Serious delinquencies, the main driver of the housing shadow inventory, declined 9.7 percent in California over the three months ending in October 2012, according to CoreLogic.
Nationwide, the current residential shadow inventory as of October 2012 fell to 2.3 million units, representing a supply of seven months, according to CoreLogic.
The October inventory level represents a 12.3 percent drop from October 2011, when shadow inventory stood at 2.6 million units.
"The size of the shadow inventory continues to shrink from peak levels in terms of numbers of units and the dollars they represent," said Anand Nallathambi, president and CEO of CoreLogic (NYSE: CLGX).
"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," he said.
As of October 2012, Florida, California, Illinois, New York and New Jersey make up 45 percent of the 2.7 million properties that are seriously delinquent, in foreclosure or in REO.
In October 2011, these same states made up 51.3 percent of all the distressed mortgages that were at least 90 days delinquent, in foreclosure or REO.
The dollar volume of shadow inventory was $376 billion as of October 2012, down from $399 billion a year ago.
The shadow inventory represented 85 percent of the 2.7 million properties currently seriously delinquent, in foreclosure or in REO.
Of the 2.3 million properties currently in the shadow inventory, 1.04 million units are seriously delinquent (3.3 months supply), 903,000 are in some stage of foreclosure (2.8 months supply), and 354,000 are already in REO (1.1 months supply).
"Almost half of the properties in the shadow are delinquent and not yet foreclosed," said Mark Fleming, chief economist for CoreLogic.
"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," Fleming said. "Investor demand will help to absorb the already foreclosed and REO properties in the shadow inventory in 2013."
CoreLogic estimated the current stock of properties in the shadow inventory, also known as pending supply, by calculating the number of properties that are seriously delinquent, in foreclosure and held as real estate owned (REO) by mortgage servicers but not currently listed on multiple listing services (MLSs).
Transition rates of "delinquency to foreclosure" and "foreclosure to REO" are used to identify the currently distressed unlisted properties most likely to become REO properties.
Properties that are not yet delinquent, but may become delinquent in the future, are not included in the estimate of the current shadow inventory.
Shadow inventory is typically not included in the official reporting measurements of unsold inventory.