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As of the end of August, there were 2.1 million properties either in the foreclosure process or headed for foreclosure, according to CoreLogic.

It's come to be known as the "shadow inventory," because it will be coming to market soon, but it's not listed yet.

To put that in perspective, there are about 4.2 million properties (existing homes and new construction) currently, visibly on the market now. So add 50 percent more, and there's your true inventory.

Rather than look at the absolute numbers, we like to look at months supply, which is how many months, at the current sales pace, it would take to sell all these homes. Add the shadow and the visible supply, and figure it into the sales pace in August, and you're looking at a 23-month supply. Nearly two years. Six months worth of supply is generally considered "normal."

"The weak demand for housing is significantly increasing the risk of further price declines in the housing market," notes Mark Fleming, chief economist at CoreLogic.

Inventory is the key to predicting the future of home sales and prices. I've said this over and over. We know that there are investors out there looking to get into the market, and that's a good thing, especially since investors are almost exclusively all-cash these days. But there aren't enough investors to soak it all up, so we have to look to the demand side for regular, organic buyers.

Fannie Mae is doing everything it can to bring in these buyers, introducing a pilot program in Orlando, FL, Detroit, Mi and San Diego, CA that will allow real estate agents to submit offers online for foreclosed properties Fannie now owns and then track them through the sale. Fannie and Freddie are both taking back more and more properties, as their sales of said properties are actually declining slightly.

Other than that, government appears to be largely out of the housing subsidy business.

I've never been a fan of government getting too far into housing, because it inevitably results in doom and gloom when the subsidy expires.

But here's the conundrum: Even as new loan delinquencies improve, they are improving slowly and are still far too elevated for comfort. On top of that, loan modifications are failing at an alarmingly high rate, which means ever more borrowers will go straight to foreclosure. Foreclosure inventories are still rising, as banks re-file and ramp up the process, which again means more inventory coming to market.

Perhaps it's time to look at a new government incentive, this time for those previously dreaded real estate investors. More to come...

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