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

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 Lisa Dempsey, the manager for Better Homes and Gardens Real Estate Gary Greene’s West Lake Houston office.

“In our market, it is something that is discussed on occasion,” Dempsey said, adding the shadow markets are not part of the daily dialogue for agents in her area.

A year, Dempsey said the shadow inventory was a concern for her agents, but not in the conventional sense. Though short sales and REO transactions do exist in Houston (and they’ve been happening with greater regularity in 2012), they are far more potent in California, Florida and other sections of the country with more distressed properties – areas, Dempsey said, that often contained prospective homebuyers looking to move to Houston.

Because those buyers would have difficulties selling their homes, it would complicate their move to the Bayou City, but now, aside from the occasional problem with relocating buyers, Dempsey said it’s not much of a concern.