Houses prices, like everything else, are a function of supply and demand.

The inventory (supply) of houses on the market has dropped significantly in recent months, fueling hope that the housing bust is over and done with.

Unfortunately, the inventory of houses listed for sale may severely understate the actual inventory of houses owners want to sell. This, in turn, may be creating a far too rosy picture of supply and demand.

Amherst Securities has produced a scary analysis of this "shadow inventory" overhang, which Amherst estimates is a shocking 7 million houses. (The consensus is only 2-3 million).

7 million houses represents 1.4-times the number of houses currently sold in the country each year. So this represents a massive overhang. As these houses hit the market in future years, they will keep pressure on house prices. This will likely either lead to further declines in prices or delay the recovery.

The build-up of shadow inventory, according to Amherst, is the result of three factors:

High "transition" rates. More mortgages that fall behind by 30 and 60 days are progressing through to default.

Low "cure" rates. Fewer delinquent mortgages than usual are returning to performing loans.

"Liquidations" of deliquent loans are taking much longer than usual. The banks are taking longer to foreclose and holding foreclosed properties to avoid putting pressure on prices (and thus triggering writedowns). Mortgage mods are delaying foreclosures. Many houses are early in the foreclosure process.

We have wrapped many of Amherst's charts into the presentation below. Here is the firm's bottom line:

We are concerned that, in light of this housing overhang, the stabilization we have seen in home prices the last few months is temporary.