In its "Shadow Inventory Update" report, Standard & Poor's estimates that the principal balance of distressed homes amounts to about $460 billion, representing nearly one-third of the nonagency residential mortgage-backed securities market currently outstanding.

The months to clear the shadow inventory increased about 18% to 41, between the end of fourth-quarter 2009 and the end of second-quarter 2010.  For the same period, the estimated months to clear were also up in each of the 20 metropolitan statistical areas S&P includes in its ongoing analysis.

"While our estimates for the time it will take to clear the supply of distressed homes on the market have declined after reaching a peak in mid-2008, the number has been on the rise again since fall of 2009,” said managing director Diane Westerback.

Standard & Poor's defines shadow inventory as outstanding properties whose borrowers are, or recently were 90 days or more delinquent on their mortgage payments, properties currently or recently in foreclosure, or properties that are real estate owned.

The report, which is published quarterly, follows a series of reports on the housing market's growing backlog of distressed residential properties, or those that need to be liquidated and re-sold because previous borrowers defaulted.

According to the report, the growth in the shadow inventory means low liquidation rates artificially skew the visible supply of distressed homes available for sale. The growing inventory negatively pressures existing home prices, and when the backlog clears, market home prices will adjust.

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