The elevated level of shadow inventory of distressed homes still depresses the housing market, said Lawrence Yun, chief economist of the National Association of Realtors (NAR).

Yun is referring to houses that have been foreclosed by banks. Many of these homes then need to be sold on the secondary market -- often at fire-sale prices -- which depresses the prices of the overall market.

According to a recent estimate by Standard and Poor's, there are 1.7 million homes in the shadow inventory. Moreover, there are about 250,000 foreclosure filings per month, so new houses are continually added to the shadow inventory. (Of course, houses are also cleared out of the shadow inventory once they're sold to buyers.)

The existence of this shadow inventory is cited as a major reason that the housing market has not recovered on pace with the overall economy.

The real estate market, unlike the stock market, lacks market clearing and price discovery.

It doesn't have an efficient mechanism of forcing people to sell. In stock and futures markets, for example, fund redemptions and margin calls can quickly force investors/managers to liquidate.

When this wave of forced-selling reaches its climax -- known as the 'liquidation phase' in Wall Street terminology -- the bottom of the market is usually reached. After that, it begins to recover.

For the housing market, forced-selling, or foreclosure, takes a long time. In fact, five years after the housing peak and about two years after the bottom of the general economy, liquidations drags on.

This has two implications.

One, people who are stuck in homes they should not have owned in the first place.  As they remain there, they prevent more qualified person from buying it.

Two, many experts believe that houses prices need to fall further before the real estate market can begin a real recovery.

Email Hao Li at hao.li@ibtimes.com

Click here to follow the IBTIMES Global Markets page on Facebook

Click here to read recent articles by Hao Li