An industry-wide focus on the rising popularity of short sales may give the impression that properties are being liquidated at a faster pace.

However, Morningstar’s Distressed Inventory Index shows a different story – the total rate of liquidation has actually decreased in recent months.

The credit ratings firm found that over a course of a year, overall distressed inventory decreased by 19% while the number of liquidations dropped by 14%.

"We estimate that it will take 40 months to clear the national distressed inventory. This is down three months from one year ago," said Brian Grow and Becky Cao of Morningstar. 

They added, "In the recent housing market we have seen rising nationwide home prices, the heightened interest in stressed properties by investors, a higher percentage of short sale liquidations, and improved loan performance."

With these factors it would seem reasonable to assume distressed inventory would be reduced at a faster pace. However, while the distressed inventory continues to decline, so does the liquidation rate. 

The total volume of distressed loans in the private-label market peaked in December 2009 at 1.8 million properties. 

The volume has been falling since the beginning of 2010, according to Morningstar. 

For instance, the number of distresses properties as of February 2013 is 1 million, down more than 40% from the peak, and down 19% from a year ago, Morningstar said.


"Despite the increased use of short sales in 2012, fewer properties overall are being liquidated and so the improvement to the distressed inventory due to short sales is constrained," the analysts said.

As of February, short sales as a percentage of total distressed sales increased from 45% to 53%. 

"The increase in short sales has not accelerated the overall speed of liquidation. In fact, there is a noticeable decline in the liquidation rate since the third quarter of 2012, when the short sale percentage continued to rise, but the months of inventory stopped declining," the report stated. 

In general, there has been a reduction of distressed inventory over the past year, but the reduction has been constrained by a decreasing liquidation rate and varies by region. 

The liquidation rate started slowing down in the third quarter of 2012, despite an increased use of short sales.

"While there may be benefits associated with short sales, such as quicker property disposition and higher sale prices relative to foreclosure sales, short sales alone do not appear to be doing enough to speed up the resolution of distressed loans," the analysts concluded.