” Barclays said in its report.
The company estimates the current REO supply to be 478,000 and expects it to rise to 536,000 by late 2011.

Barclays’ delinquency pipeline snapshot shows that as of February, there were 2.4 million mortgages at least 90 days past due and 2.1 million more already winding through the foreclosure process, which combined makes up a shadow inventory of 4.5 million.

It’s a daunting tally and could grow larger as foreclosure alternatives are exhausted, but Barclays’ model forecasts 4.7 million distressed sales over the next three years, with 1.6 million coming in 2010, 1.6 million in 2011, and 1.5 million in 2012.

The research firm notes, however, that an orderly liquidation of shadow inventory will require both “more robust household formation and job growth.”

Some market indicators, though, are looking favorable. This week, Fannie Mae reported only a minor increase in its March serious delinquency rate – 5.59 percent versus 5.51 percent in February. RealtyTrac also reported a 12 percent month-to-month decline in default notices for April.

Barclays says this data supports its forecast that the industry is only a few months away from reaching peak levels of shadow inventory.

http://www.dsnews.com/articles/threat-of-shadow-inventory-diminishing-barclays-2010-05-14