By Les Christie, staff writerJanuary 20, 2011: 7:34 AM ET

NEW YORK (CNNMoney) — There is a growing glut of foreclosed homes threatening to hit the market over the next couple of years, potentially delaying any recovery.

There were 1.7 million homes either owned by the bank or in some stage of foreclosure at the end of the third quarter of 2010, according to a recent report by Standard & Poor’s. It would take 44 months, at the current rate of sales, to sell them off — a 25% increase from the beginning of 2010. (S&P does not count home loans backed by Fannie Mae and Freddie Mac.)

This so-called “shadow inventory” may depress home values and delay the housing market recovery.

“The problem is you have all these properties coming down the pipeline that are nearly certain to hit the market. That’s going to be a negative for the supply-demand equation,” said Diane Westerback, Managing Director for S&P and an author of the report.

S&P defines shadow inventory as properties whose borrowers are (or recently were) 90 days or more delinquent on their mortgage payments, ones currently or recently in foreclosure or that are back in the hands of the banks.

Data through Sept. 30 from the Mortgage Bankers Association, which tracks about 80% of the market, suggests there are more than 2 million Americans seriously delinquent on their mortgages and another 2 million bank-owned homes. Plus, RealtyTrac reported last week that a million homes were repossessed in 2010

Westerback said the biggest contributor to the longer shadow inventory is that banks are taking far longer to foreclose on homes than they once did.

There are several reasons for that. One is that banks have struggled to keep up with the sheer volume. Last year there were nearly 2.9 million homes that received some kind of foreclosure notice.

Many foreclosures have also been delayed as banks make greater efforts to save homes by modifying mortgages. Gathering all the paperwork and working out a deal with all the parties takes time.

The banks have gotten better at this, according to S&P, with modified loans less likely to re-default. In early 2008, 80% to 85% of these loans re-defaulted. By the third quarter of 2009, that had dropped to a 50% to 55% rate.

Of the 20 separate markets S&P analyzed, Miami was the only market of the 20 that S&P analyzed where shadow inventory did not did expand during the first three quarters of 2010.

In Minneapolis, it rose 61% between Dec. 31, 2009 and Sept. 30, 2010, to 35 months from 21. Las Vegas went up 48% to 30 months supply, and Portland, Ore. jumped 47% to 45 months.

In New York, foreclosures are relatively moderate, but many have gotten stuck in the pipeline. As a result, the state now has the longest shadow inventory list, with nearly 10 years worth of homes. Boston’s shadow inventory is at 62 months and Miami’s is 60.  source: money.com

If you’re like millions of Americans, you probably thought buying a house was one of the best investments you could ever make. And watching your home’s value decline over the last few years probably makes you a little nauseous.

Well, after hearing from Peter Schiff of Euro Pacific Capital, you may need some Dramamine.

On CNBC’s Halftime Report Schiff revealed an alarming forecast; one that he also penned for the Wall Street Journal. He says, despite the sharp drop since 2007, “housing prices based on historical measures are about 20% above where they should be.” In other words prices haven’t fallen enough.

His argument is largely predicated on his belief that the main reasons home prices stabilized recently is because the government has propped them up.

He says, “the home buyer’s tax credit, record low interest rates, government mortgage-assistance programs, and the increased presence of Fannie Mae, Freddie Mac and the Federal Housing Administration in the mortgage-buying business have, for now, put something of a floor under house prices.”

Schiff makes the argument that without these artificial means of support, prices would have continued to fall.

In fact, he thinks they should have fallen – and fallen a lot. “Considering the weakness in the economy and the glut of houses on the market, housing prices should be below their historical averages.”

In case you’re wondering how Schiff arrived at a 20% drop – it’s a simple case of calculating a reversion to mean.

He’s crunched numbers and found that “in the 100 year between 1900 and 2000 home prices in the US increased an average of 3.35%.

If home prices had followed that average trajectory he says the Case Shiller Index should be at 126.7 (in October). Instead, it was at 159.

”This would suggest the index would need to decline an addition 20.3% from current levels.”

For what it’s worth Schiff does tell us, “we don’t have to get there through a big drop in the price of houses; we could also get there because the price of everything else but houses goes up.”

But either way, if Schiff is right, homeowners are looking at pain.

We know that Schiff is a tad dramatic – some would say alarmist – but his forecasts are not without merit.

In late 2006, Schiff predicted the housing bubble and resulting subprime mortgage crisis and in late 2008, he predicted the automotive industry crisis and the crisis in the banking and financial markets.

I’ve you agree with Peter Schiff’s thesis, Steve Cortes says the trade is short the XHB [XHB  17.43    0.01  (+0.06%)   ] . source: cnbc

According to economist Nouriel Roubini, the housing market is in a double dip.

Photo: Oliver Quillia for CNBC Nouriel Roubini

And negative Case-Shiller Home Price numbers out today only confirm that unpleasant truth.

“It’s pretty clear the housing market has already double dipped,” says Roubini. “And the rate of decline is stronger than in previous months,” he said of the new housing data.

Aside from below trend economic growth, there are two factors specific to the housing market that are putting downward pressure on home prices.

The first factor is the expiration of federal home buyer tax credits for first time home buyers.

“If you look at the data, Case Shiller has been falling every month since the tax credit expired in May. Everyone who wanted to buy a home did so by April,” Roubini said.

“That tax credit stole demand from the future and its expiration led to another 30% fall in home sales, pushing Case & Shiller lower for the last few months,” Roubini wrote in a text message earlier this morning.

The second factor putting downward pressure on home prices is the ongoing chaos with mortgage documentation, and the consequent suspension by banks of mortgage foreclosure proceedings—which has actually worsened the underlying problems in the housing market.

“There has been an effective moratorium on foreclosure,” said Roubini.

And the beginning of the end of that moratorium means more housing supply is about to become available on the market.

“The shadow inventory of not-yet-foreclosed homes—due to the moratorium—will surge in the next year,” Roubini says.

Both factors, taken in concert, set up a scenario where market fundamentals put downward pressure on prices: “Supply will increase, demand will drop,” Roubini said.

The Case Shiller Composite-20 Index, which represents the broadest measure of U.S. home prices in the survey, fell 1 percent on an adjusted basis during the September/October time period, based on data release earlier today.

All 20 Metropolitan Statistical Areas included in the survey showed declines—reflecting a broad based, non-regional erosion of prices in the housing sector.

But Roubini isn’t yet predicting a double dip recession for the broader economy.

“The rest of the economy is recovering. Most of the numbers are consistent with a growth rate of 2.7 percent,” Roubini said.

But that 2.7 percent growth is still below trend. “So unemployment will likely remain above 9 percent,” according to Roubini’s analysis.

Roubini adds that there are other ominous economic signs on the horizon including: “The eurozone shock, long-term structural deficits, and state and local governments [operating near] bankruptcy.”

And, if homeowners begin walking away from their properties en masse, those negative trends might well pick up steam:

“12 million households are already in negative equity and 8 million more have an LTV btw 95 and 100%. Thus even a 5% fall in home price will push an extra 8 million in negative equity with risk of millions walking away from their home—i.e. jingle mail,” Roubini wrote me in a text message earlier today.

It’s certainly a sobering scenario to contemplate as we head into the New Year.