Analysts say 7 million soon-to-be foreclosed properties have yet to hit the market.

Posted by Elizabeth Strott on Thursday, September 24, 2009 8:59 AM

Any optimists touting a housing recovery might want to pause and think about this: Amherst Securities Group analysts believe the market faces another major hurdle because about 7 million properties that are likely to be seized by lenders have yet to hit the market.

The "huge shadow inventory" reflects mortgages already being foreclosed upon or now delinquent and likely to be and, assuming no other properties are on the market, it would take 1.35 years to sell this inventory based on the current pace of existing-home sales, analyst Laurie Goodman wrote in a note to clients.

In 2005, there were 1.27 million properties in the same situation.

There have been a number of recent economic reports hinting at a recovery for the housing market. In May and June, the S&P/Case-Shiller 20-city index of home prices rose, the first month-over-month increases in values since 2006. Prices for U.S. homes rose by 0.3% in July from June, the Federal Housing Finance Agency reported earlier this week.

"The favorable seasonals will disappear over the coming months, and the reality of a 7-million-unit housing overhang is likely to set in," the analysts said, according to Bloomberg News.

Meanwhile, The Wall Street Journal reported on Wednesday that real-estate agents and analysts worry that when the shadow inventory is unleashed, it could cause a big bump in the road to recovery and add a new layer of difficulty for the housing market.

Ivy Zelman, the chief executive of Zelman & Associates, a research firm based in Cleveland, believes 3 million to 4 million foreclosed homes will be put up for sale in the next few years. The question is whether the flow of these homes onto the market will resemble "a fire hose or a garden hose or a drip," she told the paper.