Today’s real estate economy watchers are focused on inventory as they look for a break in the housing recession that grips the nation.

Recent inventory and months’ supply numbers are cause for hope, at least at first glance. Total housing inventory at the end of March fell 1.6 percent to 3.74 million existing homes available for sale, which represents a 9.8-month supply at the current sales pace, compared with a 9.7-month supply in February, according to last week’s existing home sales report from NAR.

Moreover, 2009 inventories through March are down slightly from 2008 and about the same level as 2007, shown in this graph from the Calculated Risk blog.

Two factors suggest it’s too soon to declare victory. First, over the past three years of the housing crisis, millions of homeowners have delayed plans to sell until the market improves. The size of this “shadow supply” is unknown but it’s certainly sizeable. A survey last October for Move, Inc. by Gfk Custom Research found that more than a third of all consumers (36 percent)-more in the higher-priced West (40.2 percent)-say they or someone they know has delayed buying or selling a home in the current housing market. Certainly, an improvement in prices will stimulate these deferred sales.

Second, distress sales including foreclosures, which today make up as much as a half of all existing home sales, don’t respond to the same supply and demand factors as do properties sold voluntarily. The fortunes of individual owners rather than the real estate marketplace determine the foreclosure inventory. With more and more moratoria taking effect, unemployment at record levels, a thid of the nation’s homeowners under water on their mortgages and the new federal initiative yet to have an impact, it’s hard to know what to expect.

Of course, there’s no shadow supply of new homes. The number of newly built, single-family homes on the market declined for a 23rd consecutive month in March as builders focused on winnowing down their inventories of unsold units, according to new-home sales data reported by the U.S. Commerce Department. Inventory shrank to 311,000 units, which is a 10.7-month supply at the current sales pace. Builders across the nation have been devastated, and thousands have gone out of business. Even a strengthening of the market will not trigger the level of new home construction of normal times; too much construction capacity has been lost and builders have been selling off land to stay afloat. New homes, however, accounted for only about nine percent of March home sales.

Not only are foreclosures harder to forecast, they are also harder to sell and require a significant discount below market value. A year ago, the web site Trulia conducted a survey that found that 69 percent of U.S. adults feel that there are negative aspects to purchasing a foreclosed home. Survey respondents mentioning negative aspects of purchasing a foreclosed home, 69 percent cited hidden costs; 35 percent considered the prospect risky; and 33 percent mentioned the possibility of the home losing value. Another Trulia/RealtyTrac study found that three-quarters of respondents expect a discount of at least 25 percent on a foreclosure. Trulia found demand for foreclosures declined seven points during home buying season last year. NAR reported last month that foreclosures are indeed selling at a 20 percent discount. If the overall economy doesn’t improve, will the supply of foreclosures will outlast the demand?