Current residential shadow inventory continued to fall from peak levels, CoreLogic said in a third quarter report.

Shadow inventory shrank to 2.3 million units in October, which represents a supply of seven months. This accounted for 85% of the 2.7 million properties currently seriously delinquent – in foreclosure or real estate owned. A year ago, shadow inventory stood at 2.6 million units, dropping 12.3%.

Shadow inventory is expected to continue to shrink due to investor demand, which will help absorb the already real estate-owned properties and foreclosed properties in the shadow inventory in 2013.

"We expect a gradual and progressive contraction in the shadow inventory in 2013 as investors continue to snap up foreclosed and REO properties and the broader recovery in housing market fundamentals takes hold," said Anand Nallathambi, president and CEO of CoreLogic.

The dollar volume of shadow inventory also fell to $376 billion, down from $399 billion a year ago.

"The size of the shadow inventory continues to shrink from peak levels in terms of numbers of units and the dollars they represent," Nallathamb said.

Of the 2.3 million properties currently in the shadow inventory, 1.04 million units were seriously delinquent, 903,000 are in some stage of foreclosure and 354,00 are already in REO.

"It’s certainly encouraging to see the shadow inventory figures decrease over the last months, and it suggests that servicers are liquidating and approving short sales at greater velocity," managing director Luis Vergara of Mission Capital Advisors told HousingWire.

Click on the graph to view shadow inventory detail.

Serious delinquencies significantly fell across the nation including 13.3% in Arizona, 9.7% in California, 6.8% in Colorado, 6.8% in Michigan and 5.9% in Wyoming.

"Almost half of the properties in the shadow are delinquent and not yet foreclosed," Mark Fleming, chief economist for CoreLogic said.

He added, "Given the long foreclosure timelines in many states, the current shadow inventory stock represents little immediate threat to a significant swing in housing market supply."

In October, California, Florida, Illinois, New Jersey and New York made up 45% of the 2.7 million seriously delinquent properties. Last year, these states accounted for 51.3% of all the distressed mortgages, which were at least 90-days delinquent, in foreclosure or REO.

Provider of analytics and business services CoreLogic estimates the pending supply — current stock of properties in the shadow inventory — by calculating the number of properties that are seriously delinquent, held as REO and in foreclosure by mortgage servicers, but not currently listed on multiple listing services.