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The problem of shadow inventory has been widely reported on, but difficult to quantify.  A new report out of John Burns Real Estate Consulting estimates the added supply at 10 months or about 4.7 million units and will ultimately result in lower prices (via WSJ):

“The report also estimates that the distressed share of home sales will rise to around 40% of all home re-sales through 2012. And that the shadow inventory of distressed loans will stay at elevated levels through 2016.

The rising share of distressed sales could send prices down faster because banks are less likely to wait to reduce prices on their inventory of bank owned homes. The Irvine, Calif.-based housing consultancy estimates that prices will fall by 8% to 11% through 2012, though the declines will be worse if the economy deteriorates or interest rates rise significantly. The firm estimates that distressed sales will peak next year at 2.36 million, up from 2.05 million this year and 1.5 million in 2009.”

This only reconfirms my belief that the real estate market remains one of econ 101 – supply and demand.  According to Econoday months’ supply in new homes has remained high despite falling prices.  The pre-bubble level was roughly 4 months of supply.  This should continue to put pressure on real estate prices as demand simply fails to outstrip an overwhelming amount of supply.